The Fiscal Alibi: Hidden Spending Needs and Government Reputation

Georgy Lukyanov and Hengrina Ly

No 26-1796, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: A government may ask for a high tax because it faces a genuine expense. The same demand can also be made by a government that intends to keep the proceeds. We study this ambiguity in a two-period reputation model with privately observed spending needs and an endogenous tax base. The opportunist chooses between outright confiscation and levies that an honest government might impose. We characterize the three possible regimes through a single equilibrium equation. A mean-preserving spread of legitimate needs weakly raises the opportunist’s lifetime value, with a strict increase precisely when the spread changes the upper tail relevant for mimicry. We then give a necessary and sufficient curvature condition for this ordering to extend to a general reputational continuation prize. Verification reduces the value of concealment, but also changes how the opportunist extracts. In the benchmark economy, greater auditing weakly lowers current citizen welfare, even before audit costs, while improving the future allocation through better information. The welfare case for verification consequently depends on the balance between these two effects. Examples yield no auditing, an optimum within a regime, and an optimum at the boundary between regimes.

Keywords: government reputation; hidden fiscal needs; taxation; convex order; audits; political agency (search for similar items in EconPapers)
JEL-codes: D82 D83 H11 H21 H61 (search for similar items in EconPapers)
Date: 2026-10-21
New Economics Papers: this item is included in nep-acc and nep-pub
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