Fiscal Illusion and the Perceived Price of Provincial Government Output in Canada

Description

This paper examines if how governments finance themselves can influence the perceived price of and hence demand for government output. Using a standard model for government output and a panel data set often Canadian provinces for the period 1961 to 1992, we find that tax revenues are perceived more acutely than other major revenues (borrowing, federal transfers, investment income) and some taxes are recognized more than others. We also find learning by taxpayers (declining fiscal illusion) during the period and that lower increases in perceived tax prices lead to more seats for incumbent politicians.