Between what is given and what is received, there is the fiscal residue

In 1950 the economist James Buchanan defined the parameter on the basis of which to evaluate the adequacy of the overall redistributive activity of the public sector

In Italy and Italian-speaking countries, too, the concept and expression of “residual taxation” has recently been introduced.

Although relatively recently used in non-English-speaking countries, it was first introduced by the American economist James McGill Buchanan Junior in an essay in 1950 entitled “Federalism and fiscal equity” and published in the scientific periodical “American Economic Review”.

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Nobel Prize for Economics in 1986, in order to find an ethical justification for the transfer of resources from the richest to the least rich states in the USA, he identified in the so-called fiscal residue the parameter by which to evaluate the adequacy of the overall redistributive activity of the public operator.

In extreme synthesis, he understood it as the balance between the contribution each individual makes to the financing of public action and the benefits he receives in the form of state expenditure.

The principle of horizontal equity as a rule

James McGill Buchanan argued that, according to the principle of horizontal equity (treating equals equally), public activity (considering all levels of government, from the nation state to the municipality) should ensure equality of tax residuals for equal individuals (in terms of income).

For the Tennessee economist, who passed away in 2013, it followed that “an individual should be assured that wherever he wishes to reside in the nation, the total tax treatment he will receive will be approximately the same.”

Based on this principle, tax residuals in a territory that result simply from the fact that citizens with relatively higher incomes are concentrated in that territory (as, for the most part, is the case in the Italian regions north of the Tuscan-Emilian Apennines) are ethically justified.

Equal income should be treated equally

What should matter is that citizens with the same income, but residing in different regions, are treated in the same way.

In the public sector, the fiscal residual is therefore the difference between all the revenues (tax and other revenues such as alienation of public assets and collection of receivables) that the Public Administration (both state and local) takes from a certain territory and the resources that are spent in that territory.

In the case of the Regions and, therefore, of the main territorial public bodies, the fiscal residual is calculated as the difference between taxes paid (net of regional revenues, including non-tax revenues, depending on how it is calculated) and the total public expenditure received, for example, as transfers or in general for public services.

“The Sack of the North”, a shocking essay by Luca Ricolfi

In the Italian context, residual taxation made headlines following the publication in 2010 of an essay by sociologist Luca Ricolfi entitled “Il sacco del Nord”.

In it, he highlighted how the range of residual taxation for the regions of northern Italy varied between 50 and 80 billion euros per year, while that for the southernmost areas of the country was negative for a figure between 41 and 79.

Accordo preliminare tra il Governo e la Regione Emilia-Romagna (italian)
Accordo preliminare tra il Governo e la Regione Lombardia (italian)
Accordo preliminare tra il Governo e la Regione Veneto (italian)

It was shown how the levels of individual consumption did not correspond to the levels of GDP per capita of each individual Region.

Therefore, the territories that benefited from residual taxation had a noticeable increase in consumption more than proportional to their Gross Domestic Product, to the detriment of the other Regions.