Fairness in taxation: a philosophical and empirical analysis

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Master of Science in Economics

Master’s thesis

Fairness in taxation

A philosophical and empirical analysis

Candidate:

Michele Ceraolo

Supervisor:

Prof. Simone D’Alessandro - Universit`

a di Pisa

Foreign tutor:

Prof. Nadine Riedel - Westf¨

alische Wilhelms-Universit¨

at M¨

unster

Universit`a di Pisa - Dipartimento di Economia e Management Scuola Superiore Sant’Anna

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Vectigalia nervos esse rei publicae semper duximus We have always believed the taxes being the sinew of the state1

Oratio pro lege Manilia de imperio Cn. Pompei Marcus Tullius Cicero

In modern states, therefore, taxation is not only a dynamic, potentially conflictual relationship, but one whose changing form may have potentially far-reaching implications

Chapter 1, p.4 The New Fiscal Sociology (2009) Isaac William Martin, Ajay K. Mehrotra and Monica Prasad

Unless a tax system is generally accepted as fair, the fundamental purpose of taxation is lost.

Volume II, p. 17 Report of the Royal Commission2 _{on Taxation (1966)}

1_{My own translation.}

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Abstract

This thesis aims to study the concept of “fairness” in taxation as comprehensively as possible using an interdisciplinary analysis.

Chapter one is pledged to the philosophical analysis of fairness in taxation. Since the concept of fairness is not well defined, we start to study it from some pillars of the economic literature; hence we show how the fairness in taxation and the structure of the State are inextricably entangled: the concept of fairness is state-structure dependent.

After a reconstruction of the evolution of fairness following the state-building as a red thread, we achieve relevant philosophical results regarding the possibilities of intervention of the government in the Welfare State.

Thanks to the philosophical analysis results, in Chapter two, we can then answer relevant questions regarding the current “health” of the Welfare State. Indeed, the economists often argue about the uncontrolled growth of the state sector in a Welfare State model or the impoverishment of the middle class due to an imbalanced tax burden.

We answer these questions through a descriptive comparative analysis using France, Germany and Italy.

Thanks to all the readings done for the philosophical analysis, we convinced ourselves that the economic literature is unbalanced; in particular, there could be a bias towards the study of optimal taxation at the expense of the study of tax fairness.

In Chapter three we therefore test this hypothesis through a meta-analysis in which we count the amount of papers studying optimal taxation issues and papers studying fairness in taxation. To do so, we use two different approaches: the first one employ rigid rules and it is our main tool; the second method follows flexible rules and we use it as a control.

According to our results, the hypothesis regarding the bias seems to be confirmed; however, more robust studies are needed to get a definitive answer.

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List of Figures

1.1 Tax and society . . . 24

2.1 Dynamics of the government expense and the “net” government ex-pense over GDP and population for France, Germany and Italy. Data source: own elaboration on information from IMF. . . 43 2.2 Difference between the average post-tax national income and average

post-tax disposable income of our three classes: (a) graphs the poorest 20% of the population; (b) graphs the middle 60% of the population; (c) graphs the richest 20% of the population. Data source: own elaboration on information from World Inequality Database. . . 47 2.3 Difference between the average pre-tax national income and average

post-tax disposable income of our three classes: (a) and (A) poorest 20% of the population; (b) and (B) middle 60% of the population; (c) and (C) richest 20% of the population. Data source: own elaboration on information from World Inequality Database. . . 49 2.4 Dynamics of middle class income using the income in 1980 as point

of reference and the percentage of income taken by taxes each year. (a) France; (b) Germany; (c) Italy. Data source: own elaboration on information from World Inequality Database. . . 51 2.5 Dynamics of all the three variables regarding the French income. (a)

poorest 20% of the population; (b) middle 60% of the population; (c) richest 20% of the population. Data source: World Inequality Database. 53 2.6 Dynamics of all the three variables regarding the German income. (a)

poorest 20% of the population; (b) middle 60% of the population; (c) richest 20% of the population. Data source: World Inequality Database. 54

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2.7 Dynamics of all the three variables regarding the Italian income. (a) poorest 20% of the population; (b) middle 60% of the population; (c) richest 20% of the population. Data source: World Inequality Database. 55 2.8 Difference between the average post-tax national income and average

post-tax disposable income of our three classes: (a) poorest 20% of the middle class; (b) middle 20% of the middle class; (c) richest 20% of the middle class. Data source: own elaboration on information from World Inequality Database. . . 57 2.9 Difference between the average pre-tax national income and average

post-tax disposable income of our three classes: (a) and (A) poor-est 20% of the middle class; (b) and (B) middle 20% of the middle class; (c) and (C) richest 20% of the middle class. Data source: own elaboration on information from World Inequality Database. . . 58 2.10 Dynamics of the main component of the tax systems in the three

selected countries: (a) France; (b) Germany; (c) Italy. Data source: own elaboration on information from OECD. . . 60 2.11 Dynamics of some relevant tax rates: (a) flat corporate tax rate; (b)

top income tax rate; (c) bottom income tax rate, (d) VAT rate. Data source: own elaboration on information from OECD and country-specific sources. . . 63 2.12 Dynamics of the main component of the tax systems in the three

selected countries: (a) France; (b) Germany; (c) Italy. Data source: own elaboration on information from OECD. . . 64 2.13 Dynamics of average income of the rich class over the poor class. (a)

France; (b) Germany; (c) Italy. Data source: own elaboration on information from World Inequality Database. . . 67 2.14 Dynamics of average income of the rich class over the middle class.

(a) France; (b) Germany; (c) Italy. Data source: own elaboration on information from World Inequality Database. . . 68

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2.15 Dynamics of average income of the upper middle class over the lower class. (a) France; (b) Germany; (c) Italy. Data source: own elabora-tion on informaelabora-tion from World Inequality Database. . . 70 2.16 Dynamics of average income of the upper middle class over the middle

middle class. (a) France; (b) Germany; (c) Italy. Data source: own elaboration on information from World Inequality Database. . . 71

3.1 Representation of first classification with Venn’s set . . . 74 3.2 Representation of improved classification with Venn’s set . . . 76

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List of Tables

3.1 Rigid Approach - Selection without de-noise code - Sum of the iden-tified papers in the Top 5 journals. . . 79 3.2 Rigid Approach - Selection with de-noise code - Sum of the identified

papers in the Top 5 journals. . . 79 3.3 Rigid Approach - Optimality/Fairness ratios in the top5 journals . . . 79 3.4 Flexible Approach - Sum of the Top 5 journals . . . 81 3.5 Flexible Approach - Optimality/Fairness ratios in the top5 journals . 81 3.6 Rigid Approach - Selection without de-noise code - Sum of the

iden-tified papers in the second tier of journals. . . 83 3.7 Rigid Approach - Selection with de-noise code - Sum of the identified

papers in the second tier of journals. . . 83 3.8 Flexible Approach - Sum second tier of journals . . . 83 3.9 Flexible Approach - Optimality/Fairness ratios in the second tier of

journals . . . 83

4.1 Rigid Approach - Selection without de-noise code - Amount of papers for the selected areas published in American Economic Review. . . 108 4.2 Rigid Approach - Selection without de-noise code - Amount of papers

for the selected areas published in Econometrica. . . 108 4.3 Rigid Approach - Selection without de-noise code - Amount of papers

for the selected areas published in Journal of Political Economy. . . . 108 4.4 Rigid Approach - Selection without de-noise code - Amount of papers

for the selected areas published in Quarterly Journal of Economics. . 108 4.5 Rigid Approach - Selection without de-noise code - Amount of papers

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4.6 Rigid Approach - Selection with de-noise code - Amount of papers for the selected areas published in American Economic Review. . . 109 4.7 Rigid Approach - Selection with de-noise code - Amount of papers

for the selected areas published in Econometrica. . . 109 4.8 Rigid Approach - Selection with de-noise code - Amount of papers

for the selected areas published in Journal of Political Economy. . . . 109 4.9 Rigid Approach - Selection with de-noise code - Amount of papers

for the selected areas published in the Quarterly Journal of Economics.109 4.10 Rigid Approach - Selection with de-noise code - Amount of papers

for the selected areas published in Review of Economic Studies. . . . 109 4.11 Rigid Approach - Selection without de-noise code - Amount of

pa-pers for the selected areas published in American Economic Journal: economic policy. . . 110 4.12 Rigid Approach - Selection without de-noise code - Amount of papers

for the selected areas published in International tax and public finance.110 4.13 Rigid Approach - Selection without de-noise code - Amount of papers

for the selected areas published in Journal of Public Economic Theory.110 4.14 Rigid Approach - Selection without de-noise code - Amount of papers

for the selected areas published in Journal of Public Economics. . . . 110 4.15 Rigid Approach - Selection without de-noise code - Amount of papers

for the selected areas published in the National Tax Journal. . . 111 4.16 Rigid Approach - Selection with de-noise code - Amount of papers

for the selected areas published in American Economic Journal: eco-nomic policy. . . 111 4.17 Rigid Approach - Selection with de-noise code - Amount of papers

for the selected areas published in International tax and public finance.111 4.18 Rigid Approach - Selection with de-noise code - Amount of papers

for the selected areas published in Journal of Public Economic Theory.111 4.19 Rigid Approach - Selection with de-noise code - Amount of papers

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4.20 Rigid Approach - Selection with de-noise code - Amount of papers

for the selected areas published in the National Tax Journal. . . 112

4.21 Flexible Approach - American Economic Review . . . 113

4.22 Flexible Approach - Econometrica . . . 113

4.23 Flexible Approach - Journal of Political Economy . . . 113

4.24 Flexible Approach - Quarterly Journal of Economics . . . 113

4.25 Flexible Approach - Review of Economic Studies . . . 113

4.26 Flexible Approach - American Economic Journal: economic policy . . 113

4.27 Flexible Approach - International tax and public finance . . . 114

4.28 Flexible Approach - Journal of Public Economic Theory . . . 114

4.29 Flexible Approach - Journal of Public Economics . . . 114

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Chapter 0 Introduction

This thesis stems from the following question: what is a “fair tax system”? Before answering, let us take a step back.

The debate on taxation is old as the idea of State itself; indeed, when there are some institutions to be financed, there is also the need for a tax system to collect the needed resources. The more complex the State’s structure, the higher the revenues required by the State. The more democratic the society has become, the more equity has been asked by the citizens.

Taxation is, therefore, a fundamental brick of the economy. For this reason, economists started to study it since the origin of Political Economy itself; we can indeed find the list of the requirement for a tax system in the Wealth of Nations (Smith 1776). With the development of the discipline of Economics1 _{the spectrum} of issues related to the taxation enlarged and, in particular, the studies of the causes of market disequilibria came to light.2 _{This was a turning point for the study of} economics and therefore also for the analysis of tax systems: economists were now

1_{Economics is the the label used when the mathematical modeling enriched the political}

econ-omy.

2_{A clarification is here needed. Smith is considered the father of Laissez-faire thanks to his}

concept of Invisible Hand. However, from the following quotation, we can grasp what the concept of economic equilibrium was in its early stages: “He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. [...] By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” (Smith, 1776, Book IV, Chapter II, paragraph IX); indeed, the theoretical framework was not ready to analyse the effect of taxation on equilibria.

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able to describe the effect of direct taxes, indirect taxes, negative taxes on the market equilibria in the case of perfect competition, oligopoly, monopoly.

Even more recently, empirical studies revolutionised the economic discipline, and a debate around distributional issues related to taxation emerged.

A methodological question now arises: is this “usual” economic mindset ade-quate to tackle the issue of fairness in taxation? We think that the spectrum of the analyses should be broader and one of the aims of this thesis will, therefore, be some enrichment of points of view for the study of tax systems. Law, Philosophy, Sociology, History. All these fields of research have studied the effects of taxation upon society; however, we think that there is not enough interaction between these subjects. Instead of feeding the “economic imperialism” (Guala 2006, Laezar 2000), we wanted to enrich the economic analysis with different points of view. This frame-work should allow to study the concept of fairness for tax systems thoroughly.

It is not unusual to see policymakers creating taxes to fulfil some revenue goals and then adjust them due to lack of equity or presence of market distortions; this thesis tries to recover the philosophical discussion around the taxes. Does the State have the right to tax wages? And the property? Is the redistribution one of the goals of taxation? Is how the collected taxes are spent relevant?

These are the kind of questions that are going to drive our discussion regarding fairness in taxation.

Thanks to the foundations laid by the philosophical analysis, we are able to study current issues of the Welfare State under a new light; indeed we selected four relevant questions regarding the sustainability of the Welfare State as a state model. We decided to answer through a descriptive comparative analysis; in particular we selected three countries: France, Germany and Italy. These group should be similar enough to be comparable, but different enough to give us interesting insights.

Albeit a study with a philosophical discussion and a descriptive analysis is al-ready self-sustaining, we decided to add a third chapter: a meta-analysis.

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bias; in particular, we started to believe that the study of optimal taxation was pre-ferred over the fairness in taxation. Therefore a meta-analysis, which is an “analysis of data from a number of independent studies of the same subject” (OED 2020b), was the perfect tool to test our hypothesis.

we structured a double-approach test: a method following is our main tool and a flexible method a control tool.

Literature

As aforementioned, one of the efforts of this thesis is to round up the tax research stemmed from different fields; then, it is essential to specify the primary sources used for this research.

Firstly we have to discuss proper economic literature describing the different branches that enriched our analysis.

As a fundamental reference, we have clearly taken textbooks on Public economics (Atkinson and Stiglitz 1980, Musgrave and Musgrave 1973, Kaplow 2008, Salani´e 2011); however, these have only scattered sections regarding the matter in hand. We were lucky to have at our disposal some on target references such as some recent collection of research papers on empirical studies on tax systems (Albi and Martinez-Vazquez 2001, Huerlimann, Brownlee et al. 2018) or comprehensive fiscal analysis (Mirrlees 2011). Nevertheless, the literature regarding inequalities (Bowels 2012, Piketty 2014, Milanovic 2016) gave us some important information for the empirical part, while the history of economic thought (Robbins 1998) and economic history literatures (Polanyi 2001, Besley and Persson 2009) supported us in our historical and philosophical reconstruction.

Sociology, philosophy and history: these are the other fields that we strive to involve in our analysis.

Sociology is not often used by economists; for this reason, we looked for a “giant” as a reference point; Schumpeter (1918) with his manifesto of a Fiscal sociology opened a not large but consistent literature (Martin, Mehrotra et al. 2009) regarding the mutual effects of taxes and sociology.

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Since we affirm that the philosophy behind taxation has been neglected by the eco-nomic literature, we have extensively studied this field; in particular, we focused on three subjects: philosophy of law (Bhandari 2017; Gallo 2007), political philosophy (Rawls 1971, Aquinas 2002) and economic philosophy (O’Neill, Orr 2018; Maslove 1993). All of them were necessary to understand the justification of taxes and the limits upon the state action. Lastly, we did not want to forget about the connection between State, taxes and history; in this regard, we have found some useful histori-cal recollections focused on historihistori-cal events only related to taxation (Adams 2001, Burg 2003).

Data

When we had to choose the data sources for the Descriptive Analysis, we realised that only one of the following strategies was achievable:

1. to get all the data related to the same country from one source; 2. to get all the data related to the same issue from one source.

Since the reliability of results is strongly dependent on the consistency of data col-lection among countries, we preferred the second strategy.

We identified three main sources for the data in the descriptive analysis: we used the IMF and the OECD dataset for the state finances; while the World Inequality Database pre- and post-tax income distribution.

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Chapter 1 Philosophical discussion

1.1 “Fairness”, “equity” or something else?

The reader of this thesis could legitimately have thought “Why did they choose a vague word as “fairness”? Wouldn’t be better to use a precise word like ‘equity’ ?”. In the literature scholars use different expressions to identify the topics related to some concept of “justice” in the study of taxation and the most used are “equity” or “distributional issues” (Musgrave and Musgrave 1973; Mirrlees 2011); indeed these sections focus on the effect of taxation on the distribution of income and wealth. In other sources (James and Nobes 2018, chapter 3; Kaplow 2008, chapter 3) we have seen the topic relegated to a comparison “allocation vs equity”; here the actual issue was the unavoidable trade-off between the choices indicated by the minimisation of the dead-weight loss and the policies suggested to improve the fairness of the system. Both these approaches were not satisfying for us; indeed, we wanted to analyse the fairness in taxation in the broadest context possible.

When we started working on this thesis was indeed challenging to identify all the characteristics that a fair tax system should address; therefore, this chapter follows the same path we walked.

As the first step, we studied what recognised sources addressed as pillars in the design of a tax system and in 1.2 we show three different sources of these principles. As a second step we tried to understand how history and sociology interact with

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economics in the development of fiscal policies, and we synthesised it in 1.3.

Finally, we started the study of fairness from the very beginning: the definition of the tax. From that definition, it was clear to us that fairness was a dynamic idea and we decided to reconstruct its dynamics following the development of the State. Section 1.4.1 is the result of this analysis.

1.2 Principles for taxation

As aforementioned, in this section we want to see how prescriptions for a just tax system have changed through time.

Not only we are going to consider three moments of time, but also three different types of sources: respectively a pillar of the economic literature; a monumental research work commissioned by the Canadian government; the textbook of one of the most famous economists regarding the public finances.

1.2.1 Adam Smith - A.D. 1776

Adam Smith dedicates the Book five of the Wealth of Nations to the Revenue and expenses of a country; in particular the second Chapter regards Of the “Sources of the General or Public Revenue of the Society”. Here we can find the four maxims1 regarding the taxes:

1. Canon of Equality2

One’s contribution to general taxation must be proportional to one’s income.

1_{Renamed by the literature canons.}

2_{Full quotation: The subjects of every state ought to contribute towards the support of the}

government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation. Every tax, it must be observed once for all, which falls finally upon one only of the three sorts of revenue above mentioned, is necessarily unequal in so far as it does not affect the other two. In the following examination of different taxes I shall seldom take much further notice of this sort of inequality, but shall, in most cases, confine my observations to that inequality which is occasioned by a particular tax falling unequally even upon that particular sort of private revenue which is affected by it. (Smith 1776, pp.1103-1104)

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2. Canon of Certainty3

All the characteristics of the tax payment must be clear and certain: the time, manner and quantity; otherwise, the tax will be more unpleasant then it should be.

3. Canon of Convenience4

The timing for the payment of a tax must be placed in the least displeasing moment; again, the goal is to minimise the burden of the contributor.

4. Canon of Economy5

3_{Full quotation: The tax which each individual is bound to pay ought to be certain, and not}

arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person. Where it is otherwise, every person subject to the tax is put more or less in the power of the tax-gathered, who can either aggravate the tax upon any obnoxious contributor, or extort, by the terror of such aggravation, some present or perquisite to himself. The uncertainty of taxation encourages the insolence and favours the corruption of an order of men who are naturally unpopular, even where they are neither insolent nor corrupt. The certainty of what each individual ought to pay is, in taxation, a matter of so great importance that a very considerable degree of inequality, it appears, I believe, from the experience of all nations, is not near so great an evil as a very small degree of uncertainty. (Smith 1776, p.1104)

4_{Full quotation: Every tax ought to be levied at the time, or in the manner, in which it is most}

likely to be convenient for the contributor to pay it. A tax upon the rent of land or of houses, payable at the same term at which such rents are usually paid, is levied at the time when it is most likely to be convenient for the contributor to pay; or, when he is most likely to have wherewithal to pay. Taxes upon such consumable goods as are articles of luxury are all finally paid by the consumer, and generally in a manner that is very convenient for him. He pays them by little and little, as he has occasion to buy the goods. As he is at liberty, too, either to buy, or not to buy, as he pleases, it must be his own fault if he ever suffers any considerable inconveniency from such taxes. (Smith 1776, p.1104-1105)

5_{Full quotation: Every tax ought to be so contrived as both to take out and to keep out of the}

pockets of the people as little as possible over and above what it brings into the public treasury of the state. A tax may either take out or keep out of the pockets of the people a great deal more than it brings into the public treasury, in the four following ways. First, the levying of it may require a great number of officers, whose salaries may eat up the greater part of the produce of the tax, and whose perquisites may impose another additional tax upon the people. Secondly, it may obstruct the industry the people, and discourage them from applying to certain branches of business which might give maintenance and unemployment to great multitudes. While it obliges the people to pay, it may thus diminish, or perhaps destroy, some of the funds which might enable them more easily to do so. Thirdly, by the forfeitures and other penalties which those unfortunate individuals incur who attempt unsuccessfully to evade the tax, it may frequently ruin them, and thereby put an end to the benefit which the community might have received from the employment of their capitals. An injudicious tax offers a great temptation to smuggling. But the penalties of smuggling must rise in proportion to the temptation. The law, contrary to all the ordinary principles of justice, first creates the temptation, and then punishes those who yield to it; and it commonly enhances the punishment, too, in proportion to the very circumstance which ought certainly to alleviate it, the temptation to commit the crime. Fourthly, by subjecting the people to the frequent visits and the odious examination of the tax-gatherers, it may expose them to much unnecessary trouble, vexation, and oppression; and though vexation is not, strictly speaking, expense, it is certainly equivalent to the expense at which every man would be willing to redeem himself from it. It is in some one or

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Tax design must also consider the collection of taxes: a tax that is costly to retrieve or it is easy to avoid without proper punishment is not a good tax.

Economic literature often refers to Adam Smith as the “father of economics”: this is due to his futuristic description of market equilibrium through the concept of the market’s invisible hand; but its contribution to tax design is not negligible. Smith’s four maxims of taxation are still valid today and gave birth to discussions still ongoing; in particular, the Canon of Equality gave birth to the two fundamental concepts of equity in tax design: vertical equity and horizontal equity. The former is the most intuitive: who has more must pay more; the latter instead is a more advanced idea: only two identical individuals must pay the same amount of taxes. Therefore, not only the income or the wealth is relevant for the calculation of the due taxes but also other individual characteristics (e.g. family composition, medical non-discretionary expenses, location, etc...).

1.2.2 Royal Commission on Taxation - A.D. 1966

6

In 1966, after four years of work, the Royal Commission on Taxation published a monumental work of 6 volumes thoroughly analysing the Canadian taxation to improve the fairness of the system7 (Canadian Encyclopedia 2020). The second volume of this Royal Report focuses on “The Use of the Tax System to Achieve Economic and Social Objectives”; in particular, there are four main goals for the tax system.

1. To maximize the current and future output of goods and services desired by Canadians

The tax system should be used, in conjunction with the other instruments (i.e. government expenditure management, debt policy, monetary policy and foreign trade policy), to achieve: full employment, an increasing rate of productivity, price

other of these four different ways that taxes are frequently so much more burdensome to the people than they are beneficial to the sovereign. (Smith 1776, p.1105-1106)

6_{Full text available at}

https://epe.lac-bac.gc.ca/100/200/301/pco-bcp/commissions-ef/carter1966-eng/carter1966-eng.htm

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stability.

2. To ensure that this flow of goods and services is distributed equi-tably among individuals or groups

In order to achieve a more equitable distribution of output, the tax system should be consistent with the following: recognition of the ability to pay principle as a pillar of the tax allocation; recognition of the ability to pay of the family, as distinct from the individual members of the family; the recognition that the special responsibilities and non-discretionary expenditures; avoidance of tax concessions.

3. To protect the liberties and rights of individuals through the preser-vation of representative, responsible government and maintenance of the rule of law8

Obscure law, and law that is not consistently enforced, creates uncertainty; when rules cannot readily be determined, it is impossible for the individual to know in advance what he is free to do. A taxpayer should be able to understand promptly, with great certainty and at modest cost, the tax consequences of a proposed course of action before making a decision.

4. To maintain and strengthen the Canadian federation

The tax system should be readily adaptable to the changing needs of the people in different provinces, yet would be a firm and robust instrument for the realisation of our national objectives.

At the beginning we were not sure to compare this four objectives with the ones of the other sources; indeed this Royal Report is a long and complex document and together with these goals enumerate a long series of sub-goals. however, we considered these four to be interesting because the authors dealt with two distinctive elements:

1. the interconnection with other policy goals; 2. the conflicts among objectives.

8_{This point is composed by many sub goals that are difficult to summarise because of the}

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Still too often economists approach each economic topic independently from the others; therefore to see that the Canadian policymakers tried to interconnect the fiscal policy with the full employment and the price stability it evidences a modern idea of economic policy.

The second point is actually studied in an entire chapter of the second volume (i.e. “Chapter 2 - conflicts among objectives) and it begins with the statement “The purpose of this Volume of the Report is to consider how the tax system might be directed toward the more complete realization of Canada’s economic objectives in a manner consistent with our equity objective”. This approach is particularly interesting because not only tries to find all the trade-offs present in the path to achieve the above-stated goals, but it is also well aware that (when it is impossible to do a Pareto improvement) the trade-offs will be solved only giving weights to the goals in conflicts.

1.2.3 Musgrave and Musgrave - A.D. 1973

9

Musgrave’s textbook gives a synthetic list of principles shared among economist that should improve Smith’s four maxims.

1. the revenue yield should be adequate;

2. the distribution of the tax burden should be equitable. Everyone should be made to pay his or her fair share, a matter to be dealt with in the following chapter;

3. what matters in the designing of a tax system is not only the impact point at which the tax is imposed but its final resting place;

4. taxes should be chosen so as to minimise the interference with economic deci-sions in otherwise efficient markets;

5. the tax structure should facilitate the use of fiscal policy for stabilisation and growth objectives;

6. the tax system should permit fair and nonarbitrary administration and it should be understandable by the taxpayer;

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7. Administration and compliance costs should be as low as is compatible with other objectives.

Musgrave’s points are most concise among the three sources we have chosen they are not only able to summarise the majority of the ideas introduced by Smith and the Royal Report, but they add one element incredibly important in public economics: there can be differences between the “point of the economy” where the tax is applied and point where the burden weights.

1.2.4 Considerations

We started to study these three sources just to get an overview of the topic but what we got was far more interesting. There are two opposite observations to be done: on the one hand, it surprises the consistency of some prescriptions; on the other, it is interesting to see how the increased complexity of economics as a subject also influenced the rules of a good tax system.

Among Smith’s four canons the Canon of Equality is, at the same time, the most modern and na¨ıve; as we have seen the idea of horizontal and vertical equity, often summarised in the ability to pay principle10_{, is one of the cores of the} mod-ern discussion on the tax system and have been glimpsed by Smith’s first canon. Nevertheless, the explanation of the British philosopher is just sketched and do not recognise the hidden implications and issues.

It is important to highlight that it is visible the passage from the principles of an author living in a Liberal State and authors experiencing a Welfare State: full employment, economic growth and price stability are in the Welfare State an important goal and the tax structure has to play its role in their achieving.

An unpleasant surprise was the absence of the idea regarding taxation as a tool against market failure. These sources are well aware that taxes usually have a negative effect on a competitive market but wholly ignored the advantages emerging

10_{This is just one possible principle determining the horizontal and vertical equity but it is the}

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from the introduction of a tax in a sector of the economy characterised by market failure.11

11_{We indeed disagree with Musgrave (2000) where the author describes Smith and the Classicals}

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1.3 Some sociological and historical notes

One of the main drivers of this thesis was to bring together different subject in the study of taxation; indeed Schumpeter’s Manifesto of “a fiscal sociology” (Schum-peter 1918; Martin, Mehrotra et al. 2009) was inspiring. The Austrian economist starts from the work of the philosopher and sociologist Rudolf Goldscheid (1925; Goldscheid and Lazarsfeld 1917) to explain the importance of study taxation to understand the society12 _{and vice versa.}

Fiscal measures have created and destroyed industries, industrial forms, and industrial regions even where this was not their intent, and have in this manner contributed directly to the construction (and distortion) of the edifice of the modern economy and through it of the modern spirit. [...] The public finances are one of the best starting points for an inves-tigation of society.

(Schumpeter 1918, p. 101)

This view of the profound consequences of the fiscal policy is terribly interesting; economists are usually interested in the effects of taxes on the market, on the income and wealth distribution but they rarely study the effects on the structure of the society. As we said, this is a double directed relationship.

Let us analyse both the arrows depicted in Figure 1.1 starting with the effect of taxation on society’s behaviour.

Economists know very well that taxation influences the behaviour of people because the most famous assumption in micro models is the maximisation of individual utility; because of this assumption, agents will put their money and time in the activities with the highest marginal return on utility. The addition of a tax changes the returns and therefore the bundle chosen by agents. Instead, it is often ignored by

12_{It is interesting to note that the etymological origin of the word society - in Italian societ`}_a

- comes from the Latin word socius that literally means somebody who commits himself in a common endeavour; this means that the collective noun societas indicates a group of people that shares not only rules but also goals. (Bombelli 2019; Benveniste 1969)

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Figure 1.1: Tax and society

economics the effect of taxation on “macro behaviour”13_{while there are some} disrup-tive historical events are rooted in “fiscal quarrels”: for example, both the American and the French revolutions are ignited by the addition of a new tax (Passant 2017). Ross (2004) even suggest that taxation is one of the drivers of democratisation from the modern Era. Since we will write again about revolutions in Appendix B, here we believe interesting to include a more evocative historical example: the effect of economic incentives on the transportation of convicts from Great Britain to Aus-tralia14 (Cowen and Tabarrok 2011 chapter 1; Hyman 2011). We know that this example is a bit of a stretch because we are considering a governmental payment as a negative tax; still, we considered important to give an example far from the market equilibrium. Since In 1787 the English government allowed some ship owners to transfer convicts from the British prison to the Australian ones and they would be paid a fixed amount of money for each prisoner that had left European Island. The payment is the key point: the health conditions of the passengers at the end of the long voyage did not affect the revenue of ship owners. As a consequence, the prisoners had to bear inhumane conditions15. The English government then decided to switch to a payment method based on the number of alive captives disembarked in Australia: this reduced the mortality of over the 90%.

13_{The application of Microeconomics in Political science, in particular the use of game theory,}

but it is usually relegated in international relationship studies (Snidal 1985; Stone 2001).

14_{“Transportation was held to be a deterrent to crime, a punishment and a means of supplying}

the colonies with labour.” (O’Toole 2006)

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Regarding the second arrow of the relationship of Fig 1.1 we can start again from the Australian captives transportation: was indeed the English public opinion that reacted to the injustice treatment of the inmates and forced a to act the Government. In general, the influence of society on the taxation system is easy to picture in democracies because parliaments are collectors of the collective will in a certain moment of time and they are the one with the legislative power, but this relationship goes way deeper. Snape (2017) definitely helps us broaden our vision because, in his paper, he describes how even the justification of taxes changes through societies. Therefore, in the feudal society, we find theologians examining the limitations of taxes and also Thomas Aquinas advises how to levy taxes “without sin”16. Instead, in the absolute monarchy, the justification of state impositions derived directly from the king; “L’´Etat, c’est moi!”, “I am the State” is the iconic sentence attributed17 to Louis XIV of France and indeed the will of the monarch was enough to enforce a law an, therefore, a fiscal measure. Snape goes on, but these examples are sufficient to depict the roots of the relationship we were considering.

This double-sided relationship is indeed at the base of the law itself: indeed, law and society are in an unavoidable and unstoppable reciprocal influence (Slongo 2015; Bombelli 2019). As aforementioned, the parliament is the institutionalisation of this mechanism. New societal beliefs push people to vote for congresspersons aligned with them and these members of the parliament will carry on laws crystallising the new ideas. However, also, in this case, we should not imagine that society influences law only through parliamentarism: indeed, it was the evolution of the society that made the “Ancien R´egime” unbearable.

“In this world nothing can be said to be certain, except death and taxes” is the idiom made famous18 _{by Benjamin Franklin; it is usually an ironic reference to the}

16_{Hence it is that there is an ancient custom in some lands for lords to impose certain taxes}

upon their subjects, and if these are not immoderate, this can be done without sin; for, according to the Apostle (I Corinthians 9:7), ‘Who goeth a warfare any time at his own charges?’ Therefore a prince who fights for the common benefit can live at the community’s expense and make a charge upon the business of the community either through the established forms of taxation or, if these are not in place, or if they are not sufficient, by levying a charge on individuals. (Aquinas 2002)

17_{The historians do not agree whether the French king actually used it or not.}

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unavoidable oppressive power of the State, however in these few paragraphs we tried to show how the development of human society is interlaced with the evolution of the tax system; therefore re-reading Franklin’s statement in this new light we can say that taxes are a pillar of human society.

The ideas expressed in this section are going to be useful as a background for our philosophical reconstruction.

It is interesting to notice how the literature regarding the fiscal history is still scat-tered: papers that reconstruct the fiscal history of a single state are scarce if we do not consider USA (e.g. Henning and Kessler 2012; Wallis 2001; Wallis 2000), UK (e.g. Mirrlees 2011) and France (e.g. Bozio, Garbinti et al. 2018; Bonney 1998); this is no coincidence, these are some of the few states with a unified administrative sys-tem centuries old. Reaseach works regarding the birth of taxation are even rarer:19 in our search we have found very interesting the monumental work of Charles Adams (2001). The author not only tries to describe the evolution of the tax system since the Ancient history, but he also uses the same connection described by us between society and the fiscal system.

Franklin towards Jean-Baptiste Le Roy of the 1789 (Shapiro 2006).

19_{Indeed this topic is part of the still developing “World History”.“World historians have}

system-atically compared the experiences of different societies in the interests of identifying the dynamics that have been especially important for large scale developments” (Bentley 2011, p.2).

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1.4 The concept of fairness in taxation

When we were trying to define comprehensively and convincingly the concept of fairness, we decided to restart our reasoning from the very beginning: the definition of tax. Here we have listed the definition of “Tax” from a consistent variety of sources, in this way we can obtain the essential elements of this fundamental brick.

Definition #1 - English dictionary

A compulsory contribution to the support of government, levied on per-sons, property, income, commodities, transactions, etc., now at fixed rates, mostly proportional to the amount on which the contribution is levied. (Oxford English Dictionary 2020)

Definition #2 - International institution

Taxes are compulsory, unrequited payments, in cash or in-kind, made by institutional units to government units; they are described as unrequited because the government provides nothing in return to the individual unit making the payment, although governments may use the funds raised in taxes to provide goods or services to other units, either individually or collectively, or to the community as a whole. (OECD 2001)

Definition #3 - Fiscal policy textbook

A tax is a compulsory levy made by public authorities for which nothing is received ‘directly’ in return. [...] The levy is partly used to provide public goods in return, but its size is also determined by many other factors. Taxes are therefore transfers of money to the public sector but they exclude loan transactions and direct payments for publicly produced goods and services. (James and Nobes 2018, p.18)

Definition #4 - Fiscal policy textbook

A tax is a compulsory contribution, imposed by the government and while taxpayers may receive nothing in return for their contribution they nev-ertheless have the benefit of living in a relatively educated, healthy and safe society. (Nightingale 2001, p.5)

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Definition #5 - French professor of public law

The tax is an outright cash payment, required from individuals through authority and without consideration, in order to cover public encum-brances.20(Gaston J`eze)21

Definition #6 - German tax law

Taxes are cash benefits to which no specific consideration is paid and are imposed by a public-law institution in order to generate income for all those who are subject to the legal obligation to provide. Revenue generation can be secondary.22 _{(Abgabenordnung}23 ₂₀₀₂₎

Definition #7 - Italian Revenue Agency

Part of the wealth of the private person that the State, the Regions and the local authorities take compulsorily in order to sustain the necessary maintenance expenses and to satisfy public needs. From a juridical point of view, the tax is an obligation deriving from the law and its main features are: a) it is compulsory and b) there is no direct counter-service from the State. (Agenzia Dell’Entrate n.d.)

Even if there are indeed relevant differences among these definitions, it is al-though possible to find some common characteristics. Let us list them.

• taxes are compulsory;

• taxes are a special payment because they do not receive a direct good or service in return;

• the taxes are collected by the government (or in general a public institution).

Among these three essential elements, given the process explained in 1.3, we agree with Murphy (2015): he affirms that the expression “compulsory contribution” is

20_{My own translation.}

21_{Even if we could not find a precise reference for this quotation we decided to keep it because}

this very sentence is reported by a French textbook (Waserman 2016, p.36) and Gaston J`eze is

considered “the founder of the fiscal studies in France” (quotation of the French jurist Claude-Albert Colliard reported by Cohen 2013)

22_{Official translation}

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misleading because suggests that people are excluded from the tax-making process which is then imposed upon them. We have then reduced the definition of tax to a special payment with just two characteristics.

This close relationship between taxation and government convinced us that to reconstruct the development of the concept of fairness we could use the stages of State building as “guiding thread”.

Thanks to Snape (2017) we are not following a totally new path: in that paper, the author describes how the different types of State justified the presence of taxa-tion. Our aim is indeed similar, but Snape’s focus on the political and philosophical motives is hard to follow, while we are convinced that the aims of the State are a smart choice in the study of fairness.

1.4.1 The State as “guiding thread”

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There are many ways in which a history of ideas may be written. One us a strict chronological accounting, moving from year to year and en-compassing the entire subject. Another is to proceed on an author by author basis, focusing on what the main contributors had to say. Then there is the option to select major themes and to see how they evolved, thus taking a number of runs down (or up) the time path of doctrinal development (Musgrave 1985)

We just described why to connect the development of the State with the concept of fairness in taxation is interesting, therefore we just need to pay attention to the clarity of our exposition.

For this reason we established three fundamental points in the reconstruction that will follow:

24_{We need to add another lexical elucidation: we are going to consider the terms “State” and}

“Government” as exchangeable. This is not an uncommon choice even if it has been criticised by experts of the theory of the State (Robinson 2013), however, for our level of study of the State organisation this ambiguity will not be a threat.

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1. the defining elements of that type of State/government; 2. the characteristics of the corresponding tax system; 3. the implications on fairness.

The Minimal State

Which are the essential elements needed to define a State? This fundamental ques-tion has received different answers, but the one given by Max Weber has always found large acceptance:

[The State is] a human community that (successfully) claims the monopoly of the legitimate use of violence within a given territory (Weber 1946, p. 78).

At first glance, this can seem a too meagre definition, but Weber’s conciseness is part of the success of the statement; let us analyse it piece by piece.

• “Within a given territory” is necessary because a government has power only on its territory.

• “The legitimate use of violence” is the very pillar of the definition; indeed it indicates that the State has the right and the duty to use the violence legitimately; this means that there are also boundaries set to such violence. Therefore a set of laws are into force.

• “Claims the monopoly” is important because inside the territory of the state there could be other communities trying to use the power in a legitimate way, but these are incompatible with the very existence of the state.

We can easily see how this type of government stems from the basic human needs of protection and property25 _{and this is in line with the role of the government in} the ancient civilisation. People accept the authority of the government and the imposition of taxes if the State is able to assure safety from both criminals and foreign threat. Property rights all over history have had a unique role in the state-building process indeed, e.g. in the early stages of modern democracies the ownership

25_{Indeed in the famous Maslow’s pyramid (Maslow 1954) we find the need of safety right after}

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of a minimum value of wealth was a necessary condition to gain political rights or, in the Roman Republic, the ultimate goal of a Roman was to finish the military service and then gain a plot of land. This peculiar relevance of “property” is preserved in our definition of Minimal State.

To study the Minimal State we need to make a choice: to analyse it in a purely theoretical way or to consider only the realisation that we have seen in human history; in our opinion, the second path is the most interesting because it allows us to give strength to our observations.

The Minimal State above described needs to finance three main state elements: police and army forces, a legislative apparatus, a simple bureaucratic structure. Nowadays to decide how to finance we need to address a series of issues related to tax design (e.g. distortionary effects, progressivity, implicit incentives, etc..); however, in the ancient world there was not many tools to control the collection of taxes. Two were the most common choices: poll taxation and property taxation. A poll or head tax is the simplest conceivable levy: each individual has to pay a fixed amount of money each year; this is an extremely unequal tax, in particular, if we consider that usually the rich had less numerous family than the poor. The poll tax was so despised by the population that, also in the classical antiquity, when a minimum level of State bureaucracy was achieved, the property taxation was the usual tool.

Can we talk about fairness in a tax system that sustains this Minimal State? and about equity? Our answers are respectively yes and no.

We already said that the ancient civilisations had a state apparatus similar to the one here described; since we know that taxation was one of the causes of riots and rebellion, consequently, fairness is an issue even in such a simple state. Burg (2003) is an incredible recollection of rebellions caused by fiscal issues and there are more than a few that happened in states that we can consider Minimal State; therefore, we have several examples were the unfairness was so great that it pushed people to revolt.

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in distribution - because the government of a Minimal State does not consider the reduction of inequalities one of its goal.

The Liberal State

In this tripartitioned scheme, the Liberal State is the weak element; both the Min-imal State and the Welfare State are functional step while the Liberal State is a political one, this give us some problem in the identification of the essential ele-ments of this type of State.

The life of the Liberal State indeed not only spread from the 121526 _{till the First} World War,27 but during these centuries the idea of Lberal State evolved continu-ously; it is therefore tough to find a “useful” definition.28 _{However there is indeed} an undeniable characteristic of the Liberal State: the presence of representatives.

In 1.3 we briefly described how the society could affect the tax system: the main channel indeed needs the presence of a Parliament or a similar institution. A house of representatives allows the meeting of different stakeholders and their needs are always way larger than the simple protection of the private property given by the Minimal State: for this reason, a Parliament is a sufficient element to broaden the role of the State.

Even if we already mentioned the weakness of the definition of Liberal State, we want to give some examples on this incredible variety. In the United Kingdom of the Magna Charta, some medieval laws were still in force; for example peasants were still obliged to work for free for the local Lord for a given amount of hours. Instead, during the Elizabethan’s era, not only the servitude was abolished but the State was starting to take care of the poors through the famous “Poor Laws”; but again, during the Elizabethan’s era, nobody would have even imagined a public

26_{On 15 June 1215 King John of England signed the Magna Carta Libertatum}

27_{Indeed we give some details regarding the relations between the origin of parliament and}

taxation in 4.1

28_{In Bobbio (1995 p.38) we can find a famous definition of Liberal State: The epitome of the}

liberal state is the epitome of the state in which all citizens enjoy equal freedom, namely, all citizens are equally free, or equal in the right to freedom (my own translation). This definition is so veiled that it is impossible to obtain definite state and economic elements; therefore we cannot use it.

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education or a national health system. Instead, the world’s oldest national social health insurance system is the German one and it was introduced by Bismark in the German Empire in 1883,29 _{another example of Liberal State. Even if the Magna} Charta, Elizabeth’s reign in UK and Bismark’s guidance of Germany happened in three very different historical periods, all of them happened in a Liberal State.

We can imagine the timeline of the Liberal State as a run towards its full realisa-tion in the Welfare State: this is particularly true if we look at some essential authors. Beveridge, Keynes and Rawls are nowadays considered pillars of the Welfare State, however, they considered themselves belonging to the cosmos of the Liberal State.

In this section, we cannot answer the question regarding the fairness in taxation, but the logic will be clear at the end of 1.4.1.

The Welfare State

We just said that the Welfare State is the full realization of the Liberal State but to create an appropriate definition is not as easy as we can imagine. Let us start from the defining elements chosen by the Encyclopaedia Britannica (n.d. b):30

29_{Health Insurance Bill of 1883, Accident Insurance Bill of 1884, and Old Age and Disability}

Insurance Bill of 1889

30_{Full definition: Welfare state, concept of government in which the state or a well-established}

network of social institutions plays a key role in the protection and promotion of the economic and social well-being of citizens. It is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those unable to avail themselves of the minimal provisions for a good life. The general term may cover a variety of forms of economic and social organization.

A fundamental feature of the welfare state is social insurance, a provision common to most advanced industrialized countries (e.g., National Insurance in the United Kingdom and Social Security in the United States). Such insurance is usually financed by compulsory contributions and is intended to provide benefits to persons and families during periods of greatest need. It is widely recognized, however, that in practice the cash benefits fall considerably short of the levels intended by the de-signers of the plans.

The welfare state also usually includes public provision of basic education, health services, and hous-ing (in some cases at low cost or without charge). In these respects the welfare state is considerably more extensive in western European countries than in the United States, featuring in many cases comprehensive health coverage and provision of state-subsidized tertiary education.Antipoverty pro-grams and the system of personal taxation may also be regarded as aspects of the welfare state. Personal taxation falls into this category insofar as its progressivity is used to achieve greater jus-tice in income distribution (rather than merely to raise revenue) and also insofar as it used to finance social insurance payments and other benefits not completely financed by compulsory con-tributions. In socialist countries the welfare state also covers employment and administration of consumer prices.

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• equality of opportunity;

• equitable distribution of wealth;

• public responsibility for those unable to avail themselves of the minimal pro-visions of a good life;

• public education system; • public health services; • compulsory social insurance.

After our preparatory discussion in section 1.2 we expected several characteristics - such as the aim of full employment and growth - which are here missing; since this definition does not satisfy us, let us see how the economic literature defines the Welfare State.

Garland (2016) states that economic literature gives three alternative founding elements:

1. welfare for the poor;

2. social insurance, social rights and social services; 3. government’s regulatory powers.

Garland (2016) notices the oddness of considering as alternatives these founding elements; we definitely agree with the author: it is counter-intuitive to think these three characteristics as alternatives to each other instead of complementary. Since

The modern use of the term is associated with the comprehensive measures of social insurance adopted in 1948 by Great Britain on the basis of the report Social Insurance and Allied Services (1942) by Sir William (later Lord) Beveridge. In the 20th century, as the earlier concept of the passive laissez-faire state was gradually abandoned, almost all states sought to provide at least some of the measures of social insurance associated with the welfare state. Thus, in the United States the New Deal of Pres. Franklin D. Roosevelt, the Fair Deal of Pres. Harry S. Truman, and a large part of the domestic programs of later presidents were based on welfare state principles. In its more-thoroughgoing form, the welfare state provides state aid for the individual in almost all phases of life—“from the cradle to the grave”—as exemplified in the Netherlands and the Social Democratic governments of the Scandinavian countries. Many less-developed countries have the establishment of some form of welfare state as their goal.

The principal problems in the administration of a welfare state are: determining the desirable level of provision of services by the state; ensuring that the system of personal benefits and contributions meets the needs of individuals and families while at the same time offering sufficient incentives for productive work; ensuring efficiency in the operation of state monopolies and bureaucracies; and the equitable provision of resources to finance the services over and above the contributions of direct beneficiaries. (Encyclopaedia Britannica n.d. b)

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the approaches suggested by the literature did not convince us, we decided to restart our quest for the definition of Welfare State from its very father: William Beveridge.

Beveridge is a liberal economist and politician and in 1941 was chosen by from a Commission set up by the English government to examine the fragmentation of so-cial assistance policies (Benassi 2010) and the following year he published the work that laid the foundations for the development of the idea of Welfare State: Social Insurance And Allied Services.31

In this report, Beveridge address the government to fight against the five “Giant Evils” of “Want, Disease, Ignorance, Squalor and Idleness”; in particular, he pro-poses a social program able to sustain citizens from “cradle to the grave”.

The fight against the five Giant Evils as government’s duty has become a back-bone of the Welfare State.

It is interesting to notice that Beveridge was profoundly convinced to be a Liberal economist and we can find the confirmation in the stress he puts in his work Full employment in a free society (1944) regarding the link between the quest for the full employment with the individual liberties.

The Report [...] is not concerned simply with the problem of full em-ployment. It is concerned with the necessity, possibility and methods of achieving full employment in a free society. (Beveridge 1944, p.21)

If we considered only the elements given to us by Beveridge, we still would lack some of the elements we already recognised as essential for the Welfare State; therefore, we decided to state our own definition. Before doing so, we need to introduce at least another author: John Maynard Keynes.

Economists well know that Keynes revolutionised Economics and focused its work on the policies which governments need to put in action to achieve full em-ployment; however, he is also relevant to have stressed the prevalence of the “real”

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economy over the financial one.

In chapter 12 of the General theory (1936), while addressing the effects of expecta-tions and “animal spirits”, Keynes indeed stats that the government should act to mitigate the “predominance of speculation over enterprise”.

Now we have all the information we needed to list the fundamental characteristics of a Welfare State:

1. equality of opportunity;

2. equitable distribution of wealth;

3. public responsibility for those unable to avail themselves of the minimal pro-visions of a good life;

4. public education system; 5. public health services; 6. compulsory social insurance; 7. pursue of economic growth;

8. public intervention in the economy to assure full employment and other social objectives;

9. the dominance of real economy on the financial one.

Stating these as duties of governments in Welfare States allows us to achieve results philosophically troublesome.

Progressive taxation

Usually, papers in philosophy of law or fiscal studies have hard times in proving the admissibility of progressive taxation: let us take a couple of examples. Fried (2018) builds its case around the concept of State as market actor and then tries to analyse the consequences of this when the market is not efficient and imagining that the in the relationship State-taxpayer “the individual’s tax burden functions as the shadow price for the public goods he or she actually wants and gets from the government”; instead Cohen Stuart (1889) proves that from the principle of equal sacrifice derives the justification for progressive taxation.

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Our approach follows the contractualist school instead; in the Welfare State a social contract is in force: it allows and compels the government to act towards a re-duction of inequalities. Therefore, the creation of a tax with more than proportional increase belongs to the possibility of the State.

The selection of tax base

In 1.2.1 we introduced the idea of horizontal equity; here, the government finally has the justification for enforcing it. Equality of opportunity is a vast concept and after Rawls (1971) is usually summarised with the Maximin principle but let us apply it in tax design. An orphan, a single mother, a disabled person are likely going to have more difficulties in succeeding than an identical person belonging to a complete family or without disability: for this reason the tax system must reward some special categories of people whatever level of wealth or income they have.

Tax differentiation

We are accustomed to see a different level of taxation on goods. The most known difference is in VAT; even if this type of tax (that we will study in ??) is a flat one, it differentiates between essential goods, “normal” goods and - sometimes - luxury goods. Sin taxes are another example of tax differentiation.

In these cases, the “ethical” justification that allows discriminating is pretty straightforward, but in the Welfare State there are other types of differentiation that require a specific reason.

It is not easy to do an all-embracing recollection of tax differentiation; therefore, we will cite two of the most relevant in contemporary political debate: the financial taxes and the environmental taxes.

The financial taxes are justified thanks to the State’s duty of affirming the dominance of the real economy on the financial one; while the environmental taxes are justified through the government possibility on intervention in the economy for important social objectives.

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Tax on wealth

To tax wealth is indeed philosophically troublesome: wealth is nothing more than accumulated post-tax income; therefore, a tax on wealth can be seen as an unfair tax because it burdens something that has already been taxed. Again the goals of equality of opportunity and equitable distribution of wealth allow government also to tax wealth.

Even if here we are just sketching the philosophical implication of our construction of the Welfare State, we need to add some other details regarding the taxation of wealth because of the distinctive characteristics that wealth has.

Wealth, more than income, is an element that determines an individual’s life. Let us give some examples: a wealthy individual is likely to have other wealthy and influential individuals in their social network and then to have access to unique opportunities; for a given level of talent a wealth student is more likely to continue their studies in a good institution compared to a poor student that need a scholarship or that even need to work to help the family balance sheet; a wealthy individual can start a business with less effort than a poor; a wealthy individual can chase a career in a sector characterised by volatile revenues or with a long period of low income without too much anxiety.

Summarising: wealth gives non-linear advantages; therefore, not only it is justi-fied to tax wealth, but it is justijusti-fied to tax it with a progressive scheme.

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Chapter 2 Descriptive Analysis

In Chapter 1 we have pursued a reconstruction of the evolution of the State and its relationship with the tax structure. We showed that fairness issues increase along with the complexity of the State and we put as the final step of this dynamics the Welfare State.

We described the Welfare State as the pinnacle of a long state-building process: its ambitious aims allows the government to act in the economy directly and to find new balances between the individual rights and the social welfare. However, the model of the Welfare state today is not convincing as it was some decades ago: it is often said that the Welfare State is a model not sustainable anymore or that it is failing its very purposes. This is what we want to investigate in this section through data analysis.

We have chosen four relevant questions regarding the relationship between Wel-fare State and its finances to understand if the worries regarding the health of this state model are well-grounded or not:

1. Is the State continuously growing?

2. Is it true that the burden of the taxes has shifted towards the middle class? 3. Has globalisation made more difficult to collect some kind of taxes?

4. To what extent is the Welfare State reducing inequalities?

Let us comment on the choice of these questions.

Fairness in taxation: a philosophical and empirical analysis

Master of Science in Economics

Master’s thesis