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Shadow Budgets, Fiscal Illusion and Municipal Spending: The Case of Germany

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  • Peter Haug

Abstract

The paper investigates the existence of fiscal illusion in German municipalities with special focus on the revenues from local public enterprises. These shadow budgets tend to increase the misperception of municipal tax prices and seem to have been neglected in the literature. Therefore, an aggregated expenditure function has been estimated for all German independent cities applying an “integrated budget” approach, which means that revenues and expenditures of the core budget and the local public enterprises are combined to one single municipal budget. The estimation results suggest that a higher relative share of local public enterprise revenues might increase total per capita spending as well as spending for non-obligatory municipal goods and services. Empirical evidence for other sources of fiscal illusion is mixed but some indications for debt illusion, renter illusion or the flypaper effect could be found.

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Bibliographic Info

Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 9.

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Date of creation: Apr 2009
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Handle: RePEc:iwh:dispap:9-09

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Keywords: fiscal illusion; municipal enterprises; panel data regression;

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  1. Rupert Sausgruber & Jean-Robert Tyran, 2005. "Testing the Mill hypothesis of fiscal illusion," Public Choice, Springer, vol. 122(1), pages 39-68, January.
  2. Borcherding, Thomas E & Deacon, Robert T, 1972. "The Demand for the Services of Non-Federal Governments," American Economic Review, American Economic Association, vol. 62(5), pages 891-901, December.
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  5. Thomas DiLorenzo, 1982. "Utility profits, fiscal illusion, and local public expenditures," Public Choice, Springer, vol. 38(3), pages 243-252, January.
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  7. Kevin Deno & Stephen Mehay, 1988. "Municipal utilities and local public finance: A simultaneous model," Public Choice, Springer, vol. 57(3), pages 201-212, June.
  8. Kalb, Alexander, 2008. "The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities," ZEW Discussion Papers 08-051, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  9. Buettner, Thiess, 2003. "Tax base effects and fiscal externalities of local capital taxation: evidence from a panel of German jurisdictions," Journal of Urban Economics, Elsevier, vol. 54(1), pages 110-128, July.
  10. Dollery, Brian & Worthington, Andrew, 1999. "Fiscal Illusion at the Local Level: An Empirical Test Using Australian Municipal Data," The Economic Record, The Economic Society of Australia, vol. 75(228), pages 37-48, March.
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  12. Dollery, Brian E & Worthington, Andrew C, 1996. " The Empirical Analysis of Fiscal Illusion," Journal of Economic Surveys, Wiley Blackwell, vol. 10(3), pages 261-97, September.
  13. Epple, Dennis & Romano, Richard E., 1996. "Ends against the middle: Determining public service provision when there are private alternatives," Journal of Public Economics, Elsevier, vol. 62(3), pages 297-325, November.
  14. Walter Misiolek & Harold Elder, 1988. "Tax structure and the size of government: An empirical analysis of the fiscal illusion and fiscal stress arguments," Public Choice, Springer, vol. 57(3), pages 233-245, June.
  15. Geoffrey K. Turnbull, 2007. "Government Form and Performance: Fiscal Illusion and Administrative Ability In U.S. Counties," Southern Economic Journal, Southern Economic Association, vol. 73(3), pages 754–769, January.
  16. Eric J. Brunner & Stephen L. Ross, 2009. "Is the Median Voter Decisive? Evidence of 'Ends Against the Middle' From Referenda Voting Patterns," Working papers 2009-02, University of Connecticut, Department of Economics, revised May 2010.
  17. Pommerehne, Werner W & Schneider, Friedrich, 1978. "Fiscal Illusion, Political Institutions, and Local Public Spending," Kyklos, Wiley Blackwell, vol. 31(3), pages 381-408.
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