FISCAL ILLUSION AND THE DEMAND FOR LOCALGOVERNMENT EXPENDITURES IN ENGLAND ANDWALES

This paper examines a public choice model of fiscal illusion in the demand for localgovernment goods applied to local government expenditures in Britain. Data for twofiscal years, 1991/92 and 1993/9, are used reflecting two very different local taxregimes – the Community Charge in 1991/92 and the Council Tax in 1993/94. Theprincipal evidence for fiscal illusion is the demonstrable flypaper effect under both taxregimes: a unit increase in grant is associated with a far larger increase in per capitalocal expenditure (about 0.75 of a unit) than is a comparable unit increase in averageincome (less than 0.2 of a unit). There is no consistent evidence of renter illusion. Incomparing the two tax regimes we find that both taxes achieved the same degree ofaccountability, so that a flat rate tax is not necessary for accountability. We findevidence that taxpayers on higher incomes appear willing to pay higher taxes, even ifthe higher expenditures benefit those on lower incomes...