The Capital Tax

«The Economist», 15 maggio 1920, pp. 1004-1005

Turin, May 7

The Gazzetta Ufficiale of May 1, 1920, contains a new edition (dated April 22, 1920) of the legislative orders relating to the extraordinary capital tax, tax on increments of capital owing to war, and to the extraordinary tax on dividends of shares and other bearer securities. The history of variations of the Italian capital tax is an interesting instance of the difficulties which are necessarily incurred by Governments desirous to transform into a reality the general idea of a levy on capital. There were three stages in the Italian experience on this subject. In July last the Nitti Cabinet, shortly after coming to power, decided to create an extraordinary tax on capital, with a discrimination against fortunes made by war. This decision was probably all that the Government had thought on the matter. A Departmental Commission was nominated, from which, after some very general debates, a small Committee was selected, composed of Professors Cabiati, Einaudi, Gini, Griziotti, and of Dr. Benettini and D’Aroma, of the Department of Finance. This Committee set to work, and in the last days of September, 1919, produced a project, which was afterwards called, in the public Press, the specialists’ project. Passing over the very detailed sections relating to valuation, payments, penalties against offenders of the law, the gist of the project was as follows: – All men and women – political persons, excluding juridical persons, such as public bodies, joint stock companies, and the like, which are to be taxed through the shareholders, &c, – possessed of a capital of at least 20,000 lire (£ 800 at the par of exchanges) are to be subjected to an extraordinary forced loan. The loan to be of 5 per cent, of a capital of 20,000 lire, 9.96 per cent, on 100,000 lire, 13.09 per cent, on 200,000 lire, 20.69 per cent, on 1,000,000 lire (£ 40,000), 31,01 per cent, on 10,000,000 lire, and 40 per cent, on 100,000,000 and over (£ 4,000,000 and over). The payment of the forced loan was to be distributed over eight years if three-fourths of the capital consist of land and houses, over six years if land and houses constitute from a fourth to three-fourths parts of the capital, and four years if land and houses are less than a fourth part of the total capital. The years are always four and the tax always 40 per cent, for the bearer securities (Consols and other public debts, securities, shares, debentures, &c.) which are not registered or inscribed, somewhat in the fashion of English securities, in a term of six months.

Notwithstanding the name of forced loan, the tax was, in truth, a capital levy, because the taxpayer had the right to reduce the payment to two-thirds of the published rate when he declared his intention of renouncing to the bonds of the forced loan. As the loan was to give a dividend of only 1 per cent, and to be redeemed in 70 years from January 1, 1930, the full payment of the tax, with the bonus of a 70-years 1 per cent, bond, was equivalent to a two-thirds payment without the bonus of the bond.

The project was received with mixed feelings by the public opinion. Great was the apprehension 1) of landed and housing interests, which feared that payment in so short a time as eight years may lead to general selling and lowering of values; 2) of banking men, who doubted a run on deposits; 3) of joint stock companies, which said that so high a tax as 40 per cent, on all bearer securities may cause a severe crisis on the bourses. In a country like Italy, in which inscribed or registered stocks and shares are little known (perhaps only five billions on a total of 80 billions of public debt and other securities), the problem of bearer securities is overwhelming, and is destined to baffle all attempts to a progressive tax on capital and income. What certainty is there of taxing in proportion to the real fortune if the bearer securities are escaping? The device of taxing these securities at the maximum rate, or 40 per cent., was imagined to force possessors to inscribe them.

As a matter of fact, the Government delayed legislation till after general elections – and the delay was one of the causes of the Socialists’ great success, as it gave them a popular platform against the selfishness of the propertied class, which, after enriching themselves by the war, refused to pay an overdue tribute toward restoration of public finances; and on November 24, 1919, published a decree for a so-called extraordinary capital tax, payable in 30 years. The tax was to be 0.167 per cent, per annum on men possessed of a capital of 20,000 lire, gently rising to 0.833 per cent, per annum on fortunes of 100,000,000 lire and over.

The new decree of April 22, 1920, is a recognition by the Government that the critics were right in some of their strictures. The lower taxable limit is to be raised from 20,000 to 50,000 lire (£ 2,000 at the par of exchanges). The rate of the tax is put at 4.50 per cent, for fortunes of 50,000 lire, at 9.61 per cent, for 100,000 lire, at 11.62 per cent, for 1,000,000 lire, at 24.11 per cent, for 10,000,000 lire, at 40,14 per cent, for 50,000,000 lire, and at 50 per cent, for fortunes of 100,000,000 lire and over. The tax to be payable in 20 years if the fortune consist of 40 per cent, or over of land and houses, and in 10 years if the proportion of land and houses to total fortune is less than 40 per cent. The taxpayer has the right to redeem at any moment the payments yet to be made, with a discount of 6 per cent, per annum. The special tax on dividends of private bearer securities (i.e., excluding always the State Consols, bonds, bills, &c.) is raised from 9 to 15 per cent.; and, as it does not exempt to possessor from the liability to the capital levy, it is hoped that many will inscribe their stocks.

The capital levy is accompanied, as it was, indeed, in all the stages, by an extraordinary tax on fortunes made during the war. The tax goes from 10 per cent, on 9 to 10 per cent, increases on pre-war fortunes to 80 per cent, on over 70 per cent, increases. The tax is very drastic; but it has to be remembered that the definition of “increases of fortune owing to war” is a special one. An increase of fortune has the same meaning as “war profit”. And so the war profits – i.e., the profits realised from August 1, 1914, to December 31, 1919, by traders and industrial and trading companies, which had already been taxed with a war profit tax from 10 to 60 per cent., according to the proportional excess over pre-war profit standard – are to be newly taxed on the remaining portion with the new tax on war fortunes. In some cases the two taxes will amount together to a rate of 91 per cent., which is truly not a small tax.