Revenue structures, the perceived price of government output, and public expenditures

This article examines how revenue structures, through fiscal illusion effec ts, influence government spending. It does so with a regression,model in wh ich public spending depends on the perceived price of public services and o ther demand variables. The authors construct a perceived price term that pr ovides a more general framework for testing together several hypotheses of fiscal illusion. The perceived price depends on public revenues, decomposed into nine revenue sources. and is a weighted average of how fully taxpayer s recognize the cost of each revenue source. For a sample of the 10 Canadia n provinces from 1961 to 1992, the authors find that revenue structures inf luence spending, that tax revenues are perceived more acutely than other ma jor revenue sources (borrowing, grants), and that some taxes are recognized more than others. The results can be viewed as consistent with debt illusi on, flypaper, and income-elastic versions of fiscal illusion while casting doubt on using the Helfindahl index to represent fiscal illusion. The autho rs also find learning by taxpayers (declining fiscal illusion) during the p eriod.