PUBLIC FINANCE. — The etymology of finanza is usually derived from the medieval term “finatio,” “financia” (a corruption of “finire”), and is understood as the act by which accounts were settled and concluded (“finare”) for the performance of work, a composition, or a levy. There is private finance and public finance. The former consists, in the broad sense, of private wealth; the latter, of public wealth. Naturally, over time, the meaning of finanza was in part broadened and in part more precisely defined according to varying social circumstances and needs.
CONTENTS:
I. Public finance and financial activity
II. Constituent elements of public finance. Minor elements or presuppositions. —III. Public expenditure
IV. Public revenue. Principally: taxes and tax systems. —V. The State budget
VI. Extraordinary revenue: the public debt
VII. Public finance and monetary circulation. Recurring inflations: their causes and effects on the finances of States. — VIII. The scientific study of public finance.I. PUBLIC FINANCE AND FINANCIAL ACTIVITY
Public finance concerns the facts relating to the wealth that the State and the lesser public bodies procure and employ for the attainment of public ends, which are specified in public needs.When consideration is given to the subject (the State and, within its sphere and according to the forms and within the limits established by it, the lesser bodies: regions, provinces, municipalities, etc.) that carries out these activities, one speaks of financial activity; and this expression always implicitly includes the qualification “public.” Moreover, the importance of this activity in the history of peoples—as advanced political communities—has always been so great, and has acquired such clear significance in relation to other wealth-producing activities (those of private individuals, and those of the State itself insofar as, like private individuals, it engages in commerce, industry, etc.), that the single word finance, in ordinary usage, has always proved to bear the specific meaning of public finance. Finances entered usage in France in the sixteenth century with reference to public bodies, signifying wealth, and more particularly the State’s revenue, for the attainment of its ends. This complete meaning can be sufficiently understood from the following phrase of Chancellor De l'Hospital (1368): — Nos adversaires ont peu de finance, mais ils la ménagent bien.
II. CONSTITUENT ELEMENTS OF PUBLIC FINANCE. MINOR ELEMENTS OR PRESUPPOSITIONS. – There are, therefore, three constituent elements of financial activity:
a) the State, which constitutes the subjective element; and this also when it concerns the public bodies subordinate to it, since the public needs satisfied by such bodies always fall within the ends of the State, and their finances are regulated by the State, including in the manner ordinarily applied to its own finances;
b) the ends of the State (objective element), which are generically determined as the ends of preserving and developing the political organism;
c) wealth, which consists of economic goods (income and assets) already existing for the most part within private economies, and which the State employs to a given extent (normally, within the State itself, through taxes: imposts, fees, etc.), thereby forming public revenues and using these for public expenditure.
The minor elements or presuppositions of financial activity relate to the historical and local environment. They concern the various aspects of the life of the State, in which the life of society is also contained, in its material and spiritual elements, such as: the system of production and distribution of wealth; the territorial distribution of the population and its division into income and professional classes, and also, to some extent, the physical configuration of the territory itself; the respect that the State has for private property, and the freedom it allows in the formation of income and in private consumption and saving, as well as exchanges with foreign countries, the culture and education of the people, and also their domestic and social customs; the taxpayers’ fiscal education, the political forms and established relations that characterize what are called the civic rights and freedoms of the citizen, including the publicity given to financial budgets and the regard accorded to public opinion concerning the financial action of the State and of other public bodies; and so forth.
III. PUBLIC EXPENDITURE
Public expenditure, from the beginning of the nineteenth century, shows a considerable and continuous progressive increase, corresponding to the growing expansion of the purposes of the State.At present, the aim of what is called social security or social prosperity in most European and American countries constitutes a very powerful impetus toward the increase of public expenditure by States and by the smaller territorial entities (regions, provinces, municipalities) and non-territorial entities (institutional administrative bodies created or recognized by the State, with their own legal personality, in order to pursue specific social and economic purposes).
Indeed, the conditions for a parafiscal finance are increasingly being created; this, precisely, serves as a limit to classical finance relating to the fundamental and traditional purposes of political organizations, making room for finance conducted by non-territorial public bodies, with special aims and tasks of a social nature and of stimulating economic life. Such finance is properly called parafiscal, although it does not yet have clearly determined theoretical and practical limits, especially with regard to the nature and tasks of a large number of institutions and associations of a voluntary character or even of a compulsory mutual nature, among which social insurance is the principal example.
Moreover, a policy of public investment, in this second postwar period, serves as an instrument for implementing changed forms of State intervention in economic life (dirigisme, planning), and also acts as a force for achieving new aims of social advancement and civil and economic progress. Public investment thus constitutes a surpassing of the classical policy of public works (limited to such objects as roads, ports, fortifications, etc.) and gives public credit new directions, toward new objectives to be attained throughout the national economy, also by means of the general management of credit and private investment.
IV. PUBLIC REVENUES, PRINCIPALLY: TAXES AND TAX SYSTEMS
Only in the modern State and in the periods closest to our own have public revenues been constituted almost entirely by taxes (derived revenues), whereas in the past, and even more so in the Middle Ages and the early modern age, sources of revenue consisted to a large extent of assets considered to belong personally to sovereigns and princes, or of trades and forms of production conducted or undertaken by them (the fiscal domain, original revenue production); as well as of rights in the forms of regalia belonging to them, from which certain forms of taxation in the more advanced modern State originated.Taxes are levied on the incomes and assets of individuals (taxpayers), both directly (direct taxes) and indirectly (indirect taxes, which affect consumption, transfers of wealth, and acts of exchange in general).
Through taxation, the more advanced contemporary States succeed in levying, on average, one-third of the total of their respective national incomes. Hence one can understand the supreme importance, in the public finance of each country, of the formation of the tax system, governed by criteria of coherence and rationality.
Besides their primary purpose of providing the treasury with revenue for public expenditure, taxes are nowadays increasingly developing collateral functions that are not properly fiscal. They may, that is, be implemented as an instrument directly intended to modify or correct the natural course of economic life (as with protective tariffs, which serve to limit competition from foreign products within the country), or to achieve social aims (as occurs with the strongly progressive rates applied to taxes affecting the taxable capacity manifested by the sum of the incomes or property values of a natural person, or assets transferred by inheritance, bequest, or gift; thus tending to mitigate inequality in the distribution of individual wealth), etc.
Hence the distinction between fiscal finance and extra-fiscal finance, which nevertheless lends itself to giving an inadequate impression of the actual nature of the financial phenomenon.
V. THE STATE BUDGET
A highly important accounting and legal instrument in the modern State, given its political, constitutional, administrative and managerial implications for the handling of public money, is the budget, both for the periodic forecasting (the forecast budget) (which is annual, but today tends to cover longer periods) of financial events represented by numerical entries for both revenues and outlays or expenditures, and for their execution and, subsequently, for the rendering of accounts (the final budget).VI. EXTRAORDINARY REVENUES: THE PUBLIC DEBT
Extraordinary revenues, intended to meet extraordinary expenditures, may, up to a relatively limited threshold, be provided by extraordinary taxes, that is, through the temporary increase of the rates of some or all existing taxes, or the temporary introduction of new taxes.There thus arises a now highly significant aspect of financial activity: that of public loans, in the forms of: a) floating debt (to make up for temporary cash shortages, that is, for payments which, according to the forecasts, are considered sufficiently covered by the total revenues that, in relation to such payments, are late in being collected), chiefly taking the form of ordinary Treasury bills (with a short maturity which in Italy ranges from one to twelve months); b) funded debt, which either has an indeterminate maturity (no maturity) and is then called irredeemable or perpetual debt, or has a definite maturity, in which case it is redeemable debt, generally extinguished by means of annual drawings (amortizable). There is an intermediate form between floating debt and funded debt, represented by extraordinary Treasury bills, with a multi-year maturity (in Italy, the nine-year maturity predominates), which is entered as a form of expectation, in order eventually (when the credit market and political conditions prove favorable) to be transformed into funded debt. If this expectation is prolonged, provision is made by renewing the same bills when they reach maturity.
Naturally, the public debt gives rise to ordinary public expenditure items for the servicing of interest payments on the loans of which it consists, as well as for the premiums often associated with them.
Apart from repayments and other forms of extinguishing the public debt, which increasingly tend to be limited to floating debt properly so called (but which nevertheless recurs annually), the State has only one evident means of reducing the burden of public expenditure on the interest of its debt contracted under unfavorable credit-market conditions: the conversion of irredeemable funded debt; when voluntary or optional (ordinary conversion), this entails the replacement of the old loan securities with new securities bearing a lower interest rate.
VII. PUBLIC FINANCE AND MONETARY CIRCULATION. RECURRING INFLATIONS: THEIR CAUSES AND EFFECTS IN THE FINANCES OF STATES. - Monetary circulation, nowadays consisting almost everywhere exclusively and primarily of banknotes, is also a matter of grave importance for public finance.
In difficult moments for public finance, such as those in which exceptional—and at times enormous and disproportionate—expenditures arise, so that they cannot be met by the ordinary credit means, expenditures caused by wars generally constitute an extraordinary means and source of revenue, an occult instrument of public debt (but without interest), precisely through the issue of paper money to meet the State’s needs arising from such causes.
The inflation of the currency, which is its inevitable and uncontrollable consequence—at least so long as those provoking causes persist—producing the devaluation of the monetary unit, with damage to the country’s entire economy, nevertheless has the virtue of reducing the burden of the mass of public loans previously issued by the State and by smaller public entities (and the same applies to loans between private individuals) in proportion to the reduction in the value of that same monetary unit, with reference to the respective times when those loans were issued.
In conclusion, despite the enormous and constantly growing nominal mass of public loans, as it has developed from the beginning of the nineteenth century to the present day, nearly all States, as a result of the recurring devaluations consequent upon equally recurring monetary inflations—certainly neither intended nor sought by their respective governments—find themselves from time to time considerably relieved (in comparison with the other budget items) of the effective burden of public-debt charges.
VIII. THE SCIENTIFIC STUDY OF P. F. — As an object of scientific study, public finance gives rise to one of the most important social disciplines, taught as a fundamental subject in all faculties of law, economic sciences, and political sciences: the science of public finance, together with financial law.
In these fields of study, Italy has acquired the highest renown throughout the world, both on account of its longer centuries-old tradition and because of the greater number of scholars devoted to them, through research and publications that constitute a scientific literature becoming ever more abundant and significant in contributions concerning every type, category, and aspect of financial matters, which rank among the most complex in the intricate field of the social sciences.
The foundation of the science of public finance is essentially political, with an ethical-legal character specified within the framework of the doctrine of the State.
Nevertheless, the initial orientation of modern public-finance science still predominates: this gives it an economic foundation, so that its study is conducted within the framework of economic theory, that is, it regards the science of public finance as a special branch of economic science. But the error of such an orientation is now becoming increasingly evident; consequently, the task of economic theory with respect to financial phenomena will be defined as developing a category—albeit a highly important one—of studies of the economic aspects of such phenomena, especially with regard to taxes. It is in fact necessary to know their effects on economic life (financial economics) in order to aid the search for tax systems that are as efficient as possible also with respect to the sound functioning of economic affairs, consistently with the fundamentally political aims of the State; with regard to finance, these aims are governed by the moral factor and by the juridical consciousness historically at work.
The economic orientation of the science of public finance has often been corrected by introducing into it political elements (not always understood in conformity with the real nature of the State, which pursues ends of its own that cannot be confused with those of individuals or groups of individuals) or sociological characteristics, in which, according to certain writers, the economic principle and the political element ought to be absorbed; whereas it will be necessary to return to the pure meaning of the political nature of the financial act, as it was understood by our writers, from s. Tommaso through the first half of the 19th century, characterized by the moral factor and the juridical order of the State.
1933; G. Ingrosso, Istituzioni di diritto finanziario, 3 voll., Napoli 1935-46; M. Pugliese, Istituzioni di diritto finanziario, Padova 1937; G. Tesoro, Principi di diritto tributario, Bari 1938; E. Allorio, Diritto processuale tributario, Milano 1942; M. Udine, Il diritto internazionale tributario, Padova 1940. Emanuele Morelli