Fiscal illusion and progressive taxation with retrospective voting

Antonio Abatemarco and Roberto Dell’Anno
Authors registered in the RePEc Author Service: Roberto Dell'Anno

Economic and Political Studies, 2020, vol. 8, issue 2, 246-273

Abstract: This article addresses the tax progressivity decision of a rent-maximising government under the circumstances that voters’ perceptions of the tax price of public goods are biased by cognitive anomalies (i.e. fiscal illusion) and that the electorate opts for re-appointing or for dismissing the incumbent according to a retrospective voting logic. Given electoral and constitutional constraints, we show that the design of the tax system can be sensibly affected by fiscal illusion within the population of voters. Specifically, we find that (i) the tax system is more (less) progressive when taxes and public expenditures are perceived less (more), and (ii) an increase in the median voter’s income may positively or negatively affect tax progressivity depending on the nature (pessimistic or optimistic) of fiscal illusion. The impact of fiscal illusion on tax progressivity has been validated by econometric analysis.

Date: 2020
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Working Paper: Fiscal Illusion and Progressive Taxation with Retrospective Voting (2019)
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DOI: 10.1080/20954816.2020.1728831

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