TAXATION, FISCAL ILLUSION AND THE DEMAND FORGOVERNMENT EXPENDITURES IN THE UK: A TIME-SERIESANALYSIS

Public choice analysts have often argued that the level of government spending willreflect voter-taxpayer’s demand for public goods, while the fiscal illusion literature hasargued that certain features of the tax structure affect voter’s perceptions of their taxburden causing them to underestimate how much they are paying for public goods. Insuch cases public expenditure is typically predicted to be greater than that proposed bysimple ‘decisive-voter’ demand models. In this paper we test whether standard fiscalillusion arguments, typically examined in a cross-section context, for local publicgoods, can help to explain the time-series behaviour of national-level publicexpenditure in the UK over the period 1955-94. The sources of fiscal illusion whichwe examine are: the visibility of taxes; the extend of deficit finance; revenuecomplexity; and tax elasticity. If public expenditure is determined by a fully-informed,rational decisive voter then it should be independent of these ‘tax structure’ variables....