TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, August 7, 2014

Seto Reviews Tahk's Public Choice Theory & Earmarked Taxes

JotwellTheodore P. Seto (Loyola-L.A.), An Empirical Test of Public Choice Theory (Jotwell) (reviewing Susannah Camic Tahk (Wisconsin), Public Choice Theory & Earmarked Taxes, 68 Tax L. Rev. ___ (2015)):

In 1980, James Q. Wilson, in The Politics of Regulation, predicted that laws with diffuse costs and concentrated benefits would be relatively easy to enact, but that laws with concentrated costs and diffuse benefits would be relatively hard to enact and, once enacted, hard to maintain. This hypothesis, one of the pillars of public choice theory, has long been asserted without empirical verification. ...  In Public Choice Theory & Earmarked Taxes, Susannah Camic Tahk provides the first rigorous empirical support for Wilson’s hypothesis.

Her study explores the histories of 1497 state-level earmarked taxes between 1997 and 2005. Earmarked taxes, in general, produce more concentrated benefits than taxes the proceeds of which flow into a state’s general fund. Thus, we would expect earmarked taxes to perform strongly as revenue generators. And, indeed, Tahk finds that the earmarked taxes in her sample raised 58.39% more revenue in 2005 than in 1997—a larger percentage increase than any major federal tax over the same period. ...

It is hard to overstate the importance of this accomplishment.

Tahk has identified a body of rules—earmarked state taxes—with respect to which costs and benefits can be easily quantified and winners and losers identified, and developed a method for arranging such rules on a linear scale susceptible to standard statistical analysis. In the third of a century since Wilson first posited his hypothesis, no one else has managed to do this.

Her results provide empirical support for the intuitions many of us have about taxes—most importantly, federal income and payroll taxes. The largest earmarked federal tax—the payroll tax—has been subject to remarkably little tinkering; Tahk’s work suggests that earmarking may explain its durability. Tax expenditures, by contrast, produce concentrated benefits and diffuse costs. Again, her work supports the public choice explanation for their proliferation and persistence.

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The federal government is late to enter this game. At the state and local level voters have learned that earmarked taxes are a deception. A special tax for a voter-preferred use (schools or police) allows more of the general funds to be spent on non-preferred uses. Money is fungible. The voter-preferred use rarely sees the full benefit of the new revenue.

As voters are beginning to understand this shell game special tax ballot measures are starting to fail.

Posted by: AMT buff | Aug 7, 2014 8:42:51 AM