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The present study investigates the role of fiscal illusion on income inequality in 46 selected countries in terms of income and development levels from 2002 to 2017.

The effect of fiscal illusion on income inequality is tested using the two-step system generalized method of moment (SYS-GMM) estimator.

The findings reveal the negative effect of fiscal illusion on income inequality, which means increasing fiscal illusion decreases income inequality in 46 selected countries. As in other countries, income inequality declines when fiscal illusion increases in high-income and developed countries, although the redistributive effect of fiscal illusion is more in high-income and developed countries than in other countries. In addition, the results demonstrate the positive effect of unemployment, urbanization and inflation as well as the negative effect of trade openness on income inequality in all three models.

Previous studies have examined the role of government in controlling income inequality from different perspectives; however, no study has detected the role of government in income distribution regarding fiscal illusion.

The peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-05-2022-0311.