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Fiscal illusion and cyclical government expenditure: state government expenditure in the United States

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<mark>Journal publication date</mark>31/05/2016
<mark>Journal</mark>Scottish Journal of Political Economy
Issue number2
Number of pages17
Pages (from-to)177-193
Publication StatusPublished
Early online date13/08/15
<mark>Original language</mark>English


A well‐established literature argues that fiscal illusion increases the level of government expenditure. This article focuses on the proposition that fiscal illusion also influences the cyclicality of government expenditure. Predictions are formed with reference to government reliance on high income elasticities of indirect tax revenues and on intergovernmental transfers. Predictions are tested with reference to the expenditures of 36 states in the United States from 1980 to 2000. Government expenditures are more likely to be procyclical when citizens systematically underestimate the cost of taxation.