Testing the Mill Hypothesis of Fiscal Illusion

University of Copenhagen Economics Working Paper No. 04-18

Public Choice, Vol. 122, No. 2, 2005

40 Pages Posted: 19 Apr 2005 Last revised: 17 Oct 2008

Rupert Sausgruber

Vienna University of Economics and Business - Department of Economics

Jean-Robert Tyran

University of Vienna; University of Copenhagen - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: 2004

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

JEL Classification: C92, H22, D72

Suggested Citation

Sausgruber, Rupert and Tyran, Jean-Robert, Testing the Mill Hypothesis of Fiscal Illusion (2004). University of Copenhagen Economics Working Paper No. 04-18; Public Choice, Vol. 122, No. 2, 2005. Available at SSRN: https://ssrn.com/abstract=699962 or http://dx.doi.org/10.2139/ssrn.699962

Rupert Sausgruber

Vienna University of Economics and Business - Department of Economics ( email )

Welthandelsplatz 1
Vienna, 1020
Austria
+43 1 31336 4572 (Phone)

Jean-Robert Tyran (Contact Author)

University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, Vienna 1090
Austria

HOME PAGE: http://homepage.univie.ac.at/jean-robert.tyran/

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark
+45 353 23 027 (Phone)

HOME PAGE: http://www.econ.ku.dk/tyran/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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