The hypothecation of a tax (also known as the ring fencing or ear marking of a tax) is the dedication of the revenue from a specific tax for a particular expenditure purpose. Hypothecation is the pledging of assets only.
A 2010 report by the World Health Organization offered four arguments in support of hypothecated taxes for health:
Accountability and trust
Transparency
Public support
Protecting resources
A 2012 report by the Mercatus Center criticises dedicating tax revenues to specific expenditures on the basis that it can be used by policymakers to mask increases in total government spending.
Examples of hypothecated taxation include the gasoline tax in the US, a tax on gasoline dedicated to the funding of transport infrastructure.
Another example in many European countries is a television licence. There, all users of television sets are obliged to pay the government an annual fee to use their televisions. The proceeds of the levy are then used to fund public broadcasting.
Various Chinese imperial armed forces including the Beiyang Army were assigned the customs revenues of their region.
A hypothecated tax on tobacco products was used to fund VicHealth, a Victorian government body responsible for promoting good health, from 1987 to 1997. Since then, various other governments around the world have introduced similar hypothecated taxes on tobacco products.
