Fiscal Illusion and Political Accountability: Theory and Evidence from Two Local Tax Regimes in Britain.

Abstract

Local tax reform in Britain in 1993 (reinstating a property tax) may have reversed some intended fiscal illusion reducing,and "accountability" improving, features of the poll tax (itself a reform introduced in 1990 with the specific aim of promoting accountability). We formalize these features within a median voter model of the demand for local public expenditure that distinguishes between accountability and fiscal illusion effects. The model shows that a priori accountability effects on expenditures are ambiguous. Available data for England and Wales are used to test the model. We find strong evidence of grant illusion (the fly paper effect), similar across tax regimes, with evidence of renter illusion and of less accountability under the property tax. The degree of local income inequality appears to affect expenditure levels only with the property tax. Copyright 2002 by Kluwer Academic Publishers