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.
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We are grateful for comments by James Buchanan, James Cox, Dirk Engelmann, Simon Gächter, Werner Güth, Georg Kirchsteiger, Kevin McCabe, Dennis Mueller, Dave Porter, Stephen Rassenti, Vernon Smith, Frans van Winden, as well as by seminar participants at the University of Zürich and Humboldt University Berlin. We gratefully acknowledge financial support by the Zaugg Foundation under project no. B11162107, by the International Foundation for Research in Experimental Economics (IFREE) at the University of Arizona, and by the Austrian National Bank, Jubiläumsfonds project no. 9134.
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Sausgruber, R., Tyran, JR. Testing the Mill hypothesis of fiscal illusion. Public Choice 122, 39–68 (2005). https://doi.org/10.1007/s11127-005-3992-4
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DOI: https://doi.org/10.1007/s11127-005-3992-4