A comparison of fiscal illusion for brazilain states generated by tax structure complexity

Resumo

Construction of an index that presents the distortions in the fiscal reality in Brazil caused by the complexity of the tax structure (fiscal illusion) per federation units. Method based on data from 2004 to 2020 from 27 states, through aggregate data from 5,568 municipalities, a ranking of fiscal illusion was elaborated through the Multiple Indicator and Multiple Cause Model (MIMIC). The results indicated: i) the schooling level presented the highest coefficient among the causes, being the most representative in the index, with a strong correlation between the index and the level of wealth and poverty of a society; ii) fiscal simplicity, composed of the Herfindahl-Hirschman index weighted by the tax visibility index, proved to be significant and with an expected effect on the fiscal illusion index. Therefore, extensive evidence of fiscal illusion was identified among the federation units. This study contributes to the discussion of the dynamics of Brazilian government spending based on three approaches: fiscal illusion, mill hypothesis and causal link with deficits. We corroborated the theory of fiscal illusion in Brazil, since we found evidence that the government creates distortions on the taxpayers' fiscal reality, making it difficult to perceive the price of public services (Mill's hypothesis).