Fiscal Illusion Research Articles

Truth and illusion: can a transparency reform contribute to accountable taxing behaviour?

ABSTRACT During property reassessment, local governments can take advantage of taxpayer uncertainty to raise property taxes with less public scrutiny – a form of so-called ‘fiscal illusion’. To address this phenomenon, North Carolina passed a law in 2003 requiring governments to publicly report their deviation from the revenue-neutral tax rate. We estimate the effect of this transparency reform on the extent of fiscal illusion in property taxes to understand the relationship between transparency and accountability. Using a difference-in-differences approach with county government data from 1990 to 2018, we find that counties increase property tax levies during property reassessment years, on average setting them 7.2 percent point higher than during non-reassessment years. We find that the 2003 transparency reform gradually reduced the amount of fiscal illusion and thereby contributed to more accountable taxing behaviours of governments.

Fiscal illusion at the individual level

AbstractThis study uses a survey experiment to test for fiscal illusion—the idea that taxpayers systematically misperceive their tax liabilities and contributions to public services. To date, the voluminous literature on fiscal illusion has not analyzed how better information on personalized total tax liabilities and contributions to public services would influence fiscal preferences. This is the first study to inform participants of their individual fiscal balance sheets comprising all major taxes regularly paid by taxpayers and their allocation to public services, thus comprehensively covering both sides of the fiscal account. This aim is achieved by embedding a novel personalized fiscal calculator in an online survey experiment administered to a representative sample of UK employees. The experiment finds evidence of fiscal illusion: providing personalized fiscal information reduces support for higher taxes and spending and increases support for lower taxes and spending. These findings indicate that taxpayers underestimate both their tax liabilities and the costs of public services.

Overestimation of social security payments reduces preferences for spending on social policy

We test the fiscal illusion hypothesis, which concerns whether an awareness of the government’s costs and benefits is linked to preferences for redistribution and social policy. We conduct an N=2016 survey experiment in Russia—a country where many taxpayers are not aware of social security contributions that are paid by employers on their behalf. The treatment consists of a video with a calculation of the total amount of taxes and social security contributions that typically arise from an individual’s salary. We show that for individuals who initially overestimated these payments, information provision increases preferences for redistribution, while overall, the awareness of these payments reduces preferences for state spending, possibly due to reduced trust in the government and lower satisfaction with state-provided services. This is consistent with the explanation that new information about taxes and social security contributions signals a low state quality. These results persist in a follow-up survey given six weeks later.

Fiscal Illusion Phenomena in West Sulawesi Province in 2013-2017 Period

This This research aims to analyze the phenomenon of fiscal illusions on regional financial performance. This research is derived from the website of the Central Bureau of Statistics and sites that provide regional financial data. The analysis tool for this research uses panel data regression with the method of detection of fiscal illusions using the Revenue Enhancement approach model. The results of this study found a fiscal illusion in the financial performance of the West Sulawesi Provincial Government, through the income measurement approach method, a fiscal illusion occurs in the Revenue Sharing Fund.

Analysis of the Impact of Regional Fiscal Policy on Economic Growth in North Sumatra

This study discusses the impact of regional fiscal policy on economic growth in North Sumatra. In this study also carried out the detection of fiscal illusion (flypaper effect) in fiscal policy undertaken by the local government districts/cities in North Sumatra. This study was conducted by analyzing quantitative data, that is, the data provide an overview of events using numbers, which then the results will be compared with theories and empirical evidence of relevant previous research results. The Data used in this study in the form of panel data (pool data). The results of this study showed that local revenue has a positive and significant effect on regional spending, general allocation funds have a positive and significant effect on regional spending, special allocation funds have a positive and significant effect on regional spending, simultaneously local revenue, general allocation funds, special allocation funds simultaneously have a positive and significant effect on regional spending districts / cities, directly local revenue has a positive and significant effect on economic growth proxied by Gross Regional Domestic Product, regional expenditure has a positive and significant effect on economic growth proxied by Gross Regional Domestic Product, Local revenue and local expenditure significantly affect economic growth proxied with Gross Regional Domestic Product and based on the results of research in relation to fiscal illusion from previous research can be mentioned that the fiscal illusion has occurred for a long time and in various regions in Indonesia and even in various regions in other countries. Local governments make the balance funds as the main source of revenue. Keywords: Local Revenue, Local Spending, Unconditional Grant, Growth, And Fiscal Illusion.

CREATION OF MUNICIPALITIES, FISCAL ILLUSION AND CAPTURE EVIDENCE FROM BRAZILIAN MATOPIBA REGION

This article empirically evaluates the effects of the creation of new municipalities in the states of Maranhão, Tocantins, Piauí and Bahia (MATOPIBA) on the municipalities' budget in terms of revenues and expenses (social, economic and overhead). Estimations made using panel data for fixed effects using the differences-in-differences method between 1995 and 2011 produce relevant evidence. First, the dismemberment of new municipalities contributed to an increase in the size of governments on the tax side. On the expenditure side, there was a reduction in per capita social expenditure, indicating a possible fiscal illusion in these municipalities. There was also an increase in per capita overhead expenses, which may suggest a capture of public resources in these municipalities. The use of resources on the expenditure side can vary significantly depending on whether they are funded by own or transferred revenues, reinforcing the hypothesis of fiscal illusion in these local governments.

Public-Private Partnership in Indonesia: Solutions and corruption loopholes

We need to better understand Public-Private Partnership (PPP), since most people perceive PPP as a riskless solution for government, as it involves private sector funding. In Indonesia, infrastructure development is one of the top priority sectors for Joko Widodo’s administration, and PPP has become a viable option due to budgetary constraints. However, PPP is not an impeccable solution, as there are weaknesses and loopholes for corruption to be aware of. In this literature review, we combine our previous study on Indonesia’s toll road PPP with other PPP studies to identify the weaknesses and corruption loopholes in PPP practices in Indonesia. There is clear evidence that PPP projects could end up as “white elephants”, indicating misallocation of resources and poor planning. PPP could also be used to create “fiscal illusion” to deceive public by the government. We also discovered that toll road PPP contracts in Indonesia remain vulnerable, potentially creating room for loopholes and corruption.

A comparison of fiscal illusion for brazilain states generated by tax structure complexity

A comparison of fiscal illusion for brazilain states generated by tax structure complexity

Relevance of Fiscal Illusion Proposition and Wagner Theory to Nigerian Budget Performance (Nexus among Fiscal Illusion Index, Recurrent and Capital Budget)

This paper presents an empirical analysis of the consequences of fiscal illusion for public spending outcomes in a developing country context, specifically Nigeria, over the period 1993- 2022. The presence of fiscal illusion and its main indicators are identified (measured here through deficit illusion, and degree of tax visibility, where the real burden of taxation is underrepresented to the citizen-voter). We find that the Nigerian economy reveals significant fiscal illusion as measured in above terms. Also, fiscal illusion is found to have major and positive impact on the demand for government capital expenditure and government recurrent expenditure and consequently, on real government expenditure in the economy over the chosen time period. This work demonstrated that the controversial question involving the role of fiscal illusion practices on public finances is not recent, but can be thought of as deriving from the discussion invoked by Puviani (1903) and substantially enriched by Buchanan (1960). In spite of the fact that the ‘Fiscal Illusion’ School of Buchanan and Wagner (1977) identifies higher levels of fiscal illusion promoting increasing increments in the size of the public sector, this work developed a model that predicts higher levels of fiscal illusion also decrease national economic growth rates. The government additionally creates the false illusion that public expenditures are lower than they are in reality and for this reason it is easier to maintain the illusive fiscal discipline. On the one hand, the government may cut expenditures in an ostensible way and step towards reducing the budget deficit. On the other hand, without additional procedures the government may introduce new public expenditures outside the budget and, consequently, without any special control of the law-making arm of government.

Populist attitudes, fiscal illusion and fiscal preferences: evidence from Dutch households

It is well documented that the public is often poorly informed about the economy. In the domain of fiscal policy, this may make voters susceptible to favour spending, while underestimating its costs (fiscal illusion). While politicians may have more information to judge the need for prudent economic policies, voters may be less inclined to support prudent fiscal policy if they do not believe that these politicians act in their best interest—an idea that in recent decades has become more prevalent. Using a novel dataset from the Netherlands, this paper examines whether strong populist ideas lead to more expansionary fiscal preferences, thereby reinforcing the risk of fiscal illusion. The findings indicate that respondents' populist attitudes significantly predict their fiscal preferences. Additionally, higher literacy and information provision contribute to more prudent fiscal preferences. However, the impact of literacy is conditioned by the level of populist sentiment. Poorly literate respondents show higher support for tax relief only when holding strong populist attitudes, not when expressing lower levels of populist sentiment.

Strategic Narratives in International Tax Policy Making: BEPS Action 1 and the Stability Argument

Drawing on narrative analysis developed by communications scholars, and applied by scholars of economics and international law and in policy analysis, this article studies action 1 of the Organisation for Economic Co-operation and Development's (OECD's) base erosion and profit shifting (BEPS) project as a policy narrative. The authors outline the role of narrative in international tax policy making and evaluate the probability and the argumentative and material coherence of the OECD's story about the need to ensure the stability of the international tax framework and system. Focusing on the narrative strategy adopted by the OECD to promote its pillar one proposal, the authors assess the likely persuasiveness of the OECD's stability argument—in particular, how it may have influenced the response to the proposal by the members of the Inclusive Framework on BEPS. The authors conclude that the OECD's concern about potentially destabilizing effects of digital services taxes and similar taxes on the international income tax system propagates a global fiscal illusion, and may not sustain long-term support for pillar one by many members of the Inclusive Framework.

Fiscal illusion and income inequality: an empirical investigation

PurposeThe present study investigates the role of fiscal illusion on income inequality in 46 selected countries in terms of income and development levels from 2002 to 2017.Design/methodology/approachThe effect of fiscal illusion on income inequality is tested using the two-step system generalized method of moment (SYS-GMM) estimator.FindingsThe findings reveal the negative effect of fiscal illusion on income inequality, which means increasing fiscal illusion decreases income inequality in 46 selected countries. As in other countries, income inequality declines when fiscal illusion increases in high-income and developed countries, although the redistributive effect of fiscal illusion is more in high-income and developed countries than in other countries. In addition, the results demonstrate the positive effect of unemployment, urbanization and inflation as well as the negative effect of trade openness on income inequality in all three models.Originality/valuePrevious studies have examined the role of government in controlling income inequality from different perspectives; however, no study has detected the role of government in income distribution regarding fiscal illusion.Peer reviewThe peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-05-2022-0311.

ILUSI FISKAL DAN PENGARUHNYA TERHADAP PERTUMBUHAN EKONOMI DAN KESEJAHTERAAN MASYARAKAT

This study aims to identify the occurrence of the phenomenon of fiscal illusion in the influence of Regional Taxes, General Allocation Funds, Special Allocation Funds on Regional Expenditure and their influence on Economic Growth and Social Welfare in East Java Province in 2015-2018. The type of data used is secondary data. The object of research includes 38 regencies/cities in East Java Province with data sources obtained from Reports on Budget Realization and Economic Growth and Social Welfare. The analytical method used is Partial Least Square analysis. The conclusion obtained from the test is that Regional Taxes have a positive and significant effect on Regional Expenditures, General Allocation Funds have a positive and significant effect on Regional Expenditures, Special Allocation Funds have a positive but not significant effect on Regional Expenditures, Regional Expenditures have a positive and significant effect on Economic Growth, Growth The economy has a positive but not significant effect on people's welfare. There is a phenomenon of fiscal illusion where fiscal illusions have a positive and significant effect on economic growth but not a significant positive effect on social welfare in the regency/city of East Java Province in 2015-2018.

The Determinants of Fiscal Transparency in Vietnamese Local Governments

There are few studies on the determinants of fiscal transparency in Vietnamese local governments, and most of them are qualitative studies of a few special cases and do not cover theoretically relevant factors changing over time. The main objective of this study was to examine the impacts of fiscal, demographic and political factors on fiscal transparency by using a fixed-effects model on panel data from 63 local governments in Vietnam from 2017 to 2020. The results indicate that local government expenditure, taxes and population size are positively associated with fiscal transparency, while fiscal surplus and intergovernmental grants negatively affect fiscal transparency. Our empirical findings emphasize the importance of citizens’ and policymakers’ roles in supervising Vietnamese local governments’ financial information, given the existence of fiscal illusions and agency problems.

Federal transfers and sub-national spending in India: an analysis of the stimulatory effect

This study empirically examines the stimulatory effect of federal transfers in India using a panel dataset of 21 states for the period 2005–06 to 2019–20. In mapping the stimulus effect, we test the validity of the ‘extended flypaper effect’, where lumpsum federal transfers tend to increase the state’s public spending more than a corresponding increase in its own revenue and borrowing resources. The results suggest that the marginal effects of state own-source revenues and borrowing on India’s sub-national non-capital expenditure outweigh those of federal transfers. Therefore, the existence of flypaper effects at the sub-national level in India cannot be ruled out. However, at the disaggregate level, 10 of 21 states report a stimulatory effect of lumpsum federal transfers on state spending. Of these, nine states are mapped to the capital expenditure account and one state to the revenue account. The empirical results also reveal the presence of fiscal illusion i.e., the systematic misperception of fiscal parameters. While the fiscal illusion produced by federal transfers is not a concern, the debt-driven fiscal illusion is worrisome in India as most states’ non-development revenue expenditure is fuelled by borrowed money. Hence corrective action is needed to find a strategy of optimal mix of three stimulus factors for these states namely states’ own revenue, federal transfers and state borrowing.

The art of plucking the goose: Chinese urban residents' tax consciousness

AbstractPublic finance lies at the heart of politics. It shapes citizens' political attitudes and behaviors. While the expenditure side has been studied very extensively, the income side has been neglected, especially in authoritarian regimes. Taking China as an ideal case, we use a nation‐wide random sample of urban residents to study how citizens under strong authoritarian states perceive their tax burdens. We find that Chinese citizens have low tax consciousness, defined as the perception of fairness both in comparison to people they know and to the amount of public goods they receive. Citizens' income, the amount of public goods they receive, and media consumption have important effects on their tax perception. We argue that there are three mechanisms used by China's “half‐tax state” to reduce their citizens' tax perception: (1) reduce the salience of people's tax burden, conditional on their income level, (2) generate fiscal illusion effects while providing public services in return for taxes paid, and (3) use propaganda to shape the ideology of tax compliance.

Fiscal Illusion and the Association to Advance Collegiate Schools of Business’s Promotion of the UN’s’ Development Goals

Fiscal Illusion and the Association to Advance Collegiate Schools of Business’s Promotion of the UN’s’ Development Goals

Interest rates affect public expenditure growth

<abstract> <p>The aim of this paper is to analyze interest rates and public spending to provide policy implications. Concretely, it explores the influence of these rates on public expenditure growth as opposite to the traditional direction view, dealing with 216 countries for the 1972–2021 period and estimating system GMM models. A balanced subsample is used for assessing Granger causality through a recent panel technique. The results are robust for the used dependent and target variables and also the methodology. They show that decreasing interest rates are associated with—and in some cases also lead to—lower per capita public expenditure growth. These results can be interpreted as a twofold effect of shifts in relative prices—through fiscal illusion—and of crowding out of private investment with respect to the public sector.</p> </abstract>

Public Attitudes Toward Fiscal Consolidation: Evidence from a Representative German Population Survey

The poor state of public finances in many countries has led to calls for fiscal consolidation. In practice, implementing concrete consolidation measures appears to meet with public resistance, suggesting that the success of consolidation efforts strongly depends on the popularity of the chosen measures. To identify public attitudes toward fiscal consolidation and alternative consolidation measures, we conducted a survey among 2,000 German citizens. Applying ordered and multinominal logit models, we test theory-based hypotheses about the determinants of individual attitudes toward public debt. We find that, inter alia, personal economic situation, time preferences, fiscal illusion, and trust in politicians exert a significant impact on attitudes toward fiscal consolidation and preferences for alternative consolidation measures.

Relationship Between Government Expenditure and Tax Revenue within the Framework of the Fiscal Illusion Hypothesis: Case of Turkey

Bu çalışmanın amacı Türkiye’de kamu harcamaları ile vergiler arasındaki ilişkiyi inceleyerek mali yanılsamanın geçerliliğini vergi-harcama teorisi kapsamında test etmektir. Bu çerçevede Türkiye’de dolaylı-dolaysız vergiler ile kamu harcamaları arasındaki ilişki 1971-2019 yılları için Johansen eşbütünleşme ve Granger nedensellik analizleri kullanılarak güncel veriler ile test edilmekte ve literatüre katkı sağlanmaktadır. Yapılan analizde, kurumlar vergisi ile kamu harcamaları arasında eşbütünleşme ve nedensellik ilişkisinin bulunmadığı; mal ve hizmetler üzerinden alınan vergiler ile kamu harcamaları arasında nedensellik ilişkisi bulunurken gelir vergisi ile kamu harcamaları arasında hem uzun dönemli bir ilişki hem de nedensellik ilişkisi olduğu sonucuna ulaşılmıştır. Bu durum Türkiye’de mali yanılsamanın geçerli olduğunu göstermektedir.