The Challenge of Transparency in Taxation

by Dr. Whitney B. Afonso

Fiscal illusion may not be a household term, but it is nothing new. Coined by Amilcare Puviani in 1903, fiscal illusion theorizes that the ruling class intentionally misleads the public by exaggerating the benefits of public services and obscuring the total tax burden.[1] The theory was developed and popularized by economist James Buchanan in the 1960s as a way to better understand tax policies and outcomes. While fiscal illusion involves a systematic misunderstanding of both expenditure and revenue policy, scholarly analysis has focused primarily on the revenue side through the examination of tax policies. This policy brief focuses on tax policy and its relationship with transparency as a means of possibly counteracting the effects of fiscal illusion.

While the federal government has taken the lead in implementing efforts toward greater transparency — for example, by creating the easy-to-access website to enable visitors to track the spending of stimulus money[2] — state and local governments are following suit by providing more online information about how they spend taxes.[3] Proponents of increased transparency in the public sector, including elected officials and citizens, believe that transparency is an important tool for holding governments accountable and reducing corruption. In a period when trust in government has hit a record low (24 percent in 2014 and a record low of 19 percent in 2013),[4] increased transparency is viewed as a way of promoting trust and cooperation between government and its citizens.

Despite almost universal support for transparency, there is no clear way of efficiently and effectively achieving this goal. Many such efforts involve posting more information and data online, but data dumping by itself does little to increase transparency. For example, does making 10,000 pages of expenditure and revenue information available online further transparency when the pure volume of information makes it next to impossible for researchers to understand, much less find, what they are looking for? In response to concerns about data dumping, academics and nonprofits have attempted to categorize how open and accessible state websites really are. As of 2013, 43 states have created websites dedicated to fiscal transparency. In many of those cases, however, the fiscal data the states present are not easily accessible or digestible by either nonexperts or scholars — thus the websites are not successful at reaching the majority of the public.[5] Exceptions include the states of Kentucky, Arizona, and New York, which not only present fiscal information on their websites but also provide video tutorials of how to navigate their sites.

Other common methods to increase transparency involve expanding citizen knowledge and participation in the budgetary process. This is done through information sharing in the form of budget briefs and participatory budgeting, whereby citizens choose how and where to spend a portion of their budgets (as is currently done in San Francisco, Vallejo [California], St. Louis, Chicago, New York, and Boston). Participatory budgeting allows citizen groups to create proposals and then vote on them directly, thereby taking control of a portion of government expenditures.[6]

To date, most efforts toward greater transparency in the public sector have targeted the expenditure side of public spending while ignoring the revenue side. For example, in 2013, Michigan began to provide comprehensive line-item budget expenditure reports with expenditures characterized as core services, support services, or work projects.[7] Given polling statistics showing that 76 percent of Americans believe government spends too much, this trend may not be surprising.[8] Despite the lack of attention given to the revenue side, 72 percent of Americans report that the federal government needs to either completely overhaul its tax system or make major changes to it.[9] Perhaps one reason for the emphasis on expenditures rather than revenues is that in many states, revenues are already subject to referendum and tax and expenditure limits and are therefore considered so restricted that states and local governments are less inclined to engage citizens in conversations about tax policy. Or it may be that concerns about accountability are primarily about how the money is being used — not how it is collected.

The lack of public discourse about revenue transparency does not mean that public revenues are at all transparent. This brief discusses revenue transparency with particular attention to what makes revenue instruments transparent, what the obstacles to transparency are, and some options for increasing transparency.

Transparency and the Fiscal Illusion

Transparency in government can be understood as government providing data and information on its operations, management, and policies — that is, clear information on what it is doing and how. Advocates for transparency come from across the political spectrum, from normal citizens, and from numerous nonprofits.[10]

Broadly speaking, a government’s revenues are transparent when people can understand their total tax burden, including fees and license costs. Fiscal illusion research is very concerned with the lack of transparency in government financing. Most research on this topic revolves around the tax burden and finds that fiscal illusion causes citizens to perceive their tax burden to be lower than it actually is. This misperception leads citizens to believe that government services cost less than they do, thereby creating demand for government services to be beyond what is socially optimal. This is troubling because there is also evidence that when citizens understand the true cost of government, their policy preferences change. For example, one study finds that the transparency of the local tax burden has a strong impact on citizen demand for redistributive policies: 90 percent of citizens supported a policy when the tax was opaque versus only 10 percent when the same tax burden was transparent.[11]

Part two of this article will appear in the December IOWA TRANSPARENCY NEWSLETTER.

[1] Many economists who study fiscal illusion still agree with Puviani. For an overview of some of these issues see Whitney B. Afonso, “Fiscal Illusion in State and Local Finances: A Hindrance to Transparency,” State and Local Government Review 46, no. 3 (2014): 219–228; Paulo Reis Mourao, “Towards a Puviani’s Fiscal Illusion Index,” Hacienda Pública Española 187 (2008): 49–86; Richard Wagner, “From the Politics of Illusion to the High Cost of Regulation,” Of Public Interest 3, no. 8 (2001),
[2] It should be noted that there are those who argue that the current White House is actually quite opaque. For example, see Josh Gerstein, “President Obama’s Muddy Transparency Record,” Politico, March 5, 2012,; J. B. Wogan, “Obama’s Transparency Record: Lots of Data, Not as Much Sunlight,”, Tampa Bay Times, July 16, 2012,; and Paul D. Thacker, “Where the Sun Don’t Shine,” Slate, March 12, 2013, transparency_the_white_house_is_as_opaque_secretive.html.
[3] For more on state transparency efforts, see Benjamin Davis, Phineas Baxandall, and Ryan Pierannunzi, “Following the Money 2012: How the 50 States Rate in Providing Online Access to Government Spending Data” (Washington, DC: US PIRG Education Fund, 2012), For examples of these efforts, see, for Texas, “Texas Transparency,” Texas Comptroller of Public Accounts’ transparency website,; and for Asheville, North Carolina, “Asheville Budget Explorer,”
[4] Pew Research Center, “Public Trust in Government: 1958–2014,” November 13, 2014,
[5] Examples of criteria used to evaluate these websites are level of information, historical data, tax expenditures, budget, and revenue forecasts. Websites are considered more accessible when they include learning aids or explanatory materials, such as glossaries of key terms, frequently asked questions, and video tutorials to help navigate the site. See James E. Alt and Robert C. Lowry, “Transparency and Accountability: Empirical Results for US States,” Journal of Theoretical Politics 22, no. 4 (2010): 379–406; Joel B. Thornton and Elaine Thornton, “Assessing State Government Financial Transparency Websites,” Reference Services Review 41, no. 2 (2013): 366–387; Jonathan B. Justice and John G. McNutt, “Social Capital, E-Government, and Fiscal Transparency in the States,” Public Integrity 16, no. 1 (2013): 5–24.
[6] These citizen proposals are first vetted by the jurisdiction, however. In most of these cities, participatory budgeting is available only in a certain district or ward. Vallejo, CA, is the only city of the six that conducts participatory budgeting citywide.
[7] Mich. Pub. Act 536 of 2012, Comp. Laws § 18.1373 (2015).
[8] Emily Ekins, “81 Percent of Independents, 59 Percent of Democrats say the Federal Government Spends Too Much,” Reason, September 12, 2013,
[9] Carroll Doherty, “Public Wants Tax Reform. But What Kind of Reform?” Pew Research Center, May 22, 2013,
[10] For example, see “Promoting Transparent, Effective and Accountable Government,” Ford Foundation,; “Local Policy,” Sunlight Foundation,
[11] Rupert Sausgruber and Jean-Robert Tyran, “Testing the Mill Hypothesis of Fiscal Illusion,” Public Choice 122, nos. 1–2 (2005): 39–68; see also Tino Sanandaji and Björn Wallace, “Fiscal Illusion and Fiscal Obfuscation: An Empirical Study of Tax Perception in Sweden” (IFN Working Paper No. 837, Stockholm: Research Institute of Industrial Economics, 2010),; Rupert Sausgruber and Jean-Robert Tyran, “Are We Taxing Ourselves? How Deliberation and Experience Shape Voting on Taxes,” Journal of Public Economics 95, no. 1 (2011): 164–176.

Whitney Afonso is an Assistant Professor at the School of Government at the University of North Carolina at Chapel Hill. Her research interests include state and local tax policy and citizen engagement through the budgeting process. Whitney’s research has appeared or is forthcoming in scholarly publications such as Public Budgeting and Finance, Public Finance Review, Contemporary Economic Policy, and State and Local Government Review.


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