The Theory of Public Debt in the Italian Tradition. Two Possibile Neutrality Theorems

This work considers the Italian contribution to the theory of public debt and the taxation of its interest at the end of the nineteenth century and the beginning of the twentieth century. This is a very interesting period since Italian economists examine the economic aspect of the State policies in a general equilibrium set-up with a careful welfare analysis, taking into account the difficulties of measurement and applied research. A new review of the Italian approach is motivated by the growing literature on the Ricardian equivalence and by new policy recommendations, related to the exemption of interests on public debt from taxation, at times derived from Einaudi’s theory of the “transfer-payment” in the public balance sheet. We start from the origin of public debt contributions in 1850 considering the contribution of Ferrara and Messedaglia, subsequently extended by the work of Ricca Salerno (1879), Loria (1884), Pantaleoni (1891), De Viti de Marco (1893) and critically reviewed by the work of Griziotti (1917), Borgatta (1918) and Einaudi (1913). After providing an overview of the Italian tradition of public finance, we show how Pantaleoni and De Viti correctly identify the theoretical assumptions behind the Ricardian equivalence between public debt and taxation, highlighting their points of strength and weakness. In particular,De Viti argues in favour of the use of public debt versus taxation, anticipates recent public choice models and theoretical and empirical contributions raising concerns on the credibility of the State’s commitment and the non monetary risks associated to the public debt. Moreover, De Viti examines the implication of the taxation of public debt interest, in contrast to Einaudi and the current scholars believing to the theory of the irrelevance or negative influence of the tax rate on the interest of public debt. His comprehensive model provides strong support to policy recommendations in favour of taxing the interest of public debt, including it in a comprehensive income tax.