Earmarked taxation and political competition

Although tax earmarking constitutes a voluntary constraint for government's policymaking, it is widely used in the real world. This paper investigates the electoral dimension of earmarking in a model of political competition with ideological parties. Its main contribution is to derive new insights on the relationship between earmarking and parties' probability of winning the elections. We find that the electoral pressure may favor the existence of tax-earmarking equilibria, but that it sometimes creates a tendency against earmarked taxation even when, as shown by Brett and Keen (2000) [Brett, C., Keen, M., 2000. Political uncertainty and the earmarking of environmental taxes. Journal of Public Econonomics 75, 315-340], incumbent governments have strong incentives to use earmarking rules to constrain future policymakers. (c) 2005 Elsevier B.V. All rights reserved.