Fiscal illusion Mourao (2008) attempts to quantify fiscal illusion empirically for almost 70 democracies since 1960. Fiscal illusion Fiscal illusion is a public choice theory of government expenditure first developed by the Italian economist Amilcare Puviani in his 1903 book "Teoria della illusione finanziaria" ("Theory of Financial Illusion" (not yet translated into English, but translated into German in 1960 under the title "Die Illusionen in der öffentlichen Finanzwirtschaft", Berlin: Dunker & Humblot, 1960)). Fiscal illusion suggests that when government revenues are not completely transparent or are not fully perceived by taxpayers, then the cost of government is seen to be less than
Fiscal capacity cannot improve fiscal capacity by simply raising taxes if it does not have a political, legal and fiscal history that has supported such state-power. In comparison to Besley and Persson's individual level study, Gordon and Li (2009) focus on the role of businesses and the financial sector in developed versus developing countries. They model businesses' participation in the financial sector—where Gordon and Li specifically refer to participation in the financial sector as using banks—as participation in the formal sector; they assume that tax authorities can monitor bank records, so that mass participation in the financial sector lends the state information