Empirical Estimates of Fiscal Visibility in some OECD Countries

P.4.2/9-2-96 I I I ENCUENTRO DE ECONOMIA PUBLICA Departamento de Teoría Económica y Economía Política Universidad de Sevilla Sevilla 9, 10 de febrero de 1995 PONENCIA Empirical Estimates of Fiscal Visibility in some OECD Countries. Miguel ROIG ALONSO Departamento de Economía Aplicada. Universidad de Valencia. EMPIRICAL ESTIMATES OF FISCAL VISIBILITY IN SOME OECD COUNTRIES Miguel Roig-Alonso Public Finance and Public Sector Economics Research Unit University of Valencia, Spain L- INTRODUCTION: Improvements in the efficient allocation of resources between the prívate and public sectors of an economy - as well as among its several public sub-sectors - can be reached insofar as both public revenue and expenditure have visibility, this is, the burden of public revenue and the benefit of public expenditure should be fully noticeable by individuáis1. Concerning public revenue, its visibility has changed in the course of history, depending on both economic (as the development level of a country) and political (as mechanisms of fiscal ¡Ilusión used by politicians, bureaucrats, and interest groups to overeóme taxpayers' resistance) factors (Wagner, 1976; Borcherding, 1977; Buchanan and Wagner, 1977; Fiorina and Noli, 1978; Pommerehne and Schneider, 1978; Brennan and Buchanan, 1980; Frey and Pommerehne, 1982; Tullock, 1989; Tabellini and Alesina, 1990; Dunleavy, 1991; Mueller, 1993). In a similar way, the compliance with such required property by fiscal systems now in forcé might differ remarkably among countries. With regard to public expenditure, the final or intermedíate, the public or prívate nature, the spacial effeets or dimensions, the costs necessary to obtain consumption, and other inherent characteristics of pubiicly provided goods and services represent major factors determining their benefit visibility (Weingast, Shepsle, and Johnsen, 1981; Solano, 1983; Hamilton, 1983; Becker, 1983, 1985; Mueller and MureU, 1985, 1986; Wright, 1986; Mueller, 1987; Wolff, 1987; Wildasin, 1990; Henrekson, 1992). In any case, it is necessary to dispose of logical and general indicators permitting to quantify, as exactly as possible, to what extent the required property of visibility is reached at every moment by local, state, federal or confederal, supranational, and general fiscal subsystems and systems of countries, since "...the systematic misperception of key fiscal parameters may significantly distort fiscal choices by the electorate"2. Although some authors (Puviani, 1903; Buchanan, 1967) have analyzed several elements of the tax structure largely hidden so that voters do not perceive the entire cost of providing public goods, very few attempts have been performed till now to measure fiscal ¡Ilusión or fiscal visibility in a systematic, general and direct way. However, many contributions have tried to detect and measure different manifestations or types (debt ¡Ilusión, flypaper effect, income elasticity of the tax structure, complexity of the tax system, etc.) of this characteristic for empirical applications trying to expiain the absolute or relative sizes of public budget and biases in budgetary decisions. 'By revenue visibility we mean visibility of direct burden of public revenue. Some types of public revenue (for instance, revenue from public property) might not involve any burden in the sense here reserved for this term. Symmetrically, by public expenditure visibility, visibility of direct benefit of public expenditure must be understood. Again, some types of public expenditure (for example, public purchases of prívate financial assets at market prices) might not carry any benefit with them. 2(Oates, 1991, page 431). i Wagner (1976) undertook a Herfindahl índex as a proxy variable to capture the complexity of public revenue systems. But his approach suffered, as acknowledged by himself, from serious deficiencies, since the visibility of the several classes of public revenue is likely to vary greatly, and this characteristic is not captured by this index. For this reason, it is not surprising that subsequent econometric work based on the Herfindahl index has yielded confuse and contradictory results (see: Munley and Greene, 1978; Clotfelter, 1976; Pommerehne and Schneider, 1978; Baker, 1983; Breeden and Hunter, 1985). When measuring fiscal illusion or fiscal visibility, many factors, like the relative size and the internal structure of types of revenue and public expenditure, the institutional framework, etc., are to be taken into account. So, in spite of the crucial importance of the visibility variable, its measurement is not done till now in a systematic, general and direct way because of its underlying complexity. This contribution, referring to the several levéis of territorial public administrations of any country, presents: A) Indicators permitting to make, in an operative way, time and space fiscal visibility measurements and comparisons, in order to assess the quality of sub-systems and systems of public revenue and expenditure as instruments for efficientiy re-allocating economic resources. B) Systematic and direct estimates on fiscal visibility of sub-systems and systems of public revenue now in forcé in the member countries of twenty significant OECD countries, showing a) the low valúes of revenue visibility for all these countries and b) the high divergences now existing among them. Policy implications from these estimates seem straightforward for such OECD countries: allocation improvements could be obtained by implementing changes and reforms aiming a) to raise valúes of public revenue visibility and b) to make domestic fiscal sub-systems and systems converge to OECD countries recording the highest valúes. H.- INDEX OF BURDEN VISIBILITY / INVISIBELITY OF TOTAL PUBLIC REVENUE: In general, for every level, L, of territorial public administrations of an economy, a visibility / invisibility index of its total public revenue, VLT, can be defined in such a way that 0 <, Vj <, 1 based on the following formula: r,T \^ T T VL =22 xn y>L where: a) n = number of types of public revenue for level L of territorial public administrations; b) Xgf = relative financia] weight of public revenue of type i for level L of territorial public administrations, with i = 1, 2, n; this is: 2 E «tí 1=1 with GFaf = absolute quantity of pubiic revenue of type i for level L of territorial public administrations; c) y¡J = visibility or perceptibility (for the policy intended - or legal - revenue-provider) factor of burden of public revenue of type i, to which level L of territorial public administrations is entitled, with 0 < yj < 1 ffl.- BURDEN VISIBILITY / INVISIBILITY OF A SPECIFIC PUBLIC REVENUE: An objective estimation of ya.7 - factor of perceptibility of the direct burden by a policy intended - or legal - revenue-provider of a public revenue of type i for level L of territorial public administrations - can be defined according to the following criteria: T T T T T • T Ya. = V¡L Pa. mi Ra. la. where: a) V¡LT = voluntary (va,7 = 0) or coercive (v^f = 1) nature of public revenue of type í for its policy intended - or legal - revenue-provider (coerciveness parameter), with 0 < v-J < 1 b) p¡J = full (p¡LT = 0) or nuil (pa,7 = 1) proportionality of the amount of public revenue of type i - the burden of which is borne by a policy intended - or legal - revenue-provider - to the cost of effíciently producing the good or service specifically received by him in return for his burden (proportionality parameter), with 0 <ftj< 1 c) m¡LT = full (nía.7 = 1) or nuil (m^7 = 0) information to the policy intended - or legal - revenue-provider on the concept of the direct burden he is bearing when providing public revenue of type i (concept-information parameter), with 0 <> ma7 < 1 d) qjL7 = full (q¡L7 = 1) or nuil (q¡L7 = 0) information to the policy intended - or legal - revenueprovider on the amount of the direct burden he is bearing when providing public revenue of type i (amount-information parameter), with 0 ^ qj <; 1 e) ¡a,7 = intermedíate (¡a,7 = 0) or final (¡a.7 = 1) position of the policy intended - or legal - revenue-provider in relation to his direct burden (burden-shifting parameter), with 3 O <ij:£ 1 IV.- INDEX OF BENEFIT VISIBILITY / INVISEMLITY OF TOTAL PUBLIC EXPENDITURE: Similarly to the case of public revenue, for every level of territorial public administrations, L, an index of benefit visibility / invisibility of total public expenditure, VLE, can be defined in such a way that 0 < VLE < 1 based on the following formula: TrE E E VL =LxfL y/L M where: a) q = number of types of public expenditure performed by level L of territorial public administrations; b) X,LE = relative Financial weight of public expenditure of type f performed by level L of territorial public administrations, with f = 1, 2, q; this is: 2£ 1 with GFn.E = absolute quantity of public expenditure of type f performed by level L of territorial pubiic administrations; c) y„f = visibility or perceptibility (by the policy intended - or legal - consumer) factor of benefit of public expenditure of type f performed by level L of territorial public administrations, where 0 ^ yj < 1 V.- BENEFIT VISIBILITY / INVISIBILITY OF A SPECIFIC PUBLIC EXPENDITURE: An objective estimation of y^ (factor of perceptibility by a policy intended - or legal - consumer of the direct benefit of a public expenditure of type f performed by level L of territorial public administrations) can be defined according to the following criteria: „ E „ E „ E _ E _ E¡ E where: a) V,LE = nuil (v„,E = 0) or full (vn,E = 1) consumption of a pubiicly supplied good of type f by 4 . . 8. ¡ts policy intended - or legal - user or beneficiary (consumption parameter), with 0 árjí 1 b) p„,E * full (pn.E = O) or nuil (p„,E = 1) proportionality of cost of efficient production of the publicly supplied good of type f to a specifically requited monetary burden borne by the policy intended - or legal - user o beneficiary (proportionality parameter), with 0 < p„.E < 1 c) = full (tOfd = 1) or nuil (m^ = 0) information to the policy intended - or legal - consumer or user on the concept of the direct benefit he is receiving when public expenditure of type f is being performed (concept-information parameter), with 0 < < 1 d) q1LE = full (q,f- = 1) or nuil (q„.E = 0) information to the policy intended - or legal - consumer or user on the amount of tbe direct benefit he is receiving when public expenditure of type f is performed (amount-information parameter), with 0 :£ «fa* £ 1 e) i„f = intermedíate (i^* = 0) or final (i^ = 1) position of the policy intended - or legal - user or beneficiary of the publicly supplied good of type f in relation to his direct benefit (benefitshifting parameter), with o =s <; i VLEMPIRICAL ESTIMATES ON BURDEN VISIBILITY OF TOTAL PUBLIC REVENUE: The following table presents weighted estimates on burden visibility of public revenue and grants of twenty significant OECD countries, obtained by applying index n VL = ¿2xn y a. defined in sections II and DI of this paper, to fiscal systems and sub-systems now in forcé in these countries. Such valúes have been calcuiated mainly from information and primary data on public cash flows provided by both the Commission of the European Communities3, reflecting tax structures of - and institutional situation in - every member country on January 1, 1992, and the International Monetary Fund4. For brevity reasons. intermediate working tables are here omitted. 3Inventory of Taxes Levied in the Member States of the European Communities. 15th edition, Commission of the European Communities, Luxembourg, 1993. 4A Manual on Government Finance Statistics. International Monetary Fund, Washington, 1986, and Government Finance Statistics Yearbook 1994. Volume XVIII, International Monetary Fund, Washington, 1994. 5 Three hypotheses on mínimum, plausible, and máximum shifting of tax burden have been assumed, giving rise to the corresponding series of máximum, VM, plausible, Vp, and mínimum, Vm, valúes of weighted-visibility estimates of revenue burden for the policy intended - or legal - revenue-providers. Accordíng to the VM - máximum weighted - visibility estimates of public revenue and grants: A) Australia, with a valué of 21,36%, has the most visible central sub-system, Portugal having the least one, with 5,53%. B) Switzerland, with a valué of 18,98%, has the most visible intermedíate sub-system, and Spain the least one, with 1,15%. Belgium, Denmark, Finland, France, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Sweden, and United Kingdom lacked state, región, or province government level for the years respectively considered. C) Sweden, with a valué of 48,92%, has the most visible local sub-system, Netherlands having the least one, with 0,40% only. Estimations for Greece were not possible because of nonavailability of primary data. D) Luxembourg, with a valué of 43,50%, has the most visible supranational sub-system, and Greece the least one, with 1,03%5. Estimates were not possible: a) For Italy because of non-availability of primary data. b) For Austria, Finland, and Sweden because these countries were not still members of tbe European Union for the years considered. E) Sweden, with a valué of 33,36%, has the most visible general system, Portugal having the least one, with 6,29%. Estimates for Greece and Italy were not possible because of nonavailability of primary data. According to the Vp - plausible weighted - visibility estimates: A) Again Australia, with a valué of 15,58%, has the most visible central sub-system, Portugal having the least one, with 3,88%. B) Switzerland, with a valué of 14,26%, has the most visible intermedíate sub-system, and Spain the least one, with 0,89% only. C) Sweden, with a valué of 30,58%, has the most visible local sub-system, Netherlands having the least one, with 0,23%. An estímate for Greece was not possible because of non-availability of primary data. D) Luxembourg, with a valué of 37,95%, has the most visible supranational sub-system, Greece having the least one, with 0,87%. Estimations were not possible: a) For Italy because of non-availability of primary data. b) For Austria, Finland, and Sweden because these countries were not still members of the European Union for the years considered. 5Notice that Australia, Canadá, Norway, Switzerland and U.S.A. do not have supranational government level. 6 E) Sweden, with a valué of 20,22%, again has the most visible general system, Portugal having the least one, with 4,33%. Estimates for Greece and Italy were not possible because of nonavailability of primary data. According to the \m - mínimum weighted - visibility estimates: A) Australia, with a valué of 9,81%, has the most visible central sub-system, Sweden having the least one, with 2,02%. B) Switzerland, with a valué of 9,53%, again has the most visible intermedíate sub-system, and Australia the least one, with 0,42% only. C) Sweden, with a valué of 12,23%, has the most visible local sub-system, Finland and United Kingdom having the least one, with practically 0,00%. An estímate for Greece was not possible because of non-availability of primary data. D) Luxembourg, with a valué of 32,40%, has the most visible supranational subsystem, Portugal having the least one, with practically 0,00%. Estimations were not possible: a) For Italy because of non-availability of primary data. b) For Austria, Finland, and Sweden because these countries were not members of the European Union for the years considered. E) Denmark, with a valué of 12,63%, has the most visible general fiscal system, and Portugal the least one, with 2,36%. Estimates for Greece and Italy were not possible because of nonavailability of primary data. VILCONCLUSIONS: The quality of public revenue and expenditure sub-systems and systems as policy instrumentó for efficiently allocating economic resources among prívate and public sectors and sub-sectors varíes in time and space as a result of economic, political, and social factors. The índices of fiscal visibility / invisibility defined in the previous sections of this paper bring forward a general measurement method which can be used to make relevant quantified comparisons among member countries of the International Monetary Fund provided that detailed statistic figures on execution of public budgetó as well as information about the structure of the different types of public administrations' revenue and expenditure programmes are available to researchers. Estimates obtained from different assumptions on tax shifting by applying these Índices to measure the burden visibility of revenue sub-systems and systems now in forcé in twenty significant OECD countries show: First.- Low plausible valúes of burden visibility for all these countries, specially for: a) Norway (4,39%), Greece (4,38%), Luxembourg (4,21%) and Portugal (3,88%) at a central level of government. b) Australia (1,74%) and Spain (0,89%) at an intermedíate (state, región or province) level of government. c) Italy (0,69%), United Kingdom (0,63%), Ireland (0,36%) and Netherlands (0,23%) at a local level of government. d) Portugal (1,67%) and Greece (0,87%) - among European Union member countries - at a supranational level of government. 7 e) Germany (6,86%), Austria (6,58%), Luxembourg (6,06%) and Portugal (4,33%) at the general government level. These low valúes of revenue visibility stem from the concurrence of several factors such as non-coerciveness, existence of specifíc requitals, lack of information on concepts and quantities, partial shifting of burden by tax-payers, intergovernmental grants, etc. Second.- Significant divergences between plausible valúes recorded by the three most visible general governments (Sweden, 20,22%; Denmark, 18,40%; Finland, 16,11%) and the three least ones (Austria, 6,58%; Luxembourg, 6,06%; and Portugal, 4,33%). Policy implications of these estimates seem straightforward for countries becoming economicaily more efficient and integrated: present revenue visibility valúes are low in general, and allocation improvements could be obtained by implementing changes and reforms a) to raise valúes of public revenue visibility and b) to make domestic fiscal sub-systems and systems converge to OECD countries recording the highest valúes. BIBLIOGRAPfflCAL REFERENCES - Baker, S.H. (1983): "The determinants of median voter tax liability: an empirical test of the fiscal illusion hypothesis", Public Finance Ouarterly, 11, pages 95-108. - Barro, R.J. (1974): "Are government bonds net wealth?", Journal of Political Economv. 82, pages 1095-117. - Becker, G.S. (1983): "A theory of competition among pressure groups for political influence", Ouarterly Journal of Economics, 98, pages 163-77. - Becker, G.S. (1985): "Public policies, pressure groups, and dead-weight costs", Journal of Public Economics, 28, pages 329-48. - Borcherding, T.E., ed. (1977): Budgets and Bureaucrats: The Sources of Government Growth. Duke University Press, Durham. - Breeden, C.H., and Hunter, W.J. (1985): "Tax revenue and tax structure", Public Finance Ouarterly, 13, pages 216-24. - Brennan, G., and Buchanan, J.M. (1980): The Power to Tax: Analvtical Foundations of a Fiscal Constitution, Cambridge University Press, Cambridge. - Buchanan, J.M. (1967): Public Finance in Democratic Process, University of North Carolina Press, Chapel Hill. - Buchanan, J.M., and Wagner, R.E. (1977): Democracv in Déficit: The Political Legacv of Lord Kevnes, Academic Press, New York. - Cárter, R. (1982): "Beliefs and errors in voting choices: a restatement of the theory of fiscal illusion", Public Choice, 39, pages 343-60. - Castles, F.G. (1982): "The impact of parties on public expenditure", in Castles, F.G., ed., The Impact of Parties, Sage Publications, Beverly Hills. 8 91 o o ** C5 00 p p 5° O O b b b b b b b O o o o o o o o o d* d^ d-d^ d^ oN d« d* • CANADA. 1991 FINLAND, 1990 UNITED STATES, 1992 NETHERLANDS, 1993 IRELAND, 1991 DENMARK, 1993 SWEDEN, 1992 BELGIUM, 1992 SPAIN, 1991 ITALY, 1993 UNITED KINGDOM, 1992 FRANCE, 1992 GERMANY, 1992 AUSTRIA, 1992 SWITZERLAND, 1984 NORWAY, 1990 GREECE, 1993 LUXEMBOURG, 1991 PORTUGAL, 1989 I i i i i ! j •i O o z en O r- D > H m O O m Z H 30 > I— O o < m 33 z m < 33 > Z z o > I— < en 00 91 O P 00 O N5 A» P P b b b b b b b b b b o o o o o o O o o o *s •di d* d^ d~ d* d-d* d* ^8 1 O b o SWITZERLAND, 1984 UNITED STATES, 1992 CANADA, 1991 GERMANY, 1992 AUSTRIA, 1992 AUSTRALIA, 1992 SPAIN, 1991 BELGIUM, 1992 DENMARK, 1993 FINLAND, 1990 FRANCE, 1992 GREECE, 1993 IRELAND,1991 ITALY, 1993 LUXEMBOURG, 1991 NETHERLANDS, 1993 NORWAY, 1990 PORTUGAL, 1989 SWEDEN, 1992 UNITED KINGDOM, 1992 —I > H m 30 m Ci O 30 -o 30 o < z o m Ci O < m 30 Z m Z H < "O 30 > Z z Ci en o > i— < en ro F H B • • < < < 3 -o ^ LT SWEDEN, 1992 SWITZERLAND, 1984 AUSTRALIA, 1992 FRANCE, 1992 NORWAY, 1990 DENMARK, 1993 FINLAND, 1990 UNITED STATES, 1992 CANADA,1991 LUXEMBOURG, 1991 AUSTRIA, 1992 BELGIUM, 1992 SPAIN, 1991 PORTUGAL, 1989 GERMANY, 1992 ITALY, 1993 UNITED KINGDOM, 1992 IRELAND, 1991 NETHERLANDS, 1993 GREECE, 1993 I— o o > I— a o TI < en m O 33 > Z i- < EN en H E r- < •o H 33 < > Z Z Ci -_-«„„„„„w,«T^?r«nn^^»tK^c•l71?l7<?cr^:rtrtKX?QrK^^íT^^^T-": 81 1 N> IO 00 00 o OI O Oí O OI O P O OI b b b b b O b b b b o o o o O o o o o o o* -o ~8 d^ ~8 d* ^8 d*' d* ^8 d* -8 d*-^8 ^p • LUXEMBOURG, 1991 FRANCE, 1992 UNITED KINGDOM, 1992 GERMANY, 1992 IRELAND,1991 BELGIUM. 1992 NETHERLANDS, 1993 DENMARK. 1993 SPAIN, 1991 PORTUGAL, 1989 GREECE, 1993 AUSTRALIA, 1992 AUSTRIA, 1992 CANADA, 1991 FINLAND, 1990 ITALY, 1993 NORWAY, 1990 SWEDEN, 1992 SWITZERLAND, 1984 UNITED STATES, 1992 moa en c TJ 33 > Z > H O z > I— Ci o < m 33 Z m Z H < •o 33 > Z z o en o > r~ < en F H -< B • • < < < 3 "° S 61 o o vP SWEDEN, 1992 DENMARK, 1993 FINLAND, 1990 SWITZERLAND, 1984 CANADA, 1991 AUSTRALIA, 1992 UNITED STATES, 1992 NORWAY, 1990 FRANCE, 1992 IRELAND, 1991 BELGIUM, 1992 NETHERLANDS, i 1993 UNITED KINGDOM, 1992 SPAIN, 1991 GERMANY, 1992 AUSTRIA, 1992 LUXEMBOURG, 1991 PORTUGAL, 1989 GREECE, 1993 ITALY, 1993 —i i NO U 00 OI O OI O OI O OI b b b b o b b o o o o o o o 3^ ^8 3^ -8 *8 -8 3^ *8 3^ ^8 3^ • m z m > r- O O < m 30 TI en O > < en 03 H F m )» < •o 30 > Z z o <