General fund financing, earmarking, economic stabilization and welfare

Chen, Been-Lon and Lee, Shun-Fa (2008): General fund financing, earmarking, economic stabilization and welfare. Published in: Public Finance Review , Vol. 37, (5 September 2009): pp. 507-538.

Abstract

Discussion has been made concerning pros and cons of the ways of financing public projects via either earmarking or general fund based upon a public finance approach. The paper studies the implications of desirability of earmarked and general fund based upon economic stabilization in a two-sector growth model. Regardless of the nature of public goods, earmarked tax contributes to aggregate stabilization, while general fund may be destabilizing and cause fluctuations. The underlying mechanism in favor of earmarked taxes against general fund is that general fund creates intersectoral externalities and strategic complementarities that is sufficiently large to exert endogenously persistent and recurring fluctuations in aggregate activities in the absence of shocks to fundamentals. Earmarked taxing generates only sector-specific externalities that are too small to exert local indeterminacy. In a calibrated version, we compute the level of long-run welfare and the results reflect favorably upon the use of earmarked taxing.

• Item Type: MPRA Paper
• Language: English
• Keywords: earmarked tax; general fund finance; indeterminacy, welfare
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O41 - One, Two, and Multisector Growth Models

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