Literature review

Fiscal illusion: how big government makes tax look small

13 Dec 2007

Fiscal illusion is the political art of crafting tax and expenditure policies to make taxpayers think that taxes are not as onerous as they appear. Sinclair Davidson argues that big government distorts its citizens' fiscal consciousness to allow it to raise more tax revenue and spend more than it otherwise could.

Fiscal illusion gives governments the opportunity to distort their citizens’ fiscal consciousness; in particular, it allows them to create the impression that taxes are not as onerous as they appear. In this way, big government can raise more tax revenue than it otherwise could. There are a number of different techniques government can employ to create fiscal illusion. For example, greater complexity within the tax system generates uncertainty about the true tax burden. The extensive use of hypothecated or earmarked taxes also adds to fiscal illusion. The Australian tax system is extremely complicated, and relies increasingly on hypothecated taxes. The Medicare levy is a particular example of this. The complexity of the tax system is such that only 43% of Australians understand how the graduated progressive tax system works.

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