An Investigation on Fiscal Illusion of Iran Economy (Multiple Indicators-Multiple Causes Model)

Fiscal illusion refers to a systematic misperception of fiscal parameters and an associated pattern of over - and under-estimation of expenditure and taxation liabilities which makes biases in budgetary decisions at all levels of government. This paper provides the empirical analysis of the estimates of fiscal illusion index for Iranian economy over the period of 1981 to 2012 employing a structural equation model approach in framework of Multiple Indicators-Multiple Causes (MIMIC). To this end, we have used tax burden and level of education as cause variables and public debt, the ratio of direct tax to indirect tax and the ratio of private consumption to public debt as indicators of fiscal illusion. The results show that tax burden with a coefficient of 0.79 is the most important factor for explanation of fiscal illusion. Policy makers attempt to ‘conceal’ the real tax burden by means of delusion of public debt and of private spending to the levels of public debt. Further, size of fiscal illusion has upward trend that indicates policy makers usually exploit fiscal illusion stratagems to distort taxpayers’ perceptions of their tax burdens.