Testing the Mill hypothesis of fiscal illusion

Rupert Sausgruber and Jean-Robert Tyran

No 04-18, Discussion Papers from University of Copenhagen. Department of Economics

Abstract: According to the “Mill hypothesis”, the tax burden from indirect taxation is underestimated because indirect taxes are less “visible” than direct taxes. We experimentally test the Mill hypothesis and identify tax framing as a cause of fiscal illusion. We find that the tax burden associated with an indirect tax is underestimated, whereas this is not the case with an equivalent direct tax. In a referendum to tax and redistribute tax revenue, fiscal illusion is found to distort democratic decisions and to result in “excessive” redistribution. Yet, voters eventually learn to overcome fiscal illusion.

Keywords: fiscal illusion; voting behavior; indirect taxation; redistribution; learning (search for similar items in EconPapers)
JEL-codes: C92 D72 H22 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2004-09
New Economics Papers: this item is included in nep-cdm
References: View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: Testing the Mill hypothesis of fiscal illusion (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:0418

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