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Testing the Mill hypothesis of fiscal illusion

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Author Info
Rupert Sausgruber ()
Jean-Robert Tyran ()

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Abstract

According to the “Mill hypothesis”, the tax burden from indirect taxation is underestimated because indirect taxes are less “visible” than direct taxes. We experimentally test the Mill hypothesis and identify tax framing as a cause of fiscal illusion. We find that the tax burden associated with an indirect tax is underestimated, whereas this is not the case with an equivalent direct tax. In a referendum to tax and redistribute tax revenue, fiscal illusion is found to distort democratic decisions and to result in “excessive” redistribution. Yet, voters eventually learn to overcome fiscal illusion. Copyright Springer Science + Business Media, Inc. 2005

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File URL: http://hdl.handle.net/10.1007/s11127-005-3992-4
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Publisher Info
Article provided by Springer in its journal Public Choice.

Volume (Year): 122 (2005)
Issue (Month): 1 (January)
Pages: 39-68
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Handle: RePEc:kap:pubcho:v:122:y:2005:i:1:p:39-68

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gemmell, Norman & Morrissey, Oliver & Pinar, Abuzer, 2003. "Tax perceptions and the demand for public expenditure: evidence from UK micro-data," European Journal of Political Economy, Elsevier, vol. 19(4), pages 793-816, November. [Downloadable!] (restricted)
  2. Aradhna Krishna & Joel Slemrod, 2003. "Behavioral Public Finance: Tax Design as Price Presentation," Asia-Pacific Financial Markets, Springer, vol. 10(2), pages 189-203, March. [Downloadable!] (restricted)
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  3. Bohnet, Iris & Frey, Bruno S, 1994. "Direct-Democratic Rules: The Role of Discussion," Kyklos, Blackwell Publishing, vol. 47(3), pages 341-54.
  4. Jean-Robert Tyran & Arno Riedl, 2003. "Tax Liability Side Equivalence in Gift-Exchange Labor Markets," University of St. Gallen Department of Economics working paper series 2003 2003-15, Department of Economics, University of St. Gallen. [Downloadable!]
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  5. Rainald Borck & Dirk Engelmann & Wieland Müller & Hans-Theo Normann, 2002. "Tax Liability-Side Equivalence in Experimental Posted-Offer Markets," Southern Economic Journal, Southern Economic Association, vol. 68(3), pages 672-682, January.
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  6. Dollery, Brian E & Worthington, Andrew C, 1996. " The Empirical Analysis of Fiscal Illusion," Journal of Economic Surveys, Blackwell Publishing, vol. 10(3), pages 261-97, September.
  7. Laurence J. Kotlikoff & Lawrence H. Summers, 1988. "Tax Incidence," NBER Working Papers 1864, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    • Kotlikoff, Laurence J. & Summers, Lawrence H., 1987. "Tax incidence," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 16, pages 1043-1092 Elsevier. [Downloadable!] (restricted)
  8. Ruffle, Bradley J., 2005. "Tax and subsidy incidence equivalence theories: experimental evidence from competitive markets," Journal of Public Economics, Elsevier, vol. 89(8), pages 1519-1542, August. [Downloadable!] (restricted)
  9. Fujii, Edwin T & Hawley, Clifford B, 1988. "On the Accuracy of Tax Perceptions," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 344-47, May. [Downloadable!] (restricted)
  10. Schokkaert, Erik, 1988. "Fiscal preferences and fiscal knowledge at the local level," Journal of Economic Psychology, Elsevier, vol. 9(1), pages 29-46, March. [Downloadable!] (restricted)
  11. Smith, Vernon L, et al, 1982. "Competitive Market Institutions: Double Auctions vs. Sealed Bid-Offer Auctions," American Economic Review, American Economic Association, vol. 72(1), pages 58-77, March. [Downloadable!] (restricted)
  12. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," NBER Working Papers 6789, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  13. Jean-Robert Tyran & Rupert Sausgruber, 2002. "A Little Fairness may Induce a Lot of Redistribution in Democracy," University of St. Gallen Department of Economics working paper series 2002 2002-30, Department of Economics, University of St. Gallen. [Downloadable!]
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  14. Cullis, John & Lewis, Alan, 1985. "Some hypotheses and evidence on tax knowledge and preferences," Journal of Economic Psychology, Elsevier, vol. 6(3), pages 271-287, September. [Downloadable!] (restricted)
  15. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Löfgren, Åsa & Nordblom, Katarina, 2006. "Puzzling tax attitudes and labels," Working Papers in Economics 234, Göteborg University, Department of Economics. [Downloadable!]
  2. Jean-Robert Tyran & Arno Riedl, 2003. "Tax Liability Side Equivalence in Gift-Exchange Labor Markets," University of St. Gallen Department of Economics working paper series 2003 2003-15, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
  3. Lupia, Arthur & Grafstrom, Cassandra & Krupnikov, Yanna & Levine, Adam Seth & MacMillan, William & McGovern, Erin, 2008. "How “Point Blindness” Dilutes the Value of Stock Market Reports," MPRA Paper 8191, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. Blumkin, Tomer & Ruffle , Bradley J. & Ganun , Yosef, 2007. "Are Income and Consumption Taxes Ever Really Equivalent? Evidence from a Real-Effort Experiment with Real Goods," MPRA Paper 6479, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  5. Rupert Sausgruber & Jean-Robert Tyran, 2008. "Tax Salience, Voting, and Deliberation," Discussion Papers 08-21, University of Copenhagen. Department of Economics. [Downloadable!]
    Other versions:
  6. Tomer Blumkin & Ehud Menirav, 2009. "Framing the rabbit to snare the votes," Social Choice and Welfare, Springer, vol. 32(4), pages 603-634, May. [Downloadable!] (restricted)
  7. Werner Güth & Rupert Sausgruber, 2008. "Voting between tax regimes to fund a public good," Economics of Governance, Springer, vol. 9(4), pages 287-303, October. [Downloadable!] (restricted)
  8. Lupia, Arthur & Grafstrom, Cassandra & Krupnikov, Yanna & Levine, Adam Seth & MacMillan, William & McGovern, Erin, 2007. "Loonies Under Your Bed: Misdirected Attention and the Diluted Value of Stock Market Reports," MPRA Paper 4912, University Library of Munich, Germany. [Downloadable!]
  9. Peter Haug, 2009. "Shadow Budgets, Fiscal Illusion and Municipal Spending: The Case of Germany," IWH Discussion Papers 9-09, Halle Institute for Economic Research. [Downloadable!]
  10. Jean-Robert Tyran & Rupert Sausgruber, 2002. "A Little Fairness may Induce a Lot of Redistribution in Democracy," University of St. Gallen Department of Economics working paper series 2002 2002-30, Department of Economics, University of St. Gallen. [Downloadable!]
    Other versions:
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