Fiscal Illusion Hypothesis And Its Empirical Test In China 's Economy

Because the private sector could not recognize the public price, there are theexpectation illusions and deficit illusions in government expenditure. Theseillusions cause the lower price estimation and lead the supply shortage of publicgoods. It is appeared that government investment grows very rapidly, and thisinfluences the effectiveness of allocation of social resources. RicardianEquivalence Proposition which is relative to fiscal illusions embodies the idea thatit has the same effect to economy for government to finance by debts or by tax.That is, whether the government raises money by debts or by tax it will notinfluence consumption and investment. If Ricardian Equivalence Proposition isacceptable the economic unit will not engender fiscal illusions in accumulatinglevel. Therefore, it is the main method to test fiscal illusions whether RicardianEquivalence Proposition does exist or not. In this article, we make a closeempirical research on the effectiveness of Ricardian Equivalence Proposition andwhether fiscal illusions existing or not in our country utilizing econometricsmodels, and come up with some fiscal policy advice in accordance with realcircumstances of our country.Chapter 1 gives a brief introduction to fiscal policy firstly, then lists someviewpoints of the West Economists on fiscal policy, and at last makes a briefreview of our country's fiscal policy implementation and issuance of nationaldebts since reform and open-up. Since reform and open-up, fiscal policy isplaying a more and more important role in adjusting and controlling themacro-economy in our government, and the national debt gets great attention ofgovernment day by day as the financial policy important means. Especially sincethe Southeast Asian economic crisis, structural contradiction and systematiccontradiction accumulated for a long time have been aggravated constantly in1997-1998, the economic situation of our country is very severe , the increase ininvestment is weak, the economic growth rate slows down, the export growth rateglides continuously, the overproduction contradiction is conspicuous day by day,the deflation trend is obviously strengthened, it is difficult for money supply notto remain valid growth, national economical operation fall into people demandenough predicament seriously, make the economic growth rate slow down. In Julyof 1998, the State Council determined to issue additional national debts of 100billion yuan to use for infrastructure construction formally, implement thefinancial policy taking expanding domestic demand as goal. Since this begins tostart for the positive financial policy. By 2004, of our country positive financialpolicy implement 6 years in succession already , produce the obvious result,national debt investment spurs about 10 percentage points of increase in GDP in 6,thus promoted national economy to increase fast continuously effectively.Chapter two mainly carries on the simple introduction to RicardianEquivalence Proposition, and has carried on theory analysis and real example toexamine to its validity in our country. This thought that is the same in economy isinfluenced that the government borrows financing and tax revenue financing thatthis theorem has expounded the fact ". The consumption model set up under lifecycle and lasting income hypothesis draws a step of terms that the individualutility of economy maximizes:Thus proved the equivalent theorem of Ricardo of gives definitelygovernment's expenditure route, the economic individual's consumption route isfree of government's financing way " theoretically. It has caused the economists'great interest whether Ricardo's equivalent theorem is tenable, have caused fiercedispute. This text has enumerated the main views of Barrault and Tobin. But evento this day, the economists have not formed unanimous view to the validity ofRicardo's equivalent theorem yet. This text utilizes VAR model to examine thevalidity in our country of Ricardo's equivalent theorem further. We have set upoutputs of including, consumptions, expenditure , tax revenue four VAR model ofvariable use pulse respond function is it analyses financial variable to output anddynamic effect that consume to come. And the comparative analysis that theexpenditure assault is found through assaulting to the tax revenue, the functionprescription of the tax policy is very limited, and apt to cause the violentfluctuation of the output, unfavorable to the sustainable and stable development ofeconomy. By contrast, increases expenditures long to the expansion effectduration of the output, and do not have repeated periodicity, so the positive fiscalpolicy taking expanding government's expenditure as main means can promote theeconomic growth of our country effectively, Ricardo's equivalent theorem isuntenable in our country's economy.Chapter three made an introduction to the financial illusion hypothesis in thewest, has focused on and examined the real example to the macro-economy dataof our country. The financial illusion hypothesis is one of the public choicetheories increased for government's scale of the explanation, it thinks because theillusion born to the tax revenue of Chaos production of the course of the financialrevenue and expenditure, The voter-taxpayer often underestimates the price of thetax revenue, cause the demand for the public products to increase, has supportedthe level of higher public expenditure. The basic model that this text examines is aexpenditure equation of the variable form of the logarithm: lnGt = ln A+αlnYt + βln Pt +φln Nt +δ1 ln Dt +δ2 lnVt + utThe corresponding parameter is: δ1 = βπ1,δ2 = βπ2 .We define the rate of government's fiscal revenues and total amount of retails ofthe goods is index of" expectancy illusion " V , the rate of government's fiscalrevenues and expenditure is index of " illusion of the deficit " D . At the same timewe defineΠ= Dπ1Vπ2 , and regard the level of the price and individual quantity ofeconomy as the constant, then we can get the simple public goods demandequation: lnG = c +αlnY +δ1 ln D +δ2 lnV + uWe Judge whether there is fiscal illusion in the economy of our country bymeasuring the value of the parameter Π= Dπ1Vπ2 .WhenΠ<1 alsoδ1 ln D +δ2 lnV < 0 , there is remarkable fiscal illusion. Whenthere is illusion of the deficit, the real fiscal revenues are greater thanexpenditures, namely D >1 ; Because expecting illusion exists under mostsituations, and we choose the index V <1 to satisfy under most situations, at thismoment if δ1 < 0 and δ2 > 0 establish at the same time, this will cause Π<1,namely which will cause " fiscal illusion " existence. In this way, we get theexperience equation that can be examined, and the parameter of having " fiscalillusion " is supposed: δ1 < 0 ,δ2 > 0 .Utilizing association's whole econometrics models of revising with the erroretc., the parameter that we have got fiscal illusion is estimated: :δ?1 = ?0.943 < 0,δ?2 =1.074 > 0 , and the t—statistics, the parameters are estimated to be allremarkable on number value. So, can infer from the estimation result of the model,there are remarkable expectancy illusion and illusion of the deficit in theexpenditure, the associations of two kinds of illusion form fiscal illusion causingexpenditures to expand.Finally, through the above real example, basic conclusion and policyenlightenment we get the corresponding financial policy. Receiving fiscal illusionof a certain degree in the expenditure of our country influences, no matter "expectancy illusion ", or " illusion of the deficit " has increased government'sexpenditure to a certain extent, have increased the public's demand forgovernment's public expenditure too; In case of our country, Individual IncomeTax at present charge proportion of the people too low in tax revenue, shouldperfect the Individual Income Tax System , strengthen the expropriation andmanagement dynamics of the Individual Income Tax, make it become one of t hemain body tax categories of our country progressively. Meanwhile, should pointout too, when the tax system structure of one country changes direction and takesdirect tax (the tax revenue to be perceived ) as the core progressively , thegovernment wants to keep the level of higher public expenditure and meet greaterobstruction than before. So, our government is in should be paid attention tofollowing while implementing positive fiscal policy: Simplify the tax system,...