Public Finance

PUBLIC FINANCE. - The etymology of finance is customarily derived from the medieval term "finatio", "financia" (a corruption of "finire"), and it is understood as the act by which accounts were settled and concluded ("finare") for a performance of work, a composition, a tallage. There is a private finance and a public f. The first is constituted in a broad sense by private wealth; the second by public wealth. Naturally, with the passage of time, the meaning of finance came on the one hand to expand and on the other to be better determined according to the various circumstances and social necessities.

I. PUBLIC FINANCE AND FINANCIAL ACTIVITY

Public finance has as its object 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.

If regard is had 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 such facts, one speaks of financial activity; and this expression always implies the qualification "public." Moreover, the importance of such activity in the history of peoples - as advanced political communities - has always been so strong and has acquired so clear a meaning, in comparison with the other activities of wealth (of private individuals, and of the State itself insofar as, like the former, it engages in commerce, industry, etc.), that the single word "finance" in current usage has always shown itself to have the proper meaning of public finance. "Finances" in the sixteenth century entered into usage in France with reference to public bodies, to signify wealth and more especially the revenue of the State for the attainment of its ends. This complete sense is sufficiently drawn from the following sentence of Chancellor De l'Hospital (1368): - Nos adversaires ont peu de finance, mais ils la ménagent bien.

II. CONSTITUTIVE ELEMENTS OF PUBLIC FINANCE AND MINOR ELEMENTS OR PRESUPPOSITIONS

There are, then, three constitutive elements of financial activity: a) the State, which forms the subjective element; and this also when it is a matter of public bodies subject to it, since the public needs satisfied by such bodies still fall within the aims of the State, and their finance is regulated by the State, even in the manner of ordinary finance, according to its own; b) the aims of the State (objective element), which are generically determined as aims of conservation and development of the political organism; c) wealth, which is constituted by economic goods (income and patrimony) already existing for the most part in private economies and of which the State avails itself to a given extent (normally, in the State itself, by means of tributes: imposts, taxes, etc.), forming public revenues and employing these in public expenditures.

The minor elements or presuppositions of financial activity are relative to the historical and local environment. They concern the various aspects of the life of the State, in which is also the life of society, in its material and spiritual elements, such as: the productive and distributive regime of wealth; the territorial distribution of the population and its division into income and professional classes, and also, to some extent, the physical conformation of the territory itself; the respect that the State has for private property, and for the freedom in which it holds the formation of income and of private consumption and savings, and exchanges with foreign countries, the culture and education of the people, and also those which are its customs of domestic and social life; the fiscal education of taxpayers, the political forms and the established relations that characterize what are called civic rights and freedoms of the citizen, in which enter the publicity given to financial budgets and the respect in which public opinion is held regarding the financial action of the State and of the other public bodies; and so on.

III. PUBLIC EXPENDITURES

Public expenditure, from the beginning of the 19th century, shows a notable and continuous progressive increase, in relation to the growing expansion of the aims of the State.

At present, the aim of what is called social security or prosperity in the great majority of European and American countries forms a very powerful impulse toward the increase of public expenditure by States and by lesser territorial bodies (regions, provinces, communes) and non-territorial bodies (institutional administrative bodies created or recognized by the State with their own legal personality in order to achieve determined aims of a social and economic order).

Indeed, the conditions of a parafiscal finance are increasingly being created, which serves precisely as a limit to classical finance relating to the fundamental and traditional aims of political organisms, in order to make room for a finance carried on by non-territorial public bodies, with special aims and tasks of sociality and of stimulating economic life; and this finance is agreed to be called parafiscal, although it does not yet have well-determined theoretical and practical limits, especially with regard to the nature and the tasks of a multitude of institutions and associations of a voluntary character or even of a compulsory mutualistic nature, among which chiefly social insurance.

In addition to this, a policy of public investments, in this second post-war period, serves as an instrument for carrying out changed forms of State intervention in economic life (dirigisme, planning) and also acts as a force for attaining new aims of sociality and of civil and economic progress. Public investments thus constitute a going beyond the classical policy of public works (limited to objects of roadways, ports, fortifications, etc.) and give to public credit new directions for new objectives to be attained over the whole national economy, also by means of the general management of credit and of private investments.

IV. PUBLIC REVENUES, PRINCIPALLY: TAXES AND TAX SYSTEMS

Only in the modern State and in times closer to our own are public revenues constituted in their almost totality by taxes (derived revenues), whereas in the past, and all the more in the Middle Ages and the early modern age, there were sources of revenue in large part constituted by patrimonies that were held to belong by personal title to sovereigns and princes, or by commerce and production exercised or promoted by them (fiscal domain, production of original revenue); as well as by rights in the forms of regalia belonging to themselves and from which originate certain forms of taxation of the more advanced modern State.

Taxes strike the incomes and patrimonies of individuals (taxpayers) both directly (direct taxes) and indirectly (indirect taxes, which strike consumption, transfers of wealth and acts of exchange in general).

With taxes the most advanced contemporary States come to levy on average a third of the totality of their respective national incomes. Hence one understands the maximum importance that in the public finance of each country has the formation of the tax system, regulated by criteria of organic unity and rationality.

Taxes, besides their primordial aim of procuring revenues for the treasury for public expenditure, nowadays increasingly develop collaterally also tasks that are not properly fiscal. They can, that is, be implemented as an instrument directed at modifying or correcting the natural course of economic life (such as protective duties, which serve to limit competition from foreign products internally) or at attaining aims of sociality (as happens with strongly progressive rates in the taxes that strike the contributive capacity manifested by the sum of the incomes or patrimonial values of a natural person, or patrimonies transferred by inheritance, legacies or donations; with a tendency therefore to mitigate the inequality of individual wealth), etc.

Hence the distinction into fiscal finance and extra-fiscal finance, which however lends itself to giving a poor understanding of the real nature of the financial phenomenon.

V. THE STATE BUDGET

An accounting and legal instrument of the greatest importance in the modern State, on account of its repercussions of every political, constitutional and administrative order and of order in the management of public money, is the budget, both for the periodic forecasting (estimates budget) — which is annual, but today tends toward longer periods — of the financial facts represented by numerical items for both revenue and expenditure or outlays, and for their actual carrying out and, subsequently, for the accounting statement (final accounts).

VI. EXTRAORDINARY REVENUE: THE PUBLIC DEBT

Extraordinary revenue, to meet extraordinary expenditure, up to a certain relatively limited threshold may be provided by extraordinary taxes, that is, by means of a temporary increase in the rates of some or all existing taxes or the introduction of new taxes on a temporary basis.

There thus arises one aspect, today a very significant one, of financial activity: that of public loans, in the forms of: a) floating debt (to make up for temporary cash deficiencies, that is, for payments which in the forecasts are deemed sufficiently covered by the whole of the revenue which, in relation to such payments, is delayed in collection), of which the principal form is ordinary treasury bills (with short maturity which in Italy ranges from one to twelve months); b) consolidated debt, which is either of indeterminate maturity (without maturity) and is then called irredeemable or perpetual debt, or of determinate maturity, that is, redeemable debt, for the most part extinguishable by means of annual drawings (amortizable). There is an intermediate form between the floating debt and the consolidated debt, specified in extraordinary treasury bills, with multi-year maturity (in Italy the nine-year one prevails) which is entered as a form of waiting, in order to be finally (when the credit market and political conditions prove favorable) converted into consolidated debt. If such waiting is prolonged, provision is made by means of renewals of the same bills upon reaching maturity.

Naturally the public debt gives rise to items of ordinary public expenditure, for the service of paying the interest on the loans of which it is formed, as well as the premiums that are often connected with them.

Apart from repayments and other forms of extinction of the public debt, which tend increasingly to be limited to the floating debt properly so called (but which nonetheless resumes annually), the State has only one open way to reduce the burden of public expenditure for the interest on its debt contracted under unfavorable credit-market conditions: that of the conversion of the irredeemable consolidated debt; which, when it is voluntary or optional (ordinary conversion), gives rise to 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 THEIR EFFECTS ON THE FINANCES OF STATES. - The matter of monetary circulation also forms a serious aspect for public finance, today made up almost everywhere exclusively of banknotes as its principal component.

In difficult moments for public finance, such as those in which exceptional expenditures recur — and, at times, huge and out of all proportion to being able to be sustained with ordinary credit means — determined by wars, it customarily forms a means and an extraordinary source of revenue, as a concealed instrument of public debt (moreover without interest), precisely by means of the issuance of paper money for the needs of the State arising from such causes.

The inflation of circulation, which is its inevitable and uncontrollable consequence — at least as long as those provoking causes last —, producing the effect of the devaluation of the monetary unit, with the damages to the entire economy of the country, has however the virtue of reducing the weight of the mass of public loans previously issued by the State and by the lesser public bodies (and it is the same for loans in relations between private individuals) in proportion to the reduction in the value of the same monetary unit, referred to the respective moments of issuance of those same loans.

In conclusion, despite the enormous and always nominally growing mass of public loans, such as has been accumulating from the beginning of the 19th century to the present, almost all States, as a result of the recurring devaluations consequent upon just as many recurring monetary inflations — certainly neither willed nor sought by the respective governments — find themselves from time to time considerably relieved (in comparison with the other budget items) as regards the effective weight of the charges of the public debt.

VIII. THE SCIENTIFIC STUDY OF PUBLIC FINANCE

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, of economic sciences and of political sciences: the science of finance, together with financial law.

With respect to such studies, Italy has acquired the highest renown in the world, both because of its longer centuries-old tradition and because of the greater number of minds devoted to it, through research and publications that form a scientific literature which is becoming ever more abundant and considerable for its contributions on every kind, species and aspect of financial matters, which is among the most complex in the intricate field of the social sciences.

The foundation of the science of finance is essentially political, with an ethical-juridical character taking specific form within the framework of the doctrine of the State.

Nevertheless, the first orientation of the modern science of finance still prevails, which gives it an economic foundation, whereby its study is carried out within the framework of economic theory, that is, it regards the science of finance as a special branch of economic science. But the error of such an orientation is now becoming ever more evident, so that the task of economic theory with respect to financial phenomena will be defined as developing a category, albeit a very important one, of studies of the economic aspects of such phenomena, chiefly with regard to taxes. Of these, in fact, it is necessary to know the effects on economic life (financial economics) in order to assist in the search for tax systems that are as efficient as possible also with respect to the sound conduct of economic affairs, compatibly with the fundamentally political aims of the State; which, with regard to finance, are regulated by the moral factor and by the historically operative juridical conscience.

The economic orientation of the science of finance has often been corrected by the introduction into it of political elements (not always understood in conformity with the real nature of the State, which pursues aims of its own that cannot be confused with those of individuals or groups of individuals) or of sociological characteristics, in which - according to some writers - the economic principle and the political element should remain absorbed; whereas, however, it will be necessary to reconnect with the pure sense of the political nature of the financial act, as it was in our writers, from St. Thomas onward until the first half of the 19th century, characterized by the moral factor and by the juridical order of the State.

1933; G. Ingrosso, Istituzioni di diritto finanziario, 3 vols., Naples 1935-46; M. Pugliese, Istituzioni di diritto finanziario, Padua 1937; G. Tesoro, Principi di diritto tributario, Bari 1938; E. Allorio, Diritto processuale tributario, Milan 1942; M. Udine, Il diritto internazionale tributario, Padua 1940.

Emanuele Morelli