Tax complexity and fiscal illusion: An empirical evaluation on of the Heyndels and Smolders approach

In a pioneering paper on the revenue-complexity hypothesis, Heyndels and Smolders (1995) demonstrate that the conventional employment of the Hirschman-Herfindal index (HHC) in the empirical analysis of fiscal illusion introduces an arbitrary restriction without theoretical foundation. They propose instead the more general Hannah and Kay index (HK). In this paper we extend this approach to 1991 data drawn from forty six local government areas in Tasmania, Australia. Our results are in broad agreement with those produced by Heyndels and Smolders using local government data from Flanders, Belgium. We find that the HHC may involve sizeable misspecification bias and our results provide further support for the use of HK instead of HHC.