On Fiscal Illusion in Local Public Finance: Re-Examining Ricardian Equivalence and the Renter Effect
Spencer Banzhaf () and
National Tax Journal, 2013, vol. 66, issue 3, 511-540
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.
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