Fiscal illusion and political accountability: Theory and evidence from twolocal tax regimes in Britain

Local tax reform in Britain in 1993 (reinstating a property tax) may have r eversed some intended fiscal illusion reducing, and ``accountability'' impr oving, features of the poll tax (itself a reform introduced in 1990 with th e specific aim of promoting accountability). We formalize these features wi thin a median voter model of the demand for local public expenditure that d istinguishes between accountability and fiscal illusion effects. The model shows that a priori accountability effects on expenditures are ambiguous. A vailable data for England and Wales are used to test the model. We find str ong evidence of grant illusion (the flypaper effect), similar across tax re gimes, with evidence of renter illusion and of less accountability under th e property tax. The degree of local income inequality appears to affect exp enditure levels only with the property tax.