Grant Illusion, Tax Illusion, and Local Government Spending

Abstract

Tax and grant illusion are envisioned as alternative forms of fiscal illusion in the literature, with differing implications for local government spending. This article shows that tax and grant illusion, previously thought to be separate sources of fiscal illusion, are in fact interdependent. It presents a method for identifying the relevant (if any) form of fiscal illusion, exploiting the theoretical relationships to directly estimate perception parameters. The estimates reveal that county spending is affected by the traditional depiction of grant illusion rather than tax illusion.