earmarking. The practice of linking particular elements of PUBLIC EXPENDITURE to the revenue raised by specific taxes. This process of assigning certain revenues for specific purposes is also referred to as hypothecation. Economists are divided on the merits of earmarking, some holding that the practice may impose an undesirable rigidity on certain expenditures, while others argue that such taxes can help improve ALLOCATIVE EFFICIENCY by acting as PRICES provided the taxes are levied on those who benefit from the expenditure. (See also BENEFIT PRINCIPLE.)
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