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 analyze payroll taxes and pension spending in a sample of 89 countries and find that countries where employers nominally pay a higher share of the payroll tax tend to have lower taxes and smaller pension programs, contradicting 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 bigger when taxpayers become better informed if making the tax more visible to one taxpayer group makes it less visible to another group, which I argue is plausible in some real-world applications. JEL classification: H10, H22, H55