“Public Services as Productive Factors – An Italian View”,

The Italian School of Public Finance was not at all a homogeneous body of doctrine. In particular, there were two strands – one essentially ‘democratic’, the other a non-democratic, or ruling class, strand that should not be neglected since it produced significant analysis and outstanding results. This paper focuses only on the democratic strand. This body of thought maintained that the logic of market and exchange ought to be extended to the state, although somewhat cautiously. If this school was an inspiration for the extension of the idea of contract to the state, then De Viti de Marco must be given some of the credit for laying the foundations of the contractarian approach. De Viti made the assumption that the state is one of the productive factors like land, capital and labor. In so doing, he emphasized that an independent economic equilibrium could not be conceived as pre-existing the state. The state is as important as the other three productive factors traditionally used in political economy. According to De Viti a proportional income tax would not only meet vertical and horizontal equality criteria because each unit of income produced would be charged with an equal tax bill, but such a tax would also indirectly determine the level of public services through the role that tax-prices play in the political process, provided that a fiscal constitution prevents the government from resorting to debt financing.