On Fiscal Illusion in Local Public Finance: Re-examining Ricardian Equivalence and the Renter Effect
نویسندگان
چکیده
We reevaluate fi scal illusion in local public fi nance. The Ricardian Equivalence Theorem suggests that the fi nancing of a public program using either taxation or debt shouldn’t affect outcomes, because debt is capitalized into property values. In contrast, we show individuals may rationally prefer public debt if governments can borrow on more favorable terms. We also propose a new test for the renter effect: controlling for differences in demand, the renter effect suggests renters prefer property taxes to sales taxes. Using data from U.S. open space referenda, we fi nd that households do prefer debt fi nancing, but fi nd no evidence of the renter effect.
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