The broken bridge of public finance: majority rule, earmarked taxes and social engineering

Abstract

Abstract Nobel laureate James Buchanan was influenced substantially by Knut Wicksell’s arguments in favor of unanimous consent or “qualified majorities” for approving or rejecting specific public spending programs. Buchanan thought of Wicksell’s recommendation that spending proposals be tied to dedicated revenue sources as way of erecting a bridge between the two sides of the public budget, thereby forcing politicians to face the same tradeoffs as individuals do when formulating their spending plans. We examine the history of Buchanan’s ideas on public finance and discuss how legislative processes have demolished the bridge between public expenditures and public revenues. In modern practice, tax “earmarking”, whereby local, state and federal governments ostensibly finance specific spending programs with the revenues raised by targeted consumption taxes, often becomes a smokescreen hiding the opportunistic reallocation of taxpayers’ monies to finance unrelated policies or programs. Taxes on sugar-sweetened beverages provide our main case study. Other examples from public finance, past and present, such as selective excise taxes on cigarettes, lottery tickets and motor fuels, along with Alexander Hamilton’s tax on whiskey to pay Revolutionary War debts also are examined.