The national ascension of Bernie Sanders and Alexandria Ocasio-Cortez as firebrands of democratic socialism has rocked the D. Furthermore, recent electoral victories by self-avowed democratic socialists during the midterms seem to validate polls showing Americans have grown increasingly accepting of socialism. The rising popularity of socialism is often attributed to multiple socio-economic factors. Pundits are quick to recite talking points on a range of issues such as income inequality and stagnant wage growth to a new generation of youthful voters ignorant of a failed track record of big-government central planning. Although the aforementioned variables certainly play a role in the current rise of socialism, a little-known public choice concept — the fiscal illusion — may also be quietly unfolding at the national level. First theorised by Italian economist Amilcare Puviani in , the fiscal illusion is a phenomenon that manifests when the cost of public programmes is distorted or hidden from voters.
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The national ascension of Bernie Sanders and Alexandria Ocasio-Cortez as firebrands of democratic socialism has rocked the D. Furthermore, recent electoral victories by self-avowed democratic socialists during the midterms seem to validate polls showing Americans have grown increasingly accepting of socialism. The rising popularity of socialism is often attributed to multiple socio-economic factors. Pundits are quick to recite talking points on a range of issues such as income inequality and stagnant wage growth to a new generation of youthful voters ignorant of a failed track record of big-government central planning.
Although the aforementioned variables certainly play a role in the current rise of socialism, a little-known public choice concept — the fiscal illusion — may also be quietly unfolding at the national level. First theorised by Italian economist Amilcare Puviani in , the fiscal illusion is a phenomenon that manifests when the cost of public programmes is distorted or hidden from voters.
This creates an illusion among the public that the cost of government programmes is substantially lower than it actually is, hence, sprouting a proclivity for a socialist system. Fiscal illusion is most frequently cited when accounting for the fiscal effects of monetary grants from federal to local governments, also known as the flypaper effect.
As federal and state governments grant money to municipalities, the fiscal illusion may cause the public to demand unsustainable increases in public spending. This is a fairly common occurrence in property tax relief schemes that are designed to benefit taxpayers but generally end up ratcheting up cost in the long run. In the s, economists James M. Buchanan and Richard E. Wagner expanded on the work of Puviani, stating that the complexity of the American tax system increased public expenditures by making it impossible for individual taxpayers to determine the cost they pay for particular government programmes.
In a paper, economist William Niskanen applied these ideas to the national deficit. Conservative and libertarian intellectuals argued that the government can be reduced by starving it of funds, or by, in other words, instituting tax cuts. He did not directly cite the fiscal illusion in his research but heavily eluded to such phenomena. The Reagan-era tax reform, and subsequent reductions, reduced the federal income tax burden to zero for millions of poor and middle-class Americans. However, these working-class tax cuts may have had an unintended effect.
After decades of paying little to no taxes, Americans are becoming increasingly oblivious to the cost of government. The most recent round of tax cuts may have had some stimulatory effects at the expense of perpetuating a dangerous cycle in American public finance that will continue to increase federal debt. The public seeks more for less as the government obliges.
The predictable result has been more spending and more tax cuts. The seemingly inverse relationship between concern about the national debt, its growth and calls for new massive government programmes may be evidence of the fiscal illusion as a disconnect between the actual cost of government and the perceived cost.
For those of us who still subscribe to fiscal conservatism, these trends are troubling. The nation cannot sustain unlimited military spending, the massive expansions of social programmes, trillions of dollars in new environmental mandates and unfunded tax cuts. A lack of financial buy-in may be exacerbating this problem as the voting public seems increasingly willing to ignore fiscal limitations and demand more government. The fiscal illusion is arguably present on both sides of the political spectrum.
Those on the left are willing to dramatically expand healthcare and environmental spending. The only uniting aspect of both right and left is their willingness to pass the cost onto the rich. There is ample reason to believe that this passive attitude towards the national debt will only grow more prevalent as proponents of the pro-deficit economics of modern monetary theory MMT are elevated in public discourse. MMT advocates that a government can self-finance by printing money to service or pay off public debt.
MMT proponents argue that because American debt is denominated in the American dollar, the government has a lot of latitude to accrue debt. This is true to some extent, but it is not without substantial risk. America currently occupies a unique position in global finance. The US dollar is positioned as the international reserve currency.
The strength, size and relative stability of the US economy attract both domestic and international investors as a safe place to store wealth. This means that the country can temporarily, but not indefinitely, avoid horrid economic outcomes such as those seen in Venezuela, Zimbabwe and Greece.
When given enough time, the American dominance of the international financial system may erode and be surpassed by another global superpower or an alliance of regional powers. However, the country is not immune to hyperinflation or insolvency. Since the conclusion of World War II and the fall of the Soviet Union, international stability has become more of the norm.
As peace and trade take hold globally, America faces more competition from other relatively large, stable and safe economies i. In short, although there is no immediate threat to the ability of the US government to borrow funds, long-term risks are present.
Proponents of MMT also concede the need for some taxation to avoid rampant inflation, thus confirming an inability to avoid future tax hikes to service debt payments. Firey and Slivinski further argue that future tax hikes will result in some sort of constraining effect on the size of government.
This may be compounded by the fact that the United States seems to be following in the path of Japan. Low birth rates, both domestically and globally, and more restrictive attitudes towards immigration could leave the country with more and more debt and fewer people to pay it. However, the long term is ill-defined in the macroeconomic literature. At some point, there will be a painful reckoning.
When this day will come is currently outside the predictive capabilities of modern economics. If fiscal responsibility is wholly abandoned, citizens will have to make very painful trade-offs between tax hikes and reduced government benefits or likely a combination of the two. Addressing the fiscal illusion requires the public to recognise the actual cost of running massive government programmes. There can be no illusion about the fundamentals of debt. All debt is a promise of future repayment.
The ability of the United States to make such payments should be a concern to all, especially creditors. Promises of free stuff socialism maybe become a successful electoral strategy, but no promises can invalidate the long-term dangers of the exponential growth of government debt. Sign in Join. Sign in. Log into your account. Sign up. Password recovery. Friday, June 5, Forgot your password? Get help. Cayman Financial Review. Home General The fiscal illusion and the rise of big government.
In recent years levels of public trust in government have fallen dramatically, at the same time as opposition to high levels of public spending has also grown. Whitney B. Afonso looks at the role of fiscal illusion in public support for government services. When this occurs, people may perceive their tax burden to be lower than it is, and this can encourage government to spend more on public services. With this in mind, she argues that governments need to be more transparent in informing their citizens as to the scope, costs, financing, and benefits of government services.
The fiscal illusion and the rise of big government
User name. Remember me. Fiscal illusion stems from the study of Amilcare Puviani "Financial theory of illusion" 1 and it is defined as the phenomenon that generates a feeling of easing the tax burden and an increase in social benefits, especially possible in those contexts in which the revenue of the State and the financing of public services are not fully known or controlled by the taxpayer. Fiscal illusion occurs to leading taxpayers due to the mistaken perception of living in a context where there was a reduction in the overall level of taxation or even an increase in expenditure on public goods provided without any increase in taxation. Fiscal illusion becomes evident in those contexts in which an increase in provided public services is unperceived by economic agents. They do not get the perception that this increase in services is not made up during the same period of taxation, but rather through the use of public deficit.