The Self-Hypothecating Tax

Opinion pollsters have consistently found that voters are more likely to support or tolerate a proposed tax if the revenue is hypothecated (i.e. reserved or “earmarked”) for a purpose of which the voters approve. They catch is: how can the voters know that the revenue will be spent as promised?

For example, a rational property owner should support a property tax if the revenue is spent on infrastructure that raises his/her property values by more than the amount of the tax. But how does the owner know that the tax will be spent in that way?

If the tax is properly implemented, the answer is: “Because if the government doesn’t spend the revenue as promised, it won’t get the revenue!”

Suppose a tax recovers a fraction 1/x of all real increases in site values. Then the government will have a financial incentive to invest in any infrastructure project that increases site values by more than x times the cost of the project, because such a project will pay for itself (and more) through part of the uplift in site values that it causes, while the affected property owners will retain the rest of the uplift as an after-tax benefit. But if the government doesn’t proceed with the project, the uplift won’t happen and the associated revenue won’t come in. And you won’t contribute to that revenue unless your property increases in value.

A tax on uplifts in site values is not a means of raising revenue for promised projects that may or may not proceed as promised. Rather, it is a means of making desirable infrastructure projects pay for themselves if and only if they go ahead, so that the government doesn’t get the tax unless it delivers the infrastructure.

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https://prosper.org.au/2007/11/01/the-self-hypothecating-tax/