Public Choice

, Volume 122, Issue 1–2, pp 39–68

Testing the Mill hypothesis of fiscal illusion

Article

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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Copyright information

© Springer Science + Business Media, Inc. 2005

Authors and Affiliations

  1. 1.Department of Public EconomicsUniversity of InnsbruckInnsbruck
  2. 2.Department of EconomicsUniversity of St.GallenSt. GallenSwitzerland

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