Abstract
In this paper, the examination of the specific type of fiscal illusion, known as Mill hypothesis, is provided. The source of this type of fiscal illusion originates in tax invisibility, when in comparison with direct taxes, indirect taxes are less visible to taxpayers. Feeding the fiscal illusion through the increase of tax rates of invisible taxes, governments are able to increase their expenditure. The relationship between taxes differing in their visibility and government expenditure is estimated on the sample of EU 28 countries in the period of 1995–2017. Estimated dynamic panel models using the GMM system estimator employ different groups of taxes imposed on taxpayers (indirect, direct, invisible and visible).
Highlights
The examination of the specific type of fiscal illusion, known as Mill hypothesis, is provided. The source of this type of fiscal illusion originates in tax invisibility, when in comparison with direct taxes, indirect taxes are less visible to taxpayers
Basic type of data employed in the research are data on various taxes. As it was mentioned in the part of Introduction, according to Gemmell et al (1999) and DellAnno and Mourão (2012), taxes differ in their visibility and invisible taxes are the appropriate instrument of government how to increase fiscal illusions
For the purpose of the preliminary investigation of relations between different types of taxes involved in the research and government expenditure as % of the gross domestic product (GDP) (TE), the Tab. 1 and Fig. 1 are projected
Summary
Citizenstaxpayers are not capable to evaluate all aspects of taxation imposed by the government. Hidden sides of taxation in forms of real tax incidences and real tax costs evade the understanding of total tax burden
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