The Theory and Practice of Tax Earmarking: Implications for South Africa

The practice of tax earmarking or dedication is relatively common in many parts of the world especially developing countries. The (Katz) Commission of Inquiry into certain aspects of the Tax Structure of South Africa has given some attention to the issue of tax dedication, and there are other recent indications of a growing interest in earmarking to finance high-priority public spending in South Africa. The paper reviews the literature on various theoretical and practical issues related to the definition, incidence, rationale and likely effects of tax earmarking in South Africa and abroad. The paper concludes that an extension of the practice in South Africa is unlikely to further the current public finance objectives of efficiency, equity, discipline and transparency, and that the scope of tax earmarking needs to be confined to high-profile projects which can be monitored effectively on a regular basis.