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On Fiscal Illusion in Local Public Finance: Re-Examining Ricardian Equivalence and the Renter Effect

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  • H. Spencer Banzhaf
  • Wallace E. Oates

Abstract

We reevaluate fiscal illusion in local public finance. The Ricardian Equivalence Theorem suggests that the financing of a public program using either taxation or debt shouldn’t affect outcomes, because debt is capitalized into property values. In contrast, we show individuals may rationally prefer public debt if governments can borrow on more favorable terms. We also propose a new test for the renter effect: controlling for differences in demand, the renter effect suggests renters prefer property taxes to sales taxes. Using data from U.S. open space referenda, we find that households do prefer debt financing, but find no evidence of the renter effect.

Suggested Citation

  • H. Spencer Banzhaf & Wallace E. Oates, 2013. "On Fiscal Illusion in Local Public Finance: Re-Examining Ricardian Equivalence and the Renter Effect," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(3), pages 511-540, September.
  • Handle: RePEc:ntj:journl:v:66:y:2013:i:3:p:511-540
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    References listed on IDEAS

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    1. repec:bla:pbudge:v:37:y:2017:i:1:p:112-134 is not listed on IDEAS
    2. Glaeser, Edward L. & Ponzetto, Giacomo A.M., 2014. "Shrouded costs of government: The political economy of state and local public pensions," Journal of Public Economics, Elsevier, vol. 116(C), pages 89-105.
    3. Eunji Kim & Yoonhee Ha & Sangheon Kim, 2017. "Public Debt, Corruption and Sustainable Economic Growth," Sustainability, MDPI, Open Access Journal, vol. 9(3), pages 1-30, March.
    4. repec:bla:pbudge:v:37:y:2017:i:2:p:102-124 is not listed on IDEAS
    5. Sutirtha Bagchi, 2017. "The Effects of Political Competition on the Funding of Public-Sector Pension Plans," Villanova School of Business Department of Economics and Statistics Working Paper Series 36, Villanova School of Business Department of Economics and Statistics.
    6. Sutirtha Bagchi, 2018. "The Effects of Political Competition on the Generosity of Public-Sector Pension Plans," Villanova School of Business Department of Economics and Statistics Working Paper Series 38, Villanova School of Business Department of Economics and Statistics.
    7. repec:eee:regeco:v:66:y:2017:i:c:p:150-174 is not listed on IDEAS

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