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Testing the Mill hypothesis of fiscal illusion

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Author Info
Rupert Sausgruber (University of Innsbruck)
Jean-Robert Tyran (Institute of Economics, University of Copenhagen)

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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.

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Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 04-18.

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Length: 27 pages
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Date of revision: Sep 2004
Handle: RePEc:kud:kuiedp:0418

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Related research
Keywords: fiscal illusion voting behavior indirect taxation redistribution learning

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Find related papers by JEL classification:
C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Models of Political Processes: Rent-seeking, Elections, Legislatures, and Voting Behavior

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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.:
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    Other versions:
  4. R. Borck & D. Engelmann & W. Müller & H. Normann, . "Tax Liability Side Equivalence in Experimental Posted-Offer Markets," Sonderforschungsbereich 373 2000-8, Humboldt Universitaet Berlin.
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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)
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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 & Krupnikov, Yanna & Levine, Adam Seth & Grafstrom, Cassandra & MacMillan, William & McGovern, Erin, 2008. "How “Point Blindness” Dilutes the Value of Stock Market Reports," MPRA Paper 9612, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  4. Blumkin, Tomer / Ruffle, Bradley J. / Ganun, Yosef, 2008. "Are Income and Consumption Taxes ever really Equivalent? Evidence from a Real-Effort Experiment with Real Goods," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
  5. 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!]
  6. 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!]
  7. 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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