Rational Ignorance,Rational Voter Expectations,and Public Policy: A Discrete Informational Foundation for Fiscal Illusion

This paper demonstrates that rational ignorance, properly defined, allows the possibility that fiscal illusion affects policies in a democracy. The implications of rational ignorance are examined in a setting where voters are assumed to completely understand the fiscal environment and make perfect use of any information that they possess. In this setting, it is demonstrated that ignorance may be rational, manipulated, and generate biased expectations over fiscal parameters. The analysis suggests that the electoral impact of voter ignorance is reduced, but not eliminated by electoral competition. Candidate positions only affect the electoral choices of individuals who are at least partially informed about those positions. Consequently electoral competition tends to generate policies that advance the interests of relatively informed voters. This implies that election based public policies are based upon better information than one would expect based on the widespread fiscal ignorance reported in surveys. However, even in this setting, the votes cast and the policies adopted are affected by the estimated marginal rates of substitution between private and governmental services which can not be unbiased if areas of ignorance remain — even if voters make the very best use of information in their possession. The existence of rational ignorance, once carefully defined, is sufficient to generate policy relevant fiscal illusion.     

Beliefs About Corporate America and the Structure of Opinions Toward Privatization

This research analyzes the individual-level factors associated with public support for the private provision of public goods and services. Given that privatization requires the transfer of authority from public to private entities, we argue that beliefs about private companies are an important and overlooked source of heterogeneity in explaining public policy preferences toward privatization. We test this expectation using survey data from the 2014 Cooperative Congressional Election Study. We find that support for privatization is associated with positive beliefs about the motivation of private companies and with favorable views about corporate accountability relative to the accountability of government. Opposition to privatization is associated with beliefs about corporate influence in politics. Preferences for limited government are also associated with support for privatization. These results highlight the potential for beliefs about private companies to serve as a group heuristic in political reasoning and the ability of citizens to make reasoned choices on complex public policy issues.     

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.     

Networked Coproduction of Public Services in Virtual Communities: From a Government‐Centric to a Community Approach to Public Service Support

Research on and practical attention for the coproduction of public services is increasing. Coproduction is seen as a way to strengthen the quality and legitimacy of public service and reduce costs. Scholarship on coproduction of public services repeatedly ignores the role of the new media. This is surprising since many proponents highlight its potential for changing traditional, government‐centric approaches to delivering public services. This article shows that digital communities form an important addition to the government‐centric form of public service provision since they foster both an exchange of experiential information and social‐emotional support.     

Is private production of public services cheaper than public production? A meta‐regression analysis of solid waste and water services

Privatization of local government services is assumed to deliver cost savings, but empirical evidence for this from around the world is mixed. We conduct a meta‐regression analysis of all econometric studies examining privatization of water distribution and solid waste collection services and find no systematic support for lower costs with private production. Differences in study results are explained by differences in time period of the analyses, service characteristics, and policy environment. We do not find a genuine empirical effect of cost savings resulting from private production. The results suggest that to ensure cost savings, more attention be given to the cost characteristics of the service, the transaction costs involved, and the policy environment stimulating competition, rather than to the debate over public versus private delivery of these services. © 2010 by the Association for Public Policy Analysis and Management.     

A Decision Theoretic Model of Public Opinion: Guns, Butter, and European Common Defense

Why do individuals support the public policies they do? We argue that individuals can have quite sophisticated policy preferences and that not correctly modeling those preferences can lead to critically misspecified empirical models. To substantiate this position we derive and test a decision‐theoretic model that relies upon three critical assumptions: (1) policies affect the provision of multiple goods about which individuals care; (2) individuals have diminishing returns to scale in those goods; and (3) preferences over at least some subset of those goods are correlated. Using this model, we demonstrate that arbitrarily small secondary policy effects can confound predictions over primary policy effects. Thus, not considering even arbitrarily small policy effects can cause one to conclude that evidence is consistent with one's theory when in fact it is inconsistent or vice versa. Testing this theory on support for forming a European common defense, we find evidence consistent with our model.     

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.     

Political Competition and State Government Size: Do Tighter Elections Produce Looser Budgets?

We test implications of politicalcompetition theory concerning government size, usingdata from U.S. states. We find that greaterpolitical competition in the race for governor actsas a check against bigger government. Evidence onthe effectiveness of legal limits on expendituresand/or revenues growth is mixed. The DemocraticParty is associated with bigger government, but onlywhen party representation in both the governor'shouse and the legislature is strong. The flypapereffect of grants is found to be strong. Our resultshave implications for models of fiscal illusion.     

Federal Expenditure and Fiscal Illusion: A Test of the Flypaper Hypothesis in Australia

Despite the fact that there are strong a priori grounds forpresuming that the intergovernmental grants characteristic offiscal federalism in Australia may generate fiscal illusion,no empirical effort has been directed at this line of inquiry.The present article seeks to go some way toward remedying thisdeficiency by evaluating the flypaper variant of the fiscalillusion hypothesis using a time-series analysis of AustralianCommonwealth expenditures for 1981 to 1992. The results of theseestimations provide some tentative empirical support for theexistence of a flypaper effect on public expenditure in Australiafor the period under review.     

Leviathan and Fiscal Illusion in Local Government Overlapping Jurisdictions

This paper integrates twomodels of local government behavior,leviathan and fiscal illusion, into theframework of overlapping jurisdictions.Estimation of the leviathan and fiscalillusion variables without accounting forvertical effects between overlappingjurisdictions results in overestimation ofthe horizontal effects. Using a medianvoter model and municipal and county datawe find support for the leviathan modelusing traditional tests. These effects arelargely offset, however, when the test isset within the context of the verticalrelationship. We find that municipal percapita expenditures and county per capitaexpenditures are symmetricallycomplementary.     

The Changing Public-Private Infrastructure Mix: Economy-wide Implications

This article provides an economy-wide perspective on the changing role of the public sector in developing economic and social infrastructure in Australia. It analyses the scale and macroeconomic significance of the key economic and social infrastructure sectors — communication services, electricity, gas and water supply, transport, education, health and community services, government administration and defence. It then canvasses the major policy issues that have arisen in the progression from public to private infrastructure provision and considers why concerns about the trend fall in traditional public works spending may be misplaced in light of recent economic and institutional changes.     

Budgeting for Fiscal Stability over the Business Cycle: A Countercyclical Fiscal Policy and the Multiyear Perspective on Budgeting

This essay is a theoretical exploration of a new budgetary system to cope with fiscal uncertainty and instability. ¹ It examines policies requiring positive year-end balances and infers that annual budget cycles lead to a mismatch between the budget cycle and the continuity of public service provision. The author considers a multiyear perspective on budgeting as a potential solution, with countercyclical fiscal reserves to help ensure stability during fluctuating economic conditions. By adopting budget stabilization funds and keeping sufficient reserves, states can better maintain trend-level public services during recessions. Panel data analysis provides empirical evidence that such funds helped stabilize state general expenditures during downturns. The adoption of countercyclical fiscal policy and budget stabilization funds is a step toward a longer-term perspective on budgeting, thus promoting fiscal stability over the economic cycle.     

Public Attitudes Toward Social Spending in the United States: The Differences Between Direct Spending and Tax Expenditures

This paper uses a survey experiment to examine differences in public attitudes toward ‘direct’ and ‘indirect’ government spending. Federal social welfare spending in the USA has two components: the federal government spends money to directly provide social benefits to citizens, and also indirectly subsidizes the private provision of social benefits through tax expenditures. Though benefits provided through tax expenditures are considered spending for budgetary purposes, they differ from direct spending in several ways: in the mechanisms through which benefits are delivered to citizens, in how they distribute wealth across the income spectrum, and in the visibility of their policy consequences to the mass public. We develop and test a model explaining how these differences will affect public attitudes toward spending conducted through direct and indirect means. We find that support for otherwise identical social programs is generally higher when such programs are portrayed as being delivered through tax expenditures than when they are portrayed as being delivered by direct spending. In addition, support for tax expenditure programs which redistribute wealth upward drops when citizens are provided information about the redistributive effects. Both of these results are conditioned by partisanship, with the opinions of Republicans more sensitive to the mechanism through which benefits are delivered, and the opinions of Democrats more sensitive to information about their redistributive effects.     

Conservative Mobilization and Fiscal Policies

The two conservative parties in Norway, the old Conservative Party and the younger Progressive Party increased their electoral support from 23 percent in 1975 to 34 percent in the election of 1987. The electoral mobilization by these conservative parties was mainly based on an ideologically inspired rhetoric of reduced government spending and corresponding tax reductions. With the benefit of hindsight, it may be argued that these were policies to which the two parties did not live up. Whatever their political strength in the local arena, they were unable to reduce local government income taxes. But when analysing other fiscal strategies available to local governments we do find differences related to political strength, even if the findings are not always as expected. Municipalities dominated by the conservatives are run on the principle of families paying the actual costs of having children in public day-care institutions. But so are socialist-dominated municipalities. Conservative and socialist municipalities tend to subsidize fees for home-help services for the elderly. The main fiscal source of the conservatives is fees and charges on technical services used by every household and paid according to costs. The watershed between socialist and conservative parties appears as we analyse the use of property tax - a tax used much more frequently by socialist than by conservative and centrist parties.     

Taxes,Time, and Support for Security

New technologies have been developed in response to terrorism. These present problems for local officials: implementing technologies will be expensive, and no technologies exist that can be used to gauge demand. We apply contingent valuation methodologies to determine support for additional taxes to pay for new terrorism‐related technologies and services. We present findings from a national survey about people's attitudes toward terrorism prevention and response. We find that respondents generally support new services and technologies and local tax increases to pay for them. We also find that respondents are willing to pay more if programs have everyday uses that would enhance public safety, but are less supportive as inconveniences increase.     

The provision of public services by government funded decentralized agencies

Public services are often provided by lower level agencies that are funded by higher level government. Since markets for such services do not exist, normal pressures to minimize costs do not operate; indeed, usually these costs are unobservable. We study a principal-agent model which emphasizes the distinction between the financing and provision of public services. Two broad situations are analyzed: (i) the agencies are induced to reveal true costs; and (ii) in addition, to minimize costs, agencies must be induced to exert effort. The characteristics of the optimal funding contract and the marginal cost of public funds are derived in each case.     

Fiscal Illusion and Political Accountability: Theory and Evidence from Two Local Tax Regimes in Britain

Local tax reform in Britain in 1993 (reinstating a propertytax) may have reversed some intended fiscal illusion reducing,and ``accountability'' improving, features of the poll tax(itself a reform introduced in 1990 with the specific aim ofpromoting accountability). We formalize these features withina median voter model of the demand for local publicexpenditure that distinguishes between accountability andfiscal illusion effects. The model shows that a prioriaccountability effects on expenditures are ambiguous.Available data for England and Wales are used to test themodel. We find strong evidence of grant illusion (the flypapereffect), similar across tax regimes, with evidence of renterillusion and of less accountability under the property tax.The degree of local income inequality appears to affectexpenditure levels only with the property tax.     

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.     

Securing Quality Through Contracts? The Development of Quasi-markets for Social Care in Britain

This article examines the early development in Britain of quasi-markets for domiciliary care. Initially there were widespread doubts about the appropriateness of market mechanisms for social care because it was regarded as inherently different from other goods and services. We examine these differences and how they are most apparent in domiciliary care — which is provided to the most vulnerable people in the most vulnerable of settings. The study provides a demanding test and illuminating case study of the introduction of competition through quasi-markets. It highlights some potential threats to service quality and demonstrates that to secure such quality for vulnerable users, public sector purchasers need to develop long-term, high-trust relationships with a range of high quality care providers.     

The politics and economics of revenue growth: A cross-national analysis

Abstract Despite considerable interest in comparative fiscal policy in general, and the high salience of tax policy and tax reform in the industrialized democracies, there are relatively few cross–national studies of the economic and political correlates of revenues over time. We undertake a cross–national time series study of revenue growth in fourteen OECD countries between 1958 and 1990.We test a number of political and economic hypotheses about revenue change, including political business cycle, 'fiscal illusion', elasticity, and ideological theories. For the 1958—1990 period, we find that all countries, regardless of revenue structure, experience higher real revenue growth as a result of inflation, but that revenue growth is more responsive to unemployment in countries that rely more on direct taxes compared to countries with less direct–tax reliance. We find that this effect is most pronounced in the post–1972 period. We also find that revenue tends to increase in the years following elections, consistent with the idea that governments try to minimize the political fallout from tax increases by separating them as much as possible from election campaign periods; this effect, too, is most pronounced in the post–1972 period. We find no support for 'fiscal illusion' and ideological theories of revenue growth.