Essays on fiscal illusion
The objective of this study is to examine the relationship between taxation and public spending in the UK, utilising public choice theories that the level of government spending should reflect voter-taxpayer's demand for public goods. Such theories argue that certain features of the tax structure affect voter's perceptions of their tax burden so that they underestimate how much they are paying for public goods. Fiscal illusion is investigated as a key issue in a time series analysis of general government expenditures, and a cross-section analysis of local government spending. Also survey data from British Social Attitudes is employed to analyse the relationship between tax perceptions and preferences for public spending. The time-series results show quite consistent evidence that low visibility of taxed and deficit financing are associated with increased levels of spending, but for various reasons measures of tax elasticity and complexity performed less well. Closer examination suggests that deficit financing is less an illusory plan to hide expenditure increases from voters and more a short-term necessity when shock cause (trends in) spending and revenue to diverge. The cross-section results suggest fairly strong support for the "flypaper effect" that central government grants increase spending by more than would an equivalent increase in local income. Measures of local accountability appeared to have similar effects, while evidence on renter illusion suggests different outcomes in the two alternative tax regimes (community charge and council tax). Evidence from the micro-data analysis suggests some forms of fiscal illusion, though the influence of tax misperceptions on the demand for public spending is ambiguous. Overall, the evidence is consistent with the tendency to use invisible taxes to support increased spending, however, the use of this evidence, per se, may be misleading in drawing future prospects for tax and expenditure policies. Micro data analysis of fiscal perceptions offers a potentially important means of determining policy instruments. Moreover, if governments aim at increasing local accountability, inter-governmental fiscal relations should be reconsidered.