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

Walter Misiolek and Harold Elder

Public Choice, 1988, vol. 57, issue 3, 233-245

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

Date: 1988
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DOI: 10.1007/BF00124807

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