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Taxation and public expenditures are enduring sources of frustration for the voting public. Contention stemming from a perceived lack of transparency and frivolous pork-barrel spending. These grievances are completely justifiable. Whether or not revitalizing infrastructure is a worthwhile expenditure is debatable. However, utilizing tax money to provide salary raises for administrators of an ineffective government program is clearly wastefully negligent. Calls for increased transparency of government spending is only the natural consequence of continual misallocation of tax dollars. Unfortunately, such measures are more wishful thinking than a political reality. The inefficient allocation of public funds is one of many factors eroding the public’s trust in government institutions. Invariably the question becomes, what is the government doing with my money?

The dynamics of transparent government spending is an area that has been thoroughly studied by Public Choice economists. From my own personal study of the literature, I haven’t seen any concrete solutions. Public Choice theory does, in contrast, provide us with a wealth of insight into how expenditures and taxes are obscured. How the waters are muddied is known as Fiscal Illusion. A concept first purposed by Italian economist Amilcare Puviani back in 1903 [1]. Fiscal Illusion went into relative obscurity until the theory was revived by Nobel Laureate James M. Buchanan in the 1960s. Over the years economists ranging from Richard Wagner to Tyler Cowen have addressed the mechanisms behind Fiscal Illusion. It has gone on to become one of the steadfast fixtures of Public Choice theory.

In a broad sense what is Fiscal Illusion and how does it operate within the context of taxation and government spending? Fiscal Illusion can be concisely defined as:

 

“ …. the concept that governments find it easy to raise tax revenues because of consumer ignorance about the way the tax system works” [2].

 

Once confronted with this premise it is easy to surmise that the complexities of the American tax code may be intentional. If you bury tax burdens in more deceiving means of appropriation the taxpayers are less apt to question why additional taxes are being imposed. As previously mentioned nothing irks voters more than needless government spending and tax hikes. Maybe other than cutting entitlement programs, but then again that is a different topic altogether. Being able to utilize a mechanism such as an inflationary monetary policy to operate as an implicit form of taxation. The government gets its funding and most taxpayers aren’t the wiser.

Thankfully for us, Dr. Buchanan detailed the various ways that governments implement policies that keep us in the dark about taxation. Per the noteworthy Nobel Laureate, there are seven broad categories of Fiscal Illusion:

 

  1. “ The connection between the total amount of resources actually utilized in producing or supplying public services and any individualized share in this total may be obscured to the taxpayer. In other words, the individual shares in the opportunity cost of public spending may be hidden” [3] (Page 130)

 

This is achieved through utilizing government-owned property to produce revenue, “Specific excise taxes”, utilization of public debt, inflation (printing of more money, mentioned above), false promises (labeling a long-term obligation as temporary).

 

  1. “…. institutions of payment that are designed so to tie the obligation to a time period or an event which the taxpayer seems likely to consider “favorable.” Puviani’s ingenious idea here is based on the recognition that isolated individual decisions can be influenced by temporary circumstances, and that the attitude of the individual may vary significantly with such circumstances” [4] (Page 132)

 

  1. “A third means of introducing a fiscal illusion, and one that is closely related to the one previously discussed, is found in the charging of explicit fees for nominal services rendered upon the occasion of memorable or pleasurable events. Puviani brought in marriage license fees, hunting licenses, entertainment licenses, fees for diplomas, etc.” (Page 133) [5].

 

Occupational licensing not only can serve as an unnecessary impediment to commerce, but it can also operate as an underhanded means of generating revenue.

 

  1. “ If a particular attitude is pervasive in the community, an opportunity is provided to levy a tax that will capitalize on such sentiment, making the burden appear less than might otherwise be the case” (Page 134 ) [6]

 

Essentially, manipulate social issues as a means of justifying spending. Just think about anytime the government declares war on something. War on Drugs, War on Poverty, etc.

 

  1. “ Puviani was on somewhat more firm ground when he argued that the governing class will, in order to secure the general acceptance of a tax, threaten the body politic with the direst of consequences if, in fact, the tax levy is not approved. (Page 134)” [7].

 

In other words, state officials will oversell the danger of not having a policy or program in place. Yet again to justify the budgetary earmark.

  1. “ To the extent that the total tax load on an individual can be fragmented so that he confronts numerous small levies rather than a few significant ones, illusory effects may be created (Page 134)” [8].

 

Providing some validation to my point pertaining to the complexities of tax codes. The more convoluted you can make the taxes the more difficult it becomes to track.

 

  1. The seventh way per Buchanan that Fiscal Illusion is implemented is through policies that generate ambiguity of who is ultimately responsible for the expenditure. (Page 135). [9].

 

 

There was a study published back in 2011 by the Independent Institute that did elucidate the seventh form of implementation of the illusionary policy. The study was conducted in Sweden back in 2003, the first year that “taxes constituted 55 percent” of the national income. It was found that Swedes often were aware of a specific tax and even the financial burden attached to it. However, where oftentimes confused about when it was applicable and who it was applicable to [10] (Page 9).

 

In an age of precipitous erosion of trust in institutions, the utilization of Fiscal Illusion to obtain extra funding appears to be a double-edged sword. Once the ploy to deceitfully apply more taxes is exposed then the respect for governing institutions will sink even lower. However, the trust may have not been compromised in the first place if the location of tax dollars was done so efficiently, honestly, and frugally. While this may not still appease an anarchist but would have mass appeal to most voting constituencies. The facts of reality seem to conflict with the idealization of an honest, efficient, and dollar conscious government. Either by size or by institutional corruption government programs not only are ineffective but often inefficiently funded. Creating the context for a system of state consumption that would incentivize politicians and bureaucratic administrators to favor illusory tax policies. Especially when departmentalization and staff reductions are on the table for government agencies. When you examine the role of incentivizes, if a government clerk is facing a potential layoff, it is understandable they would have circuitous taxes that would fund their department. That does not make such policies Pareto-optimal or in accordance with sound economic practices.

 

The issue of inefficient and misbranded government programs and associated allocations, in the long run, they generally end up failing. Many who purportedly oriented towards reason feel as if government programs are the most efficient means of allocating resources and services. If this were so, these same institutions would not resemble a pack insatiable jackals. A bottomless pit. These programs would be able to make do with a moderate amount of public support. Instead, we hear the countless claims of underfunding reinforced by many of the tactics described by James M. Buchanan. If a tax hike would be political suicide the government can always print more money to fund wars and other misadventures. This is why it was so prudent of Buchanan as well as Puviani to consider inflation as a form of Fiscal Illusion. The irony is that we have consumer protection laws allegedly to protect us from the deception of vendors. No such measures are in place to protect us from the same sort of dishonesty of government institutions. After all, the government is merely a socialized service provider. Since when has anyone in the private sector ever overtly paid to be robbed? Unless it constitutes some sort of perverse sexual fetish the odds are extremely low anyone has. However, the employees over at the U.S. mint are essentially publicly funded bank robbers. Providing more cash flow to the state and diminishing the purchasing power of the currency. Operating as an implied tax on the citizenry. Not with anyone’s consent, no one voting in favor of such methods of funding. However, this all reflects the haunting words of economist John Maynard Keynes:

 

“ By this means the government may secretly and unobserved, confiscate the wealth of the people, not one man in a million will detect the theft” [11]

One thought on “Fiscal Illusion- Sneaky Taxes

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