Fiscal Illusion: The Real Shell Game

Over 100 years ago, in 1903, Italian economist and scholar Amilcare Puviani published his book, ”The Theory of Fiscal Illusion.” The Italian scholars at that time were profoundly curious about the effects of government on young democracies. They asked the question, “How could politicians best use the power of the purse to pursue their projects without the ‘ruled’ getting wise?” This research gave birth to what today we call “Public Choice Economics” made famous by economists James Buchanan and Richard Wagner.

Puviani created a list of 11 ways a “ruler” could hoodwink the “ruled” and extract the taxes needed for his projects. All the while, the ruled believing they are receiving some sort of benefit from the government. Note how many of these deceptions depend on singling out one group of “ruled” as the scapegoat.

  1. Sales Taxes. An indirect tax is better than a direct tax inasmuch that it hides the actual tax within the prices of goods.
  2. Inflation. Allow the central bank to increase the supply of money. This devalues the purchasing power of each currency unit that the “ruled” possess. When prices increase, simply blame one group of the “ruled” called the merchants.
  3. Borrowing. This postpones the unrest taxation causes on the “ruled.” A later ruler may have to answer for it long after the previous ruler has absconded with the money.
  4. Gift Taxes or Luxury Taxes. This causes the illusion that only special purchases made by another group of “ruled” (the rich) should pay the tax.
  5. Temporary Taxes. A “temporary” tax is instituted for the purpose of fooling the “ruled” into believing that it will, some day, be repealed.
  6. Minority Group Taxation. Single out certain groups of the “ruled” for taxation. Examples are, the rich, drinkers, smokers and winners of profit windfalls.
  7. Dependency. Threaten collapse or social upheaval if certain State controlled services are withheld. Remember “The Sequester” and the government shut-down?
  8. Diffused Taxation. Only collect taxes in small increments. An example would be a payroll tax withholding.
  9. Undefined Taxation. The cost of the project cannot be predicted in advance. Think about Medicare, Prescription Drug Plan part B or the Affordable Care Act.
  10. Budget Complexity. An overly complex budget confuses the “ruled” into believing that more taxation is required.
  11. Generalize Expenses. Speaking in general terms camouflages the actual costs of individual components of a project.

By writing his book, Puviani had demonstrated that what is good for the politician may not necessarily be good for the public. A motivated politician can pursue his agenda while in office, taking credit where it isn’t due. He can delude the public into believing that his policy is actually good for them. Puviani’s ground breaking work opened up a whole new field in economic theory. By 1960, James Buchanan and Richard Wagner built upon his work to give us a more thorough analysis of Public Choice Theory. These men helped the public to understand that the State can and often does, hoodwink them into believing that the costs are trivial in comparison to the greater benefit of government spending. By diffusing costs over a broad population, people are given the false perception that government services, bribes, subsidies and handouts don’t cost much at all. But, a dime here or a dollar there do add up over time as budgets increase with each successful machination.

Now, take Puviani’s recipe and mix in a hardy dose of Keynesian brainwashing and you can understand how democracies, around the globe, have exploded into massive behemoths boasting tens of trillions of dollars in budget costs. For dessert, add a giant scoop of public economic ignorance and the dinner ends up in a rush to the restroom as global living standards go down the toilet.

The best way to summarize what Amilcare Puviani and the Public Choice economists are saying is by quoting that sage of free market thinkers, Frederic Bastiat,

“Everyone wants to live at the expense of the State. They forget that the State wants to live at the expense of everyone.”



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