The Italian theories of progressive taxation∗

 ∗ A first version of this paper was given at the Public Economic Theory conference (PET 06), Hanoi, 30 July–3 August 2006. The paper benefited from critical comments by Amedeo Fossati and three anonymous referees. Of course any remaining error rests with the author.

Abstract

The present paper examines the theories of progressive taxation debated in the Italian public finance literature between the end of the nineteenth century and the early decades of the twentieth century. The survey presents only the main arguments, stressing their connection with the international literature. Among the Italian economists, apart from a few opponents, the idea of progressive taxation is agreed upon, even though it is not well founded from a theoretical viewpoint. The main result of the paper is that the main case for progressive taxation is to be found in political and social reasons.

Keywords:

• Taxation
• progressiveness

Notes

 ∗ A first version of this paper was given at the Public Economic Theory conference (PET 06), Hanoi, 30 July–3 August 2006. The paper benefited from critical comments by Amedeo Fossati and three anonymous referees. Of course any remaining error rests with the author.

 1 On the history of progressive taxation, see Masè-Dari (1897) and Seligman (1908)

 2 According to Vickrey (1972: 3), ‘in a strict sense “ability to pay” is not a quantity susceptible of measurement or even of unequivocal definition’. Blum and Kalven (1953: 64) stress that ability to pay ‘does furnish a slogan with emotive appeal to which almost everyone can subscribe. The difficulty, of course, is that the key phrase is so ambiguous that the slogan lacks any content’. For a wide treatment of this point, see Myrdal (1930: 271–93).

 3 For treatments of the benefit principle, see Seligman (1908: 150–229), Weston (1903: 125–34), Musgrave (1959: 61–89) and Bird (1978).

 4 Smith (1776: 324) – whether the proportion of income spent in house-rent to other expense is highest among the rich – argues that ‘a tax on house-rent would in general fall heaviest upon the rich, (…) in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion’. Seligman (1908: 165) thinks that ‘this sentence did not lead him to demand progressive taxation at all; (…) it must be regarded as a mere incidental remarks’. Against this viewpoint, see Stamp (1929: 38).

 5 The arguments of supporters of the point of view that benefits of public services increase at more than a proportional rate to the amount of income are well summarized in Conigliani (1896: 593–4).

 6 Myrdal (1930: 162) points out: ‘The fundamental question why taxation should be proportional to interests or costs was never fully discussed. It seems almost a piece of mathematical mysticism’.

 7 De Viti De Marco (1936: 172) specifies his view thus: ‘in the financial policy of the State, however, which is at once monopolistic and authoritarian, the forces that lead to the establishment of a single price are not necessarily operative. The State, in greater measure than any private monopolistic enterprise, is in a position to practise the policy of manifold prices. For this reason, if we retain the assumption that each citizen consumes general public services in proportion to his income, it does not follow that proportional taxation is what is called for. There is missing the intermediate link which is represented by the assumption of a single price. Hence the principle of objective value of economic equivalence does not explain proportional taxation. The possibility of paying different prices for the same units of public goods is the first condition of progressive taxation’. This statement contains several assumptions: first of all, that consumer's rents are established in favour of some taxpayers. With regard to this assumption, De Viti De Marco (1936: 172) stresses that ‘from this first presumption may legitimately be derived another – namely, that these taxpayers are willing to pay different and higher prices per unit than are the taxpayers who do not enjoy a consumer's rent’ (1936: 172). ‘These are the preliminary conditions which make it possible to speak of progressive taxation’, but ‘they do not constitute the problem of progressive taxation’ (1936: 173).

 8 The sacrifice principles were mainly developed by Mill (1848), Cohen-Stuart (1889), Carver (1895) and Edgeworth (1897). For an extensive discussion, see Pigou (1949: 53–93).

 9 Many efforts have been made to interpret Mill's statement. According to Blum and Kalven (1953: 51), ‘Mill did not make the error he is usually accused of making, that is, the equal sacrifice and the minimum sacrifice principles always give the same results. He could not have made this error since in the same passage he found the declining utility of money to be “too disputable altogether”. This error cannot arise unless one assumes that money has declining utility’.

10 This criterion is considered preferable by Sidgwick (1883: 262) and Marshall (1930: 135).

11 Some economists have questioned the principle of the diminishing utility of income, because money is taken as the unit of measurement of income as well as a medium of exchange. On the attempt by Fisher (1927) to relate a statistical method of determining the curve of marginal utility of money income to the problem of progressive taxation, see Vinci (1933). Vinci's criticism is quoted by Fagan (1938: 36–8).

12 For a mathematical proof of the conditions for equal sacrifice to yield strictly progressive taxation, see Samuelson (1983: 227) and Fasiani (1952: 79).

13 Ricci's eclectic approach is not unusual in the Italian theories of progressive taxation, where there sometimes appear conclusions that seem to unify the benefit principle and the sacrifice principles (Dallera 2003: 144).

14 The reasons of the upholders of this view are explained in Robbins (1938). Many scholars, however, think that interpersonal utility comparisons can be made in a meaningful fashion. For instance, Musgrave (1959: 108) says: ‘such comparisons are made continuously and in this sense have operational meaning surely’. But already Wicksell (1896: 77) had pointed out: ‘Such comparisons are nevertheless made, for otherwise the deliberation of the tax-approving assemblies, that “bargaining between the Government and Parliament” (Wagner), about whether or not this or that public expenditure is to be accepted or rejected, would be completely without purpose. This is obviously a theoretical difficulty which must be resolved if there is to be any science of public finance in the true sense of this term’.

15 Paladini (2005: 70–2) points out that Einaudi's opinion about sacrifice principles was not initially opposed against but changed over time.

16 Buchanan (1960: 45–6) affirms: ‘We find the Italians assuming the front ranks among the critics of the sacrifice “theories” of taxation, normative “theories” or “principles” which have dominated the Anglo-Saxon tradition, and which remain influential enough to justify whole works being written to dispel them. No important Italian theorist has advanced propositions of the Mill, Edgeworth, Cohen-Stuart, Pigou type, which state that the best tax system is achieved when individual sacrifices are equal or equi-proportional or when aggregate sacrifice is minimized. The Italian contribution has been rather in excellent critiques of these propositions, for the Italians follow the developments in the English-language publications quite closely’.

17 On the difficulty of establishing an undisputed concept of minimum of subsistence, see Mazzola (1895: 14–26).

18 At the beginning of the twentieth century, Cassel (1901) proposed a progressive tax of the kind wished by J. S. Mill, with increasing exemptions (but with an element of degression) to the increasing of income.

19 Loria's approach is well summarized in Mazzola (1895: 62–79).

20 Wagner's approach is criticized by authors in favour of a thin progressiveness, like Seligman (1908: 131) who thinks that ‘it [Wagner's doctrine] would land not only in socialism, but practically in communism’. Adams (1898: 342), instead, thinks the severity of Seligman's criticism ‘uncalled for’ and that ‘Professor Wagner's argument is not like that of the extreme socialist, inconsistent with itself’. A very negative criticism of the social theory of taxation is expressed by Barone as well. Recalling the progressive taxation system called the ‘decima scalata’– applied in the fifteenth century in Florence to impoverish families who were opposing the Medici's power – Barone stresses that it is the same case as in the past: a class redistribution. What has changed is only the class that puts the tax burden on the other. These are means of social destruction, founded on no solid basis (Barone 1937: 150–1).

21 On this point, see Loria (1897: 16).

22 This separation of functions between extra-economic factors and economic factors calls to mind Wagner's distinction of the basic principles of taxation into two branches: the ‘purely fiscal’ and the ‘social welfare’ concept of taxation.

23 According to Ricci (1946: 84), Buchanan (1949: 14), Dalton (1964: 62, 66) and Morgenstern (1972: 18), De Viti De Marco's approach leads to proportional taxation as the most appropriate principle of taxation. As far as Buchanan is concerned, his subsequent interpretation of De Viti De Marco's approach looks much more worked out. Indeed, he stresses: ‘De Viti De Marco showed that either proportional or progressive income taxation could be justified on the basis of a model (…) that contained explicit recognition of the productivity of publicly-supplied goods and services’ (Buchanan 1968: 168). Musgrave (1959: 73), instead, points out: ‘even though de Viti de Marco assumes that each citizen uses public services in proportion to his income, he concludes that taxation should be progressive’.

24 Conigliani stresses the need for a progressive income tax elsewhere (Conigliani 1898: 1038–9).

25 Martello labels progressive taxation as an absurd principle, nonsense in theory and practice, arbitrary, illegal, antidemocratic, socialist and revolutionary. It is worth quoting some passages of Martello's book to give an idea of its pamphleteering character and author's very strange opinions. Martello (1895: 77) says that socialists do not want to convince themselves that poverty is like sickness. Wealth is inherited in the same way as health. Martello (1895: 85–6) thinks that taxation according to the ability to pay is equivalent to the claim that each buyer pays a different price for each good, in accordance with his economic resources. In his ideological fury against progressiveness, Martello (1895: 197) writes sentences that do not make sense, such as: progressive taxation sets up the State on the basis of privilege and degradation, bringing back society to feudalism.

26 As a matter of fact, the existence of this limit is recognized by Martello himself (1895: 96).

27 Nitti (1922: 312–13) says that, initially, an almost revolutionary or socialist nature was given to progressiveness, but now it is not possible to repeat this exaggeration without being ridiculous.

28 For a critical discussion of Rignano proposals, see Tait (1967: 106–14).

29 This conclusion has some connection with von Hayek's idea that ‘one of the chief reasons why progressive taxation has come to be so widely accepted is that the great majority of people have come to think of an appropriate income as the only legitimate and socially desirable form of reward’ (von Hayek 1960: 318).