Tax Revenue and Tax Structure

Abstract

This article examines the relationship between the selection of tax instruments Abstract and the size of the public budget. It develops and tests with data from 37 large cities a model that is an alternative to the commonly cited fiscal illusion model. The model is predicated upon the assumption that budget-maximizing governments prefer broad-based tax systems composed of inelastic taxes and not just many taxes. The empirical tests indicate that cities that rely on taxes with elastic bases tend toward lower per capita tax revenues and cities that rely on taxes with inelastic bases tend toward higher per capita tax revenues.