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Testing the Mill hypothesis of fiscal illusion

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  • Rupert Sausgruber

    (University of Innsbruck)

  • Jean-Robert Tyran

    (Institute of Economics, University of Copenhagen)

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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Bibliographic Info

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
Date of creation:
Date of revision: Sep 2004
Handle: RePEc:kud:kuiedp:0418

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Keywords: fiscal illusion; voting behavior; indirect taxation; redistribution; learning;

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  1. 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.
  2. Arno Riedl & Jean-Robert Tyran, 2003. "Tax Liability Side Equivalence in Gift-Exchange Labor Markets," Tinbergen Institute Discussion Papers 03-065/1, Tinbergen Institute.
  3. Bohnet, Iris & Frey, Bruno S, 1994. "Direct-Democratic Rules: The Role of Discussion," Kyklos, Wiley Blackwell, vol. 47(3), pages 341-54.
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  5. Borck, R. & Engelmann, D. & Müller, W. & Normann, H.T., 2002. "Tax liability side equivalence in an experimental posted offer market," Open Access publications from Tilburg University urn:nbn:nl:ui:12-112548, Tilburg University.
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  8. Krishna, Aradhna & Slemrod, Joel, 2003. "Behavioral Public Finance: Tax Design As Price Presentation," International Tax and Public Finance, Springer, vol. 10(2), pages 189-203, March.
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  10. 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.
  11. 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.
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