In many countries in recent decades, the practice of earmarking (that is, raising and allocating) particular taxes for specific benefits is widespread (McCleary 1991; Wagner 1991; Wilkinson 1994; Hsiung 2001). It is often promoted by international financial organisations to enhance fiscal transparency and is sometimes even a pre-condition for loan programmes in many developing countries with high levels of corruption and low levels of government accountability (Teja 1988; IMF 2007).
However, recent literature has argued that earmarking (or hypothecation) can be an inefficient fiscal tool. Earmarked funds may cause budget rigidities due to the inability to fund programmes that are in line with new or changing policy priorities (Wilkinson 1994; Flores-Macías 2018). It is unclear why earmarking remains a prevalent tool in public finance, being widely implemented in many developing tax states today while introducing inefficient budgetary rigidities. One way to rationalise this is to explore whether there is a decidedly political logic linked to a government’s fear of social mobilisation in response to general fund taxation. This paper tries to think through the puzzling prevalence and persistence of tax earmarking and its political causes and consequences in many emerging ‘fiscal states’ today. Why and under what conditions governments resort to tax earmarking remains understudied.
