The national ascension of Bernie Sanders and Alexandria Ocasio-Cortez as firebrands of democratic socialism has rocked the D. Furthermore, recent electoral victories by self-avowed democratic socialists during the midterms seem to validate polls showing Americans have grown increasingly accepting of socialism. The rising popularity of socialism is often attributed to multiple socio-economic factors. Pundits are quick to recite talking points on a range of issues such as income inequality and stagnant wage growth to a new generation of youthful voters ignorant of a failed track record of big-government central planning. Although the aforementioned variables certainly play a role in the current rise of socialism, a little-known public choice concept — the fiscal illusion — may also be quietly unfolding at the national level.
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In public choice theory, fiscal illusion is a failure to accurately perceive the amount of government expenditure. Since some or all taxpayers benefit from government expenditures from these unobserved or hidden revenues, the public's appetite for government expenditures increases, thus providing politicians incentive to expand the size of government. Fiscal illusion has been used to explain the flypaper effect often seen when a higher level of government provides a grant to a lower level of government.
Here, instead of reducing taxes in order to pass on the benefits of the grant to local taxpayers, the grant-receiving body increases expenditures in order to expand local services in some way.
Fiscal illusion is invoked as an explanation because the local taxpayers are not fully aware of the grant as a source of the local government's revenue. Another example of fiscal illusion can be seen in local property tax politics. Here renters, who do not pay local property taxes directly, may vote for an expansion of local government services. Fiscal illusion theory suggests they support this policy because its cost is masked by its roundabout nature through an increase in their rent payments.
In this case, however, it must be noted that economic theory suggests that only taxes falling on new structures and improvements will be passed on; taxes on existing structures with deductions for maintenance and on land are not expected to be passed on as they do not affect the returns to new housing investment, and therefore housing supply. In this case, renters have a material interest in land tax increases used to fund local services or infrastructure, and their agitation for such cannot be considered a case of fiscal illusion.
In their book Democracy in Deficit , James M. Buchanan and Richard E. Wagner suggest that the complicated nature of the U. Finally, another example of fiscal illusion may be seen in deficit spending.
CATO Institute economist William Niskanen , for instance, has noted that the " starve the beast " strategy popular among US conservatives wherein tax cuts now force a future reduction in federal government spending is empirically false.
Instead, he has found that there is 'a strong negative relation between the relative level of federal spending and tax revenues'. Tax cuts and deficit spending, he argues, make the cost of government appear to be cheaper than it otherwise would be. Mourao attempts to quantify fiscal illusion empirically for almost 70 democracies since From Wikipedia, the free encyclopedia. New York: Academic Press. Hacienda Publica Espanola. Categories : Public choice theory Fiscal policy Theory of taxation.
The fiscal illusion and the rise of big government
User name. Remember me. Fiscal illusion stems from the study of Amilcare Puviani "Financial theory of illusion" 1 and it is defined as the phenomenon that generates a feeling of easing the tax burden and an increase in social benefits, especially possible in those contexts in which the revenue of the State and the financing of public services are not fully known or controlled by the taxpayer. Fiscal illusion occurs to leading taxpayers due to the mistaken perception of living in a context where there was a reduction in the overall level of taxation or even an increase in expenditure on public goods provided without any increase in taxation. Fiscal illusion becomes evident in those contexts in which an increase in provided public services is unperceived by economic agents. They do not get the perception that this increase in services is not made up during the same period of taxation, but rather through the use of public deficit. This implies a simple shift of the increase in taxation to future years, or of an increase in the supply of money, that generates inflationary pressures.
In recent years levels of public trust in government have fallen dramatically, at the same time as opposition to high levels of public spending has also grown. Whitney B. Afonso looks at the role of fiscal illusion in public support for government services. When this occurs, people may perceive their tax burden to be lower than it is, and this can encourage government to spend more on public services. With this in mind, she argues that governments need to be more transparent in informing their citizens as to the scope, costs, financing, and benefits of government services. At the start of the last century, economist Amilcare Puviani hypothesized that the ruling class designs public tax and expenditure policies to minimize resistance from the dominated class.