Visibility of Taxes and the Size of Government

The paper studies the popular hypothesis that ‘’hiding’’ taxes from taxpayers, such as by nominally dividing the payroll tax between employees and employers, leads to higher taxes. To test the hypothesis, I analyzed payroll taxes and pension spending in a sample of 89 countries and found that countries where employers nominally pay a higher share of the payroll tax tend to have lower taxes and smaller pension programs, contrary to the visibility hypothesis. In an effort to rationalize these counterintuitive results, I derive an interest group model of the size of government where taxpayers have biased information about taxes and their incidence. The model shows that the government may get larger when taxpayers are better informed if making a tax more visible to one taxpayer group makes it less visible to another group, which I argue is plausible in some real-world applications.