Tax Reforms, Fiscal Illusion and Moral Hazard: Some Econometric Evidence from Indian Economy
Journal Title: VISION: Journal of Indian Taxation - Year 2018, Vol 5, Issue 2
Abstract
Theory of ‘Fiscal illusion’ as a theory of government expenditure was first conceived by an Italian economist Puviani suggesting that the benefits from tax revenue through government expenditure are not fully understood by the taxpayers if the government revenues are unobserved. This is due to information asymmetry. Since some or all taxpayers benefit from government expenditures from these unobserved or hidden revenues the public's demand for government expenditures increases, thus providing politicians incentive to expand the size of government. Fiscal Illusion is invoked as an explanation of the flypaper effect when a higher level of government provides a grant to a lower level of government because the local taxpayers are under the mistaken perception that the grant is to local government and not, in fact, to them. One of the sources of fiscal illusion is the complexity of the tax system. According to the fiscal illusion hypothesis, governments spending can be influenced by the size of the public sector and complexity in the tax system. An attempt is made in the present study to examine the fiscal illusion and explore its relationship with the fiscal dimension including revenue receipts and spending of the government. Considering the Indian federal system, the paper examines revenue diversification that has occurred during 1970 and 2016, and it estimates a model that examines the degree of moral hazard which arises mainly due to fiscal illusion within the framework of the principal agent.
Authors and Affiliations
Narain Sinha
Keywords
Related Articles
- EP ID EP625321
- DOI 10.17492/vision.v5i2.14516
- Views 194
- Downloads 0
Fiscal Management in India: A Study of the Impact of FRBM Act
Fiscal deficit, the gap between government's aggregate receipts and aggregate consumption, gives the flag to the union about the aggregate acquiring necessary from all sources. Since these deficits had to be met by borro...
GST and the Paradigm Shift: A Peripheral View
The Goods and Services Tax (GST) has been touted as the single biggest tax reform in the Republic of India. The GST Act proposes to replace all the indirect taxes with a single GST. The profound positive impact of the Ac...
Related Party Transactions in India: Are they influenced by New Regulatory Framework?
The unabating scandals and financial irregularities across the world seem to underline the related party transactions (RPTs) as one of the means corporates attempt to ‘manage’ earnings and divert resources as well. Misus...
Tax Planning and Investment Pattern of Academicians: A Study of Educational Institutions in Bengaluru
Tax planning involves an efficient application of various provisions and loopholes of tax laws to reduce the incidence of tax and tax burden of an assessee. This research paper aims at studying the investment pattern an...
Anti-Profiteering Provisions under GST: A move towards ensuring Consumer Welfare
One of the intended benefits of GST is to ensure reduced prices to consumers by eliminating tax cascading and ensuring availability of tax credit at various stages of production. However, this benefit may not be achieved...