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Optimal fiscal illusion and the size of government

Author

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  • E. West
  • Stanley Winer
Abstract
The interpretation of the long-standing fiscal illusion hypothesis presented here is that the illusion is the result of attempts by utility maximizing public managers (politicians or bureaucrats) to direct the resources of the community toward themselves. In general, they will succeed if the costs of information about or enforcement of managerial behavior are nonzero, and political competition is imperfect. The consequences of this application of the Williamson theory of the firm, in the context of a median voter model, include the following: 1. There will be an optimal level of illusion for the public manager and median voter simultaneously; and this is consistent with the rationality of all agents. 2. Underestimation of tax-prices by the median voter at this point by itself does not imply a continually growing public sector. 3. Misperception of taxes or expenditures alone does not imply anything about the affect of misperception on the size of the budget. For the same reason, a change in information costs is ambiguous (in the present model) in its effects on budget size, because this will influence both tax and expenditure illusions. 4. The importance of tax or expenditure structure manipulation in determining the size of the budget is an empirical question. It may be that the fiscal illusion hypothesis is empirically relevant, or it may not. Whether illusion collapses over time depends on such factors as the age structure of the electorate and the extent of political competition. It is interesting to note, incidentally, that the real ‘hidden persuaders’ may well be in the public sector if competition is more imperfect in political markets than in private. Yet, those who complain about the artificial creation of wants by private business call at the same time for greater government intervention. Copyright Martinus Nijhoff Publishers bv 1980

Suggested Citation

  • E. West & Stanley Winer, 1980. "Optimal fiscal illusion and the size of government," Public Choice, Springer, vol. 35(5), pages 607-622, January.
    • Handle: RePEc:kap:pubcho:v:35:y:1980:i:5:p:607-622
    DOI: 10.1007/BF00140089
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    References listed on IDEAS

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    Cited by:

    1. Emily Chamlee-Wright & Virgil Storr, 2010. "Expectations of government’s response to disaster," Public Choice, Springer, vol. 144(1), pages 253-274, July.
    2. Congleton, Roger D, 2001. "Rational Ignorance, Rational Voter Expectations, and Public Policy: A Discrete Informational Foundation for Fiscal Illusion," Public Choice, Springer, vol. 107(1-2), pages 35-64, April.
    3. Charlotte Twight, 1994. "Political Transaction-Cost Manipulation," Journal of Theoretical Politics, , vol. 6(2), pages 189-216, April.
    4. Ziogas, Thanasis & Panagiotidis, Theodore, 2021. "Revisiting the political economy of fiscal adjustments," Journal of International Money and Finance, Elsevier, vol. 111(C).
    5. Michael A. Nelson, 1986. "Voter Perceptions of the Cost of Government: the Case of Local School Expenditures in Louisiana," Public Finance Review, , vol. 14(1), pages 48-68, January.
    6. Philip J. Grossman, 1990. "The Impact of Federal and State Grants on Local Government Spending: a Test of the Fiscal Illusion Hypothesis," Public Finance Review, , vol. 18(3), pages 313-327, July.
    7. Aidt, T.S. & Eterovic, D.S., 2007. "Give and Take: Political Competition, Participation and Public Finance in 20th Century Latin America," Cambridge Working Papers in Economics 0714, Faculty of Economics, University of Cambridge.
    8. Dalibor Eterovic & Nicolás Eterovic, 2012. "Political competition versus electoral participation: effects on government’s size," Economics of Governance, Springer, vol. 13(4), pages 333-363, December.
    9. Muhammed Islam, 1998. "Fiscal Illusion, Intergovernmental Grants and Local Spending," Regional Studies, Taylor & Francis Journals, vol. 32(1), pages 63-71.
    10. Antonio Abatemarco & Roberto Dell’Anno, 2020. "Fiscal illusion and progressive taxation with retrospective voting," Economic and Political Studies, Taylor & Francis Journals, vol. 8(2), pages 246-273, April.
    11. Dalibor Eterovic & Nicolas Eterovic, 2010. "Political Competition vs. PoliticalParticipation: Effects on Government's Size," Working Papers wp_006, Adolfo Ibáñez University, School of Government.
    12. François Pétry & Howard R. Harmatz, 1995. "Politico-Economic Interactions in Canada: an Empirical Assessment," Public Finance Review, , vol. 23(3), pages 305-335, July.
    13. Roberto Dell'Anno & Morena De Stefano, 2014. "Un indicatore sintetico dell?Illusione Finanziaria. Un tentativo di stima per l?Italia," ECONOMIA PUBBLICA, FrancoAngeli Editore, vol. 2014(1), pages 65-92.
    14. Twight, Charlotte, 1996. "Federal control over education: Crisis, deception, and institutional change," Journal of Economic Behavior & Organization, Elsevier, vol. 31(3), pages 299-333, December.
    15. Grossman, Philip J. & Mavros, Panayiotis & Wassmer, Robert W., 1999. "Public Sector Technical Inefficiency in Large U.S. Cities," Journal of Urban Economics, Elsevier, vol. 46(2), pages 278-299, September.
    16. Aidt, Toke S. & Eterovic, Dalibor S., 2011. "Political competition, electoral participation and public finance in 20th century Latin America," European Journal of Political Economy, Elsevier, vol. 27(1), pages 181-200, March.
    17. Stanley L. Winer & Walter Hettich, 2002. "The Political Economy of Taxation: Positive and Normative Analysis when Collective Choice Matters," Carleton Economic Papers 02-11, Carleton University, Department of Economics, revised 2004.
    18. Charlotte Twight, 1988. "Government manipulation of constitutional-level transaction costs: A general theory of transaction-cost augmentation and the growth of government," Public Choice, Springer, vol. 56(2), pages 131-152, February.

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