Journal
PUBLIC CHOICE
Volume 122, Issue 1-2, Pages 39-68Publisher
SPRINGER
DOI: 10.1007/s11127-005-3992-4
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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.
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