|dc.description.abstract||This study of fiscal illusion begins by surveying
existing studies of its nature and consequences: finding no
consensus upon its definition proposes a comprehensive one:
"the misperception by one or more individuals of the value
of one or more fiscal parameters." No specifications of
source, locus, nature, duration, variables affected, or
direction of bias are presumed, and none are precluded. The
issue of aggregation of individual perceptions, often
preempted as definitional, is found to be crucial in
interpreting the existing literature.
The theoretical portion of the study uses the standard
consumer choice model and the median voter model, again
finding that the method of aggregating individual choices is
crucial. It demonstrates that high average and total levels
of fiscal illusion can be consistent with efficient social
outcomes and that survey evidence is inappropriate for
assessing the importance of fiscal illusion. It further
finds that the impact of fiscal illusion on individual
welfare provides a source of potential gain for agents who
can dispel that illusion in individuals who may be decisive
for the outcome of the collective choice process.
An examination of the incentives of various agents to
dispel illusion concludes that, though the existing
literature evinces a recurrent concern that fiscal illusion
results in misallocation of resources to and within the
public sector, especially through the public officials'
manipulation of citizens' perceptions, there exists a
considerable array of forces that have significant power to
limit the ability of such illusion to impose important
burdens upon the electorate.
The work concludes with an empirical study of the
fiscal illusion hypothesis, in which estimates of the dollar
magnitudes of the state tax "windfalls" resulting from the
federal Tax Reform Act of 1986 are calculated and, in the
estimated model, are found to exert no significant impact
upon either the levels of state expenditures or changes in
those levels. Because the windfalls are exogenous, this
finding is free from the simultaneity issues that have
compromised existing empirical studies of fiscal illusion.
The results are consistent with the proposition that
existing forces effectively limit the sway of fiscal