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Tax structure and the size of government: An empirical analysis of the fiscal illusion and fiscal stress arguments

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  • Walter Misiolek
  • Harold Elder

Abstract

This study attempts to fulfill a number of objectives. One is the (possible) reconciliation of two divergent strains of thought concerning the size of government: fiscal illusion and fiscal stress. In this respect, the results show little evidence of fiscal illusion, but provide support for some of the notions associated with the fiscal stress hypothesis, namely the effects of revenue and income variability on the size of government. Second, we try to provide a more complete specification of the size of government model through the addition of variables measuring the degree of tax exportation and the presence of tax-expenditure limitations. In both cases, the additions prove successful: greater tax exportation significantly increases the level of tax revenues and expenditures; and, and in states where there are statutory limitations on taxes or expenditures, we find lower levels of tax revenues and expenditures. In addition, our findings clearly show that the results one obtains in investigating fiscal illusion are sensitive to the manner in which the model is specified. Considerable work remains to be done in this area. Obviously, it would be desirable to specify the entire system of equations rather than one reduced form equation in the model. Also, broader and more accurate measures of tax system elasticity would perhaps illuminate the issues more effectively. And finally, the incorporation of modelling the size of government into a more inclusive theory of the public choice of revenues, spending, and government structure would be worthwhile. But these are all beyond the scope of this paper and must be deferred for later study. Copyright Kluwer Academic Publishers 1988

Suggested Citation

  • 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.
  • Handle: RePEc:kap:pubcho:v:57:y:1988:i:3:p:233-245
    DOI: 10.1007/BF00124807
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    References listed on IDEAS

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    Cited by:

    1. Yongzheng Liu & Haibo Feng, 2015. "Tax structure and corruption: cross-country evidence," Public Choice, Springer, vol. 162(1), pages 57-78, January.
    2. Casey B Mulligan, 1999. "Gerontocracy, Retirement, and Social Security," University of Chicago - George G. Stigler Center for Study of Economy and State 154, Chicago - Center for Study of Economy and State.
    3. F. Forte, 1997. "The measurement of 'fiscal burden' on GDP instead than on national net value added produced: a chapter in fiscal illusion," Banca Nazionale del Lavoro Quarterly Review, Banca Nazionale del Lavoro, vol. 50(202), pages 337-375.
    4. Musharraf Cyan & Jorge Martinez-Vazquez & VIoleta Vulovic, 2013. "Measuring tax effort: Does the estimation approach matter and should effort be linked to expenditure goals?," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1308, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    5. Becker, Gary S & Mulligan, Casey B, 2003. "Deadweight Costs and the Size of Government," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 293-340, October.
    6. David Cantarero & Marta Pascual & Roberto Fernandez & María A. García-Valiñas, 2004. "Local government debt: an application to the Spanish case," ERSA conference papers ersa04p282, European Regional Science Association.
    7. Michael Marlow & David Joulfaian, 1989. "The determinants of off-budget activity of state and local governments," Public Choice, Springer, vol. 63(2), pages 113-123, November.
    8. Musharraf Rasool Cyan & Jorge Martinez-Vazquez & Violeta Vulovic, 2014. "New approaches to measuring tax effort," Chapters,in: Taxation and Development: The Weakest Link?, chapter 2, pages 27-68 Edward Elgar Publishing.
    9. F. Forte, 1997. "The measurement of 'fiscal burden' on GDP instead than on national net value added produced: a chapter in fiscal illusion," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 50(202), pages 337-375.
    10. repec:eee:spacre:v:16:y:2013:i:2:p:83-93 is not listed on IDEAS
    11. John Creedy & José Félix Sanz?Sanz, 2010. "Modelling Personal Income Taxation in Spain:Revenue Elasticities and Regional Comparisons," Department of Economics - Working Papers Series 1097, The University of Melbourne.
    12. Haug, Peter, 2009. "Shadow Budgets, Fiscal Illusion and Municipal Spending: The Case of Germany," IWH Discussion Papers 9/2009, Halle Institute for Economic Research (IWH).

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