Against the hypothecation of taxes

One of the sillier ideas floating around out there at present is that there should be a new hypothecated tax to pay for the NHS. The reason that this is a silly idea is that there's simply no connection whatsoever between what you can tax out of a particular activity and what we wish to spend upon some other particular activity. That is, hypothecation is itself a bad idea. Here's one demand for an NHS tax:

But a credible idea for preserving Labour's most enduring achievement in government is desperately needed. An earmarked health tax may be one whose time has come, and perhaps a model for financing other strained public services and modifying voters' resistance to taxation. Gordon Brown introduced a 1% national insurance health surcharge in his 2002 budget. The trickier question is how far the idea can be extended. Should all health spending come from specific revenue sources – the total proceeds of NI, say, or a general sales tax? Should something similar be done for education? Should older people's care bills be financed from an enhanced inheritance tax? Should corporation tax go to in-work benefits – which, in effect, subsidise inadequate wages?

Leave aside here that line about modifying voters' resistance to taxation. Concentrate just on this one point: that how we raise taxation, from what, is an entirely different question from how we wish to spend the money raised.

For example, we could posit a cigarette tax to cover the costs to the NHS and social security systems of smoking. Indeed people do. That smokers actually save the NHS and social security system money by dying earlier would mean that the correct tax would be a subsidy in this case. But leave that aside: we'll tax cigarettes their direct costs to the NHS and ignore the indirect savings. This would lead to a tax much lower than the one currently levied.

So, why do we tax fags so highly? Because demand for them is inelastic. We can load 200%, 300% taxes on smokers and people will still line up to buy the coffin nails. So, therefore, we tax cigarettes highly. And the same is true of booze, petrol and a host of other things. We tax them highly simply because we can. There are also any number of things that have very low elasticity of demand with respect to price and thus those things must be taxed lightly if we are to avoid too many distortions.

So what we can tax and how we can tax it depends on attributes of the thing that is being taxed.

Over on the spending side there is absolutely no connection whatsoever between what we can raise by taxing one specific thing according to its attributes and how much we want to spend on whatever other activity we're undertaking. What we can efficiently squeeze out of smokers has no connection whatsoever to the costsof the NHS, or the education system, nor even what we might want to spend on smoking cessation programs. For example, if the smoking rate either rises or falls, does this have any influence at all on how much we might want to spend on childhood vaccination?

No, it does not, there is no connection at all between these things, between how much we can raise from one specific tax and how much we want to spend on one particular activity. Therefore we shouldn't link one specific tax with one specific area of spending: that is, hypothecation is a bad idea.

Which leaves us back with Colbert's point. The art of taxation is to have the maximum plucking of the goose with the minimum hissing. The same statement as we should tax things with highly inelastic demand and not things with elastic such.