TY - UNPB

T1 - Testing the Mill Hypothesis of Fiscal Illusion

AU - Sausgruber, Rupert

AU - Tyran, Jean-Robert

PY - 2005/4/19

Y1 - 2005/4/19

N2 - 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.

AB - 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.

KW - Fiscal illusion

KW - voting behavior

KW - indirect taxation

KW - redistribution

KW - learning

U2 - 10.2139/ssrn.699962

DO - 10.2139/ssrn.699962

M3 - Working paper

T3 - University of Copenhagen Economics Working Paper

BT - Testing the Mill Hypothesis of Fiscal Illusion

ER -