Aligning Taxes and Spending: Theory and Experimental Evidence

Abstract

Under what circumstances will members of the public hold positive attitudes toward new or higher taxes? While some scholars have posited that the practice of “earmarking” – designating tax revenues for a particular purpose – can increase support for taxes, the existing literature has not identified the conditions under which earmarking will prove effective in this regard. Here, we draw upon previous research on consumer behavior to hypothesize that support for earmarked taxes will be stronger when such taxes satisfy the criterion of “source–use alignment” (i.e., when the connection between the revenue source and the use for which those revenues are earmarked accords with familiar consumer fairness norms). Evidence in support of this hypothesis comes from two experiments on a sample of US residents matched to Census data, in which subjects were randomly assigned to read descriptions of hypothetical earmarked taxes with varying levels of alignment. Individuals consistently expressed stronger support for earmarked taxes that achieved source – use alignment as compared to earmarked taxes that did not satisfy the source – use alignment criterion. Our theory and results not only help to explain why some earmarked taxes are more popular than others, but also suggest a means for increasing public support for taxes.

Keywords: taxes, earmarked taxes, alignment, dual entitlement

JEL Classification: K34, H2, H23, H27