Earmarking of Taxes for Disruption and Recovery

In times of disruption and recovery, raising new taxes may be quite unpopular which may lead governments to instead consider earmarked taxes. However, in such scenarios, earmarked taxes tend to be designed in a non-benefit manner which is contrary to the recommendations in prior literature. Th is author seeks to provide guidance to a country that weighs all its tax policy options and decides in favour of an earmarked tax. Th e discussion begins with a deconstruction of the concept of earmarking and a comparison of an earmarked tax with a general/labelled/Pigouvian tax and fee. This chapter reviews the primary theoretical justifications for earmarking to investigate the reasons why earmarking is considered unjustifiable in a non-benefit context which provides crucial learnings for designing an earmarked tax. The chapter also scrutinises the potential merits and demerits of using earmarked taxes as responses in periods of disruption. Finally, the text provides advice to governments and policy makers by outlining the governance structure and key earmarking attributes that need to be borne in mind when designing an earmarked tax, especially in periods of disruption and recovery. The COVID-19 pandemic-induced earmarked taxes are taken as case studies in this regard.