The original use of the word hypothecation was for a pledge of property as collateral for a debt without transfer of possession to the party making the loan. The arrangement is common with modern mortgages - the borrower retains legal ownership of the property but provides the lender with a lien over the property until the debt is paid off.

Rehypothecation is when a broker pledges hypothecated client-owned securities in a margin account to secure a bank loan. Hypothecation is usually used for mortgages; other securities typically use collateral.

A more recent use of the word is as a contraction of "hypothetical dedication", as in a "dedicated tax" to be collected for a specific purpose. (This may be a spurious origin of the word, since the original definition of hypothecation as a pledging of assets could also be applied: the expected revenue from the tax in question being pledged to a particular cause). Dedicated taxes are often subject to unexpected shortfalls and surpluses. This may create political pressure to adjust the tax, to budget non-dedicated revenues for the purpose in question, or to reallocate surplus funds to other purposes.

Examples

Examples of hypothecation in the latter sense include the Gasoline Tax in the United States, which is dedicated to the funding of transportation infrastructure. A common example in many European countries is a television licence. Here, all owners of televisions are obliged to pay the government an annual fee to use their televisions. The proceeds of the fee are then used to fund public broadcasting. Another example is a dedicated tax on the private trading of securities (for example, 0.3 cents per dollar traded) used to fund public infrastructure programs directly (such as the building of a water treatment plant) or to pay the finance costs of such programs.

See also

• Conscientious objection to military taxation
• Religious Freedom Peace Tax Fund Act
• Security interest - hypothecation

References

• Hypothecation Defined & Explained at lectlaw.com
• hypothecate at insurance.cch.com

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Source: adapted by the editor from Wikipedia, the free encyclopedia; from the article "Hypothecation". Image Credit.

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