Comparative fiscal illusion: a fiscal illusion index for the European Union

Abstract

This paper provides an empirical analysis of fiscal illusion by estimating an index of fiscal illusion for 28 European countries over the period 1995-2008 employing a structural equation approach. Using Multiple Indicators Multiple Causes models, the paper investigates the main indicators of fiscal illusion and develops an index of fiscal illusion. It concludes that the chief determinants for the deployment of fiscal illusion strategies are the share of self-employment on total employment, the educational level of citizens, and the size of tax burden. At the same time, policy makers attempt to 'conceal' the real tax burden by means of debt illusion, fiscal drag, wage withholding taxes, as well as taxes on labour.