An Italian Sonderweg Towards Social Democracy? Taxes, Inflation, and the Reshaping of the Italian Fiscal Contract, 1973 – 1984

Between 1973 and 1993 Italian tax revenue (including social contribution) increased from 23 to 41 percent of GDP, respectively from one of the lowest to one of the highest levels among OECD countries. My presentation aims to explain how such a rapid and sharp increase in taxation was possible, focusing both on the characteristics of the Italian tax system after the general reform of 1973, and on the attainment of tax payers’ consent through the reshaping of the Italian Welfare State. The reformed tax system produced a more regressive distribution of tax burden due to the implementation of the VAT, a broad-base income tax on wages, a separated mild taxation of capital incomes, and the possibility of substantial evasion for self-employed. Furthermore, in the years after the reform, tax revenue from labour incomes was suddenly raised by the fiscal drag due to the high inflation of the late 1970s and early 1980s. However, both the leading ruling party, the Christian Democracy, and the trade unions managed to maintain their consensus despite an astonishingly increase in tax burden. I intend to explain this problem considering the reforms of the Italian Welfare State implemented in the 1970s: The Statute of Workers, the establishment of the National Health System, the establishment of the Universal Pension Scheme. Relying on the concept of fiscal contract (Kato 2003, Timmons 2005), I argue that workers accepted the new less favourable tax regime in exchange for the establishment of a more democratic welfare state. I will primarily present evidence from the archives of Italian political parties and from the trade unions and the employers’ federation, together with governmental publications and parliamentary records. I will support these materials with a new time series of the Italian budget from the 1960s to the 1990s.