Classics in the Theory of Public Finance

This is not the place to discuss^★★ whether, when and how far the compulsory acquisition of goods by the State may be justified. It suffices here to state that it stems from the very nature of the State as a compulsory association, in the same way as do its demands for compulsory personal services. This justifies the State’s compulsory acquisition of goods, and it occurs throughout history. Its principal forms are taxation and expropriation. The compulsory acquisition of goods by the State may be termed “public”; by contrast, we speak of the State’s “commercial” activities when it acquires revenue by its own production or by contractual services against specific returns. Public loans also belong to the latter category.

In the last analysis it is Parliament which decides the distribution of public expenditure in our country. Hence the study of the allocation of the budgetary funds available—as well as of their amount within certain limits—indicates the opinion held by the average intelligence comprised in Parliament on the scale of marginal utilities of the various expenditures.

Taxes are conceptually entirely different from all other public revenue. Ever since taxation started, taxes have so outclassed all other sources of public revenue as to make them seem almost insignificant. Taxes can be said to represent the nation’s entire civic sense on the economic plane. We must conclude that they are not only formally, but fundamentally, different from other sources of revenue. This is indeed so.

(1) The laws of price formation on the market are well known: it depends upon the varying quantities of goods and the degree of their final utility for buyers and sellers, the conditions of monopoly and competition, etc.¹ Once established, a market price has this peculiarity that it corresponds not to all the various degrees of final utility which one and the same good may have for the various persons wishing to acquire it, but only to one of these degrees of utility. Let us suppose, for example, that there are seven persons for whom a good has different degrees of final utility: A, B, C, D, E, F and G are willing to pay for a unit of this good 100, 90, 80, 70, 60, 50 and 40 lire respectively. If a price of 70 lire has been established on the market, only A, B, C and D will purchase the good, because its degree of final utility for them equals or exceeds 70; E, F and G, for whom the desired good has a final utility of less than 70, will be debarred from its purchase. But among the persons A, B, C and D who are able to buy, only Dpays a price corresponding to the degree of final utility the good has for the buyer, namely 70; A, B and C, for whom the good has a final utility of 100, 90 and 80 respectively, pay less for the good than its value to them according to the intensity of their need.

I have not been able to discover who was the first to proclaim the thesis that because the degree of utility of income decreases when income increases, it follows that equality of sacrifice entails progressive taxation. This can be found now and then mentioned casually, and as if it were tacitly assumed.

I have intentionally given this essay a somewhat challenging title and, from the outset, I have taken up a rather heterodox position in opposition to the traditional doctrines. However, the essay contains not so much a new principle of just taxation, than a method to ensure that such measure of justice as can be attained is in fact achieved in practice.

The character of pure theory, deduction from received first principles, attaches not only to the incidence of taxes, which has been considered in the preceding paragraphs, but also—in a minor degree, doubtless—to the distribution of the fiscal burden among the taxpayers, which is to be considered in what follows. There is at least one aspect of this subject which may present sufficient length of reasoning and strength of premises to deserve the title “pure”. The view thus distinguished is that according to which the sacrifice felt by the taxpayer is a dominant factor in the apportionment of the fiscal burden, the hedonistic, or in a special sense utilitarian, principle of taxation, as it may be called. Some other principle may be held—for instance, that of “ability”, or “faculty”, in a more objective sense, but can hardly be to belong to the domain of pure theory.

The pure science of public finance needs more than a theory of production and a theory of public wants.¹ It needs also a theory of public enterprise, this latter theory being simply a particular aspect of the general theory of marginal productivity. In this way due account can be taken not only of the demand for public goods and services, but also of their supply, and an attempt can be made to find the conditions of equilibrium between demand and supply.

The public domain may well in the future furnish the public treasury with more abundant receipts than it does now, but taxes will long, if not forever, remain the principal source of public revenue. Hence the study of tax questions is perhaps the most important part of the science of public finance. What is the best tax system, not only for the exchequer but for society itself? What are the consequences of various taxes for the fortunes of the taxpayers and for the relative position of the various classes of the people? What is the effect of taxation, not only on the citizens’ material output, but on their very freedom and way of life? All these are so many questions which must be probed and to which it is desirable that we should find an answer.

It is not easy to define the term public needs in an unequivocal manner. Nor can we get over the difficulty by making a distinction, as some do, between a general need (for example for bread) and a collective need (for example for internal security). Even if general needs and collective needs can be unequivocally defined, this does not solve the question of defining public needs because, in actual fact, it is not true that the economic activity of the State is designed to satisfy all collective needs and only collective needs.

We may begin by assuming that there are only two categories of taxpayers: one, A, relatively well-to-do, and the other, B, relatively poor.Within each category all individuals must pay the same price for their participation in public consumption. The problem is the relative amount of the two prices, i.e. the distribution of the total cost of the collective goods between the two groups.

In the first two sections of the paper, Sax discusses certain premises which underlie his theory of the economy of the State. He first deals with the sociological and methodological premises of his theory. The essence of the new approach, according to Sax, is that the economic activity of the State is not to be based on the exercise of political power but on the will of the community as a sum of individuals. Not every individual will be engaged actively in all decisions of the State, but may participate only in a more or less passive role through his membership in the group. The motivation of individual action in economic affairs is the same with regard to private and public economy, including in both cases egoism, mutuality and altruism.

It is common usage to speak of the public economy as the national household, or, as the case may be, the county household, city household, or generally the public household. The whole of public economy is thereby given a name taken from one single section of private economy. Similarly, whenever in the past economists tried to explain public economy, they nearly always used an approach based on the familiar concepts of private economy. Classical theory took the view that the economic relation between State and citizens is one of exchange, the citizens paying tax in exchange for public services. Nowadays it is fashionable to regard public activity as a special form of production: non-material production, supported by non-material capital, and designed to create the non-material goods of peace and rule of law. Such concepts do nothing but obscure the true nature of public economy. To be sure, public and private economy cannot be conceptually separated, both having common roots and common aims. Both have the purpose of maximizing the utility of scarce resources. But the means of power peculiar to the public economy present it with its own peculiar tasks, to be solved in its own peculiar ways. The forms of state revenue with which the theory of public finance is concerned are alien to private economy and have nothing to do either with exchange or production. The conception of tax as a price for non-material products is of no use as a basis for tax theory, because the principles involved in tax assessment have nothing in common with the law of price.

The origin of the State lies in association for purposes of defence and to meet common fiscal needs. These two factors endow the State with its distinct status as an association in law. Hence it is the most serious deficiency of our whole body of social science that we lack a theory of financial sociology and that the problems of public finance remain without sociological foundation. Only sociology can show how social conditions determine public needs and the manner of their satisfaction by more direct or more indirect means, and how ultimately the pattern and evolution of society determine the shaping of the interrelations between public expenditure and public revenue. A community’s expenditure and revenue cannot in the long run be considered separately. They have so close a reciprocal functional relationship that we may say: Tell me how and whence you acquire your revenue, and I shall tell you what your expenditure budget must look like. The same applies in reverse: Tell me what you want to spend your money on, and I shall tell you by what means you will get the required revenue, what classes of society you must draw upon and the size and kind of administrative apparatus you will need therefor. The mechanism of mutual interdependence between expenditure and revenue ought to be the primary problem of the science of public finance; but although frequent tentative beginnings were made in this direction, they were never followed up consistently.

From the economic point of view, the activities of governments and local authorities are a link in the chain of man’s endeavour to satisfy his needs. To cover the cost of such activity by taxes means converting private property into public property and so more aptly serving the satisfaction of certain general needs. Like any other economic activity, this collective activity, too, must be guided by economic principles. Modern public finance and fiscal theories attempt to define those principles and to show their relations with the principles governing the private economy.

The economy of the State is a form of economy with its own peculiar properties. We shall try to identify and analyse these properties by means of a comparison between the basic principles, the form and structure of the state economy and the free, capitalistic market economy. Despite some typification and generalization, we shall discuss the state economy in terms of the actual forms assumed by the economy of the modern State and its subordinate bodies, such as municipalities. Once we have established the features peculiar to these forms of economy and classified them, we may ask whether this type of economy can be described as communal economy. By then we shall have identified so many elements of the communal economy, that we may be able to draw the picture of an economy which is exclusively communal in form, not only by contrast to the free market economy. This will help us to a full understanding of the principle and nature of the communal economy. Finally, we shall examine how, in our present-day dualistic economic systems, such communal economy takes shape in the economy of the State, and what interaction and distinction there is between it and the free capitalistic market economy.