Tax complexity and fiscal illusion

By using the Hirschman-Herfindahl index (HHC) the traditional approach to the tax complexity hypothesis introduces a restriction into the fiscal illusion model which has no theoretical foundation. We analyse the existing framework of the tax complexity hypothesis in detail and propose to capture this complexity through a Hannah and Kay index. We extend the theoretical framework by considering the expected return on investment in information. The empirical tests show that the HHC overestimates the importance of size inequalities between different taxes, while underestimating the impact of the number of taxes as a source of informational costs. The expected revenue hypothesis is not supported.     

The illusion of fiscal illusion: Unsticking the flypaper effect

Recognizing that it is difficult to prove a negative, this paper marshals evidence in support of the hypothesis that the widely documented flypaper effect of federal grants to state and local governments is purely a statistical artifact. A review of previous studies and a monte carlo investigation suggest that the use of an inappropriate functional form may generate an illusory flypaper effect. A local expenditure equation is then estimated in alternative specifications with ten years of state level data. Empirical results confirm the sensitivity of the flypaper effect to specification, and tests of fit unambiguously favor one functional form. That specification yields no statistical evidence of a flypaper effect.     

Tax decentralization and local government size

This paper investigates the relationship between fiscal federalism and the sizes of local governments. While many empirical studies emphasized that grants encourage the growth of local public spending and local taxes constrain it, they are more silent regarding the effects of different types of tax autonomy. The paper addresses this issue by arguing that tax decentralization as organized on tax bases used only by local governments (tax-separation), rather than on tax-base sharing, would restrain local public expenditures. Using an unbalanced panel of OECD countries, the key finding is that only property taxes—mostly based on a “tax-separation” scheme—seem to favor smaller local governments. Thus, while tax decentralization is a necessary condition for limiting the growth of local governments, it does not appear sufficient, as tax-separation schemes among government levels would in fact be required.     

Testing the Mill hypothesis of fiscal illusion

According to the “Mill hypothesis”, the tax burden from indirect taxation is underestimated because indirect taxes are less “visible” than direct taxes. We experimentally test the Mill hypothesis and identify tax framing as a cause of fiscal illusion. We find that the tax burden associated with an indirect tax is underestimated, whereas this is not the case with an equivalent direct tax. In a referendum to tax and redistribute tax revenue, fiscal illusion is found to distort democratic decisions and to result in “excessive” redistribution. Yet, voters eventually learn to overcome fiscal illusion.     

Choosing between the government and the regions: An empirical analysis of the Italian constitutional court decisions

In this article the extent to which political variables can explain the behaviour of constitutional judges in Italy when dealing with conflicts between the central government and regions is explored. Two competing hypotheses are tested. One hypothesis argues that one should expect some alignment between the political preferences of the judges and the success of the central government primarily due to the appointment mechanism. The other hypothesis suggests that there should be no systematic alignment between the political preferences of the judges and the success of the central government. Unlike previous literature, the empirical results presented in this article seem to confirm that when the Rapporteur and the court's majority are allegedly affiliated with the Prime Minister's coalition, the odds of success of the Prime Minister go up.     

Fiscal decentralization and government size: An extension

This paper analyzes one method governments employ to circumvent the discipline of a competitive system of fiscal federalism — intergovernmental collusion in the form of intergovernmental grants. Grants, it is argued, serve to encourage the expansion of the public sector by concentrating taxing powers in the hands of the central government and by weakening the fiscal discipline imposed on governments forced to self-finance their expenditures. The results reported suggest that intergovernmental grants do encourage growth in the public sector. The results offer further support for the use of monopoly government assumptions in public sector modeling.     

Corruption and government size: A disaggregated analysis

Using annual state-level data over 1983–1987, this paper examines the effect of government size on corruption by public officials by including both demand and supply side incentives for engaging in corrupt practices. Our objectives are twofold. First, we assess the relationship between the incidence of corruption and overall measures of the size of the federal government and the state-local sector in each state. Second, we explore what kinds of government activities are more likely to be successful in deterring abuse of public office. Our results are generally supportive of Becker's “crime and punishment” model. Regarding the primary focus of the paper, our results show that government size, in particular spending by state governments, does indeed have a strong positive influence on corruption.     

Beliefs and errors in voting choices: A restatement of the theory of fiscal illusion

This paper reformulates the theory of fiscal illusion to make it more compatible with the median-voter model of collective choice. It emphasizes the requirement that misperceptions about marginal tax-costs and benefits must be permanent to have any significant effect on the level of public expenditures. The Lancaster-Becker model of consumer demand is then used to demonstrate the peculiar effects of permanent misperceptions on consumer demand. It can be shown, for example, that other things being the same, a Republican who underestimates continuously the marginal benefits of public activities may demand more public goods than a Democrat who overestimates those same benefits in a permanent fashion.     

Rent-seeking and the behavior of regulators: An empirical analysis

The main contribution of this paper is to describe empirically how the rent-seeking process takes place in a regulated industry through the consistency in Board decisions. Evidence provided by discrete-choice decision models of regulators confirms that the conventional rent-seeking view of regulation is correct, namely to distribute wealth between various groups differently from what market forces would do. First of all, the structure of the rent-seeking activities in the Quebec regulated trucking industry is well explained. There exist behavioral uniformities (Russell and Shelton, 1974) in decisions taken by the Quebec Transport Commission, given its wide range of choice provided by the absence of detailed regulatory standards by the Quebec legislature. Secondly, trucking firms and large shippers are the interest groups seeking to extract artificially contrived rents. The capture theory of regulation is not a dominant political strategy and therefore does not analytically explain various trades taking place among interest groups when a permit authority is requested. So logrolling by regulators is clearly essential to maintain their non-transferable investment of time and talent and protect their political afterlife. Thirdly, large firms are more successful, at the margin, than small firms in their expansion because of their political effectiveness. The regulatory agency gives more rents to those who offer relatively strong electoral support to its party. Finally, appointed regulators do not achieve other positive payoffs from the regulatory process than those which may result from the agency problem. So the regulatory agency does not promote its own policy agenda, but rather that of the elected politicians, given the organizational and control problem between these two.I am indebted to the Social Sciences and Humanities Research Council of Canada for its financial support, to Gérard Bélanger, Jean-Luc Migué for helpful comments and to Sylvain Veillette, Pascal Migué, Marc Leduc for valuable research assistance. I benefitted from useful comments by the editor of this journal. All the remaining errors are mine.     

Cost disease versus Leviathan explanations of rising government cost: An empirical investigation

In this paper we reexamine the apparently conflicting empirics of Borcherding et al. (1977) versus those of Barry and Lowery (1984). The latter, designed to test the cost disease versus bureau voting power hypotheses on US Citibase annual data between 1947 to 1979, was retested for the longer period available through 1989. Second, and more importantly, we isolate and test for the presence of a second channel for the exercise of bureaucratic power. That channel is the bureau's ability to use its information advantage to capture a portion of newly generated government rents through higher personal benefits (such as higher salaries). Such an analysis (following West, 1991) requires first that those factors generating new rents for government actually result in successful bureaucratic rent-seeking in the form of higher compensation levels. In addition, the analysis requires that these “artificial” increases in bureaucratic wages show up as significant determinants of the higher cost of providing government services. Incorporating a constructed Kau/Rubin variable into the Barry and Lowery database is then shown to improve the predictive power of both the cost disease and bureaucratic power hypotheses for US annual data between 1948 and 1989.     

An empirical analysis of municipal efficiency and local resident satisfaction by council type in Victorian local government

Although a voluminous empirical literature has examined local government efficiency, much less attention has focused on municipal effectiveness and almost no effort has been directed at the relationship between efficiency and effectiveness. In this paper, we seek to add to the latter nascent literature by investigating the relationship between operational efficiency and local resident satisfaction for three different municipal categories (metropolitan, regional, and rural councils) in the Victorian local government system over the period 2014–2015 to 2017–2018 using data envelopment analysis and an advanced regression model. We find that although a strong relationship exists between efficiency and satisfaction for metropolitan and regional councils, the same is not true of rural councils.     

An empirical approach to the optimal size of the civil service

This article attempts a purely empirical approach to the issue of optimal civil service size by looking for a systematic relationship between observed size and underlying explanators. The residuals from such a fitted relationship then serve as a first approximation to whether the government in question is overstaffed or not. The data are from Indian subnational states, which as members of a single federation, follow the same definitional conventions with respect to the civil service. The contribution of the article is methodological, and addresses an issue of central importance, since staff downsizing conditionalities attached to externally funded structural adjustment programmes are not analytically underpinned. The article also explores issues surrounding the composition of the civil service. There is no evidence that overstaffing, as determined from the residuals of the estimated specification, is the joint outcome along with staff composition, as proxied by mean salary, of job creation pressures at the lower salary scales. This suggests that correction of overstaffing might be possible without political opposition, while at the same time leaving unexplained the variation in staff composition across states. Copyright © 2008 John Wiley & Sons, Ltd.