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Testing the Mill hypothesis of fiscal illusion

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  • Rupert Sausgruber

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  • 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

Suggested Citation

  • Rupert Sausgruber & Jean-Robert Tyran, 2005. "Testing the Mill hypothesis of fiscal illusion," Public Choice, Springer, vol. 122(1), pages 39-68, January.
  • Handle: RePEc:kap:pubcho:v:122:y:2005:i:1:p:39-68
    DOI: 10.1007/s11127-005-3992-4
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    References listed on IDEAS

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    1. 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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    More about this item

    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 - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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