The Empirical Analysis of Fiscal Illusion in Iran (with the Emphasis on the Role of Indirect Taxes)

Fiscal illusion influences situation of government budget. In this paper first, has been studied possible of asymmetry in government budget using Threshold Autoregressive (TAR) and Momentum Threshold Autoregressive (MTAR) models. Then is examined hypothesis of fiscal illusion in Iranian economy. In this regard, has been specified an Error Correction Model (ECM) via the indirect tax revenues seasonal data from during (1380- 1392 ) that the results from estimation of model show i) there is a negative casual relate on the indirect taxes to government expenditures with three lags. This finding emphasizes the existence of fiscal illusion in Iranian economy ii) is confirmed the asymmetry effect of indirect taxes on government expenditures as there is fiscal illusion in situation of reducing indirect tax iii) since indirect taxes compared to direct taxes are less observable, reducing indirect tax due to fiscal illusion and misperception of people the public services and goods price lead to increasing demand for goods and services of public. Therefore, reduction of tax cannot apply as efficient tools in order to decline of budget deficit.