Towards a New Fiscal Contract.Taxes, Inflation, and Politics in Italy (ca. 1960-1990)

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Modern taxation provides governments with the resources to administer public goods, enables income and wealth redistribution, and is a fundamental tool for regulating the economy. But why do states implement modern taxes (i.e. personal income tax, general sales tax, social contributions)? Comparative historical research has pointed to the effects of the World Wars, but empirical evidence is based primarily on the US and the UK, while different patterns can be observed in many continental European countries. Italy provides a fitting case study to investigate this alternative path. Between 1973 and 1983, Italian tax revenue increased from 23 percent to 34 percent of GDP (OECD data), primarily thanks to the 1974 tax reform introducing a modern personal income tax. Our project intends to look at the role of political competition concerning the tax reform of 1974 in order to explain the rise of a modern tax state in Italy. We draw upon the political-economic framework of the fiscal contract, based on the idea that the fiscal system is the implicit product of the bargaining power of different interest groups, such as politicians, industrialists, trade unions, and experts. Our approach considers both the qualitative and quantitative dimensions of modern taxation. First, following a history-of-knowledge approach, we look at the circulation of new tax ideas on personal income taxation from the US and the UK to Italy in the 1960s. Which actors advocated the adoption of a new form of taxation? How was the model adapted in the Italian context? Second, by drawing upon tax data at the provincial level (95 units for 20 years), we investigate the quantitative facet of the tax reform. Who paid for the reform? Who benefitted? Third, we combine the findings from part 1 and part 2 to sketch out the political terms of the new fiscal contract introduced by the reform, relying on qualitative evidence from the archives. What were the terms of the contract? Which actors were involved? We intend to argue that the new fiscal contract was an important factor to reach a political equilibrium in a time of rising social and economic instability. The new combination of high taxation on workers and particularistic welfare spending helped to keep in power the leading Italian party of the time, the Democrazia Cristiana (DC). Furthermore, by relying on the political-economic framework of the fiscal contract, our findings will also help shed light on the experiences of other countries in Continental Europe that modernised their tax system after the 1970s (Spain, Portugal).