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Friday, July 01, 2005
Hypothecated taxes - a double-edged sword

Gordon Brown is drawing up plans to siphon off the millions of pounds raised each year from the GBP5 tax on airline tickets to fund a huge aid package for Africa, according to The Times today.

Ring-fencing (or "hypothecating") revenue from a particular tax for a particular project is rare because Chancellors rightly see it as a restriction on their ability to tax and spend. There have, however, been exceptions. Tobacco duty is earmarked for healthcare, and the 1p increase in national insurance for the NHS.

Although the last Conservative Chancellor Kenneth Clarke introduced air passenger duty, it has gone up considerably under Labour and become very unpopular with frequent flyers. Ring-fencing it for Third World aid will now make opposition to air passenger duties extremely difficult.

It's a pity MPs don't hypothecate revenue from a particular tax to cover their generous salaries and gold-plated pensions. That would be an easy tax to campaign against.