2 Figuerola's Project of a Personal Tax

The September 1868 liberal revolution, which deposed Queen Isabel II, ushered in a political period in which a newly elected Parliament was intended to play a central role in the Spanish political process. Circumstances allowed a group of economists belonging to the liberal school of economic thought known as the Escuela economista to take control of the Ministry of Public Finance. Laureano Figuerola, the founder and chief representative of this school, was appointed Finance Minister in the provisional government formed in October 1868Footnote 2. The Escuela economista is essential in our story. Its members, very cohesive from the doctrinal standpoint and extraordinarily committed to the diffusion of economic liberalism, were strongly influenced by French radical liberalismFootnote 3. They favoured a certain degree of doctrinarism, and believed that liberal economic tenets were sufficient to foster economic growth and successfully manage public finance. Their main concern was economic freedom, particularly for trade, and they fought tenaciously for the reduction of Spanish customs dutiesFootnote 4. Together with Figuerola, some other fellow economistas also entered the government, thus strengthening both its ideological lines and its liberalisation policiesFootnote 5.

Figuerola's appointment as Finance Minister granted him the opportunity to put into practice the economic programme of the Escuela economista, focused on the development of industrial capitalism and trade, mostly through liberalisation measures. This programme involved policies such as the encouragement of freedom of trade, industry, labour and credit; the restriction of government interventionism in industry; the transformation of indirect taxes into direct ones; the promotion of the creation of credit institutions, etcFootnote 6. Figuerola's ultimate objective was to foster Spain's economic growth in the long term. His strategy was a gradual reformism, which gave priority to economic and fiscal structural reforms. This would increase public revenues in the long term, but implied resorting to credit in the short term, temporarily boosting public debt (Costas Reference Costas1988, pp. 60-63; his decision not to tackle the problem of the budget deficit immediately would cause him many difficulties in Parliament). Concerning taxation, Figuerola's main actions were an essential reduction in customs duties, the abolition of taxes on consumption and the establishment of a tax on incomes.

On October 12, 1868, the provisional government issued the decree of suppression of consumption taxes and their replacement with a new personal taxFootnote 7. In fact, the abolition of that levy was the acknowledgement of a de facto situation, as they had already been eradicated by the local revolutionary juntas formed during the revolutionary process. Although Figuerola was not in favour of consumption taxes, he was not pleased with this radical measure, as it was against his gradualist strategy: he would surely have preferred not to remove any fiscal revenue before having an actual replacement (Costas Reference Costas1988, pp. 79-80)Footnote 8. The financial viability of the Revolution made it impossible to dispense with any source of revenues without seeking a new one, or without dramatically cutting expenses, as Treasury circumstances did not allow for tax relief. Therefore, Figuerola devised a new direct personal tax, named repartimiento personal. It was levied on «individual wealth» through two indirect indicators: rent paid for housing and the number of members of the household. It was proportional, although tax relief was allowed to large families. The allocation of the tax burden was made using taxpayers’ personal statements. However, the procedure to calculate the eventual tax debt turned out to be quite complexFootnote 9. The participation of taxpayers was sought, in the British fashion, both to allocate the tax burden and to supervise complaints. According to the project of public budget for 1869-1870, its revenues should amount to 150 million reales (around 7 per cent of all public revenues, and approximately 25 per cent less than what consumption taxes had yielded the previous year).

With this tax, Figuerola was attempting to tax individual income (which he considered to be the correct indicator of the ability to pay), taking housing expenditure as a good indicator of income. Was it his ultimate aim to introduce the seeds of a general personal income tax in Spain?Footnote 10 This would seem to be the case. According to the tax decree and his interventions in Parliament, Figuerola expected the personal tax to be the main instrument in the transformation of the direct tax structure. He planned to extend it so that it would become one of the main sources of Treasury revenues in the long term, by gradually converting all direct taxes into the personal income tax, making it the cornerstone of a modern liberal tax system. In Parliament, Figuerola supported the doctrine of the single tax on incomes as the fiscal ideal. His tax project was the instrument to achieve it: «I wish I could influence MPs’ will, and from this moment on, turn all the Spanish land taxation into a personal tax»Footnote 11. He contended that public revenues were the key to the economic regeneration of Spain. It was necessary to liberalise them steadily and to introduce a tax on incomes, which would operate as a major device to foster economic development and remove the obstacles to economic circulationFootnote 12.

Figuerola made sure that his tax was scientifically designed; that is, in line with the principles of political economy. The tax decree underlined that the personal tax project was «in accordance with sound financial doctrines»: it was a direct tax, general, equitable, certain and clear (every taxpayer knew how much he had to pay), inexpensive in its administration and collection, easy (average tax rates were low) and flexible, as it was possible to adapt the tax to the nation's increases in population and wealth. Therefore, the new tax was based on the classical liberal principles of taxation as enunciated by Smith and J. B. Say, and reproduced by the main Spanish economists of the century. From the doctrinal point of view, it was perfectly acceptable and justified. By following these scientific economic principles, the decree assured that the personal tax would result in freedom of circulation and trade, better supplied markets and would increase national welfareFootnote 13.

The doctrinal principles of personalisation and generality were particularly important to Figuerola. He believed that the principle of personalisation should become one of the milestones of the renewal of the Spanish fiscal systemFootnote 14. Taxes should be personal (unlike the main Spanish direct taxes — the land tax and the tax on industrial and trade returns — which were product taxes), because they were essentially a reciprocal exchange for the services supplied by the state to the individual, which allowed him to devote his time to his business freely and safely. The new tax brought a noteworthy innovation to the fiscal system as it introduced this principle of personalisation in a major taxFootnote 15. The principle of generality, «the only sign of justice that we can identify in consumption taxes»Footnote 16, was also crucial, because it would encourage a taxpaying culture in Spain. All individuals should pay tributes to finance state services according to their ability and for the sake of justiceFootnote 17. The principle of flexibility was another essential feature of the new tax, as it would make it possible to overcome one of the main problems of the Spanish product taxation systemFootnote 18. It was designed to be adaptable to changes in national economic growth, which is why Figuerola expected its yields to increase progressivelyFootnote 19.

The example to follow was that of the British income tax. Figuerola was convinced that his personal tax, by leading Spanish finance towards an income tax, would be crucial for the economic prosperity of the country, as had been the case in BritainFootnote 20. Figuerola explicitly sustained that his personal tax was directly inspired by the British income tax, the decisive tool that had allowed a «magnificent» transformation in the public budget of this nation, supplying the state with enough revenues without charging taxpayers much. He also praised the British fiscal culture, which was in turn responsible for the success of the income taxFootnote 21. As previously mentioned, Figuerola assumed that the healing of the Spanish economy depended on the gradual transformation of public revenues. This had happened in Britain, thanks to income tax:

3 The Personal Tax Debate in Parliament

Despite Figuerola's efforts to publicise the advantages of his project, and his pledge to eliminate its possible flaws, the new personal tax was not welcomed, mostly because public opinion had assumed that the abolition of consumption taxes would not be offset by a new levy. The new personal tax had been enforced since the end of 1868 by the provisional government decree, but it had to be sanctioned by the new Constituent Assembly formed after the elections in January 1869, in which the coalition of parties supporting the government held a majorityFootnote 23. Despite the fact that the new personal tax meant quite a modest fraction of public revenues, it turned out to be a very controversial matter. According to the parliamentary procedures, prior to the debate in the general assembly, every item in the budget project had to be examined by the parliamentary Commission of Public Budget and Sub-Commission of Public Revenues, in charge of issuing a report, which would later be discussed and voted in the assembly. Virtually all MPs specializing in political economy formed part of the commissions.

There are no records of the debates in these commissions; however, it is possible to infer that they were tough. Figuerola (not a member of the commissions himself) felt constrained to take part in the meetings in order to influence commissioners to pass his project. After deliberation, the Budget Commission decided to introduce some substantial amendments in Figuerola's taxFootnote 24: The personal tax survived, but it had suffered fundamental changes. It had in fact become a pure direct tax on personal income. As in Figuerola's scheme, every citizen over 14 years of age was liable to the tax. The settlement of the tax burden would be made in proportion to the income of every individual, assessed through taxpayers’ individual statements of incomeFootnote 25. The Administration would survey individual tax returns and taxpayers would participate in the management of complaints. Theoretically, these bases rendered the tax much fairer and more precise than Figuerola's model, but obviously posed overwhelming difficulties if the tax were to be implemented in an acceptable and reliable way. Individual statements of wealth were impossible to check by the scarcely equipped fiscal authorities, leaving much scope for fiscal fraud. Figuerola's bases were questionable, but probably more practicable. According to the report text, the flood of complaints from local councils made the reform of the income tax absolutely necessary (this was the only item of the budget in which major changes were introduced, which shows the dissensions within the parliamentary majority). Figuerola had no alternative but to accept the new bases (he defended them in the chamber), in order to save the project of setting up an income tax in Spain.

The ensuing debate in Parliament, therefore, centred on this new income tax project, although to the primitive tax planned by Figuerola changes were made constantly. Several features of this debate can be highlighted: Parliamentarian economists shared a common view of fiscal principles, grounded in economic liberalism, which none of them questioned: minimum state, budget equilibrium, efficiency and equity in taxation, preference for direct taxes over indirect, and also the convenience of taxing incomes. As a result, the discussion lay mostly in the convenience and possibility of implementing such a tax in Spain. The government faction supported it directly as an important piece of political economy. The opposition favoured the idea that principles should be applied only taking into consideration the particular characteristics of the territory. It was also a debate between long- and short-term economics. Figuerola justified the income tax (and the entire public budget) on the basis of a long-term economic reconstruction, which required new deficits, but would render its outcomes in some years. The opposition's only alternative was the immediate restoration of Spanish credit, cutting expenditure and not increasing taxes in order to balance the budget and disdaining any long-term economic strategy. Another issue pervaded the debate (as it did others too): the discussion on the eventual form that the Spanish state would have after the Revolution, bringing monarchists face to face with republicans (the latter blamed the Monarchy for the budget deficits and demanded radical cuts in spending).

MPs who defended the new income tax in the debate (mainly the spokesmen of the Budget Commission) used Figuerola's lines of reasoning already outlined in the decree of 12 October, as they served equally for the new version of the tax. Some arguments were particularly highlighted. The idea of income tax as an instrument to foster economic growth was one of them: Herreros de Tejada, MP of the Escuela economista, stated that the ultimate goal of the fiscal reforms proposed by the government was to increase national product and trade, which would render larger public revenues in the long term. Supporting the economistas’ idea that only a liberal framework could ensure economic growth, he sustained that liberalism was the driving force behind the new personal taxFootnote 26. Liberal economic doctrine provided powerful arguments to support the income tax; specifically, the idea that a single tax on incomes was the scientific ideal to build a national modern taxation system. Many MPs mentioned this idea in the debate (both to support the income tax project, and also to attack it, invoking its difficulties). Among those who defended the income tax based on this idea, Ruiz Zorrilla, the Minister of Public Works, stated that the personal income tax was a genuine attempt to gradually introduce a single tax in Spain, the ideal of taxation theoryFootnote 27. Herreros de Tejada described the single tax as the «political economy desideratum», forecasting that, once stabilised and accepted, the income tax would be the first step towards the transformation of all taxes into a single tax in Spain. Baeza, MP, also referred to the single tax as «the beautiful ideal of modern economic science»Footnote 28. The soundness of the technical design of the income tax was also invoked. Cancio Villamil, MP, highlighted the convenience of the bases of the tax: «generality and proportionality of quota». On the one hand, taxpayers should pay in proportion to their income, and on the other hand, all citizens should pay as much as they could, in exchange for the services supplied by the stateFootnote 29. The last main line of reasoning was the British example. Defenders of the income tax tried to highlight its similarities with the British income tax, which had become legendary, the balm capable of solving the financial troubles of the country. Herreros de Tejada believed that the project would have the same «wonderful» effects that income tax had had in Britain. In spite of the differences regarding fiscal culture between the two countries, he claimed: «What is so good in England, why should it be so bad in Spain?»Footnote 30. Figuerola himself also intervened ardently in the debate supporting the new bases of the tax (mentioning its vagueness and forecasting its practical difficulties). Although he believed his proposal was far better, at least the new income tax preserved the essential principles of generality and personalisation, in his opinion crucial in the fiscal modernisation of SpainFootnote 31.

The MPs who opposed the new tax started by questioning its legitimacy. Consumption taxes had been abolished during the Revolution and should not be replaced with any other tax. Besides, the income tax was the consequence of an excess in public expenditure, inherited from pre-revolutionary cabinets, which the provisional government had not been able to cut. Focusing on the income tax itself, they did not question its theoretical soundness: most, if not all, opposition MPs acknowledged that a single tax on personal incomes was the scientific ideal expressed by classical liberal authors. However, they saw it as a chimera, impossible to establish in Spain. Republican MP Tutau, the most highly qualified economist in the opposition, supported the need for an income tax in Spain, but disagreed with the bases of the projected income tax. He foresaw the immense difficulties the administration would have in collecting the tax and was very pessimistic about its successFootnote 32. Herrero, MP, a dissident member of the majority and one of the strictest opponents of the new tax, believed that the ideal of taxation theory was the single tax, be it on capital or on income, but tax fraud and the lack of resources of the fiscal administration to control individual assessments meant that it was not advisable for SpainFootnote 33. Time would prove both MPs right. A major argument against the new tax was to underline its differences with the British income tax. Its performance was quite well known by some of the MPs, British fiscal organisation was praised as the most modern in Europe, and the tax culture of British citizens was admired. All this, some MPs assured, meant that it was impossible for a similar income tax to succeed in Spain, or at least to attain the positive effects it had had on British economic growth. Republican MPs especially pointed out their differences in fairness: Orense, MP, claimed that there was no tax threshold for low incomes in the Spanish project and the method of allocation through quotas prevented real proportionality. Garrido, MP, a socialist republican, also insisted on the issue of the threshold: the income tax should be paid only by those able to contribute, as was the case in BritainFootnote 34. However, the main criticism came on the issue of technical differences: Tutau, despite being an admirer of the British income tax, voted against the personal tax because he believed that the project had numerous flaws when compared to its British modelFootnote 35. The issue of the individual assessment of income that was apparently working well in Britain was the most controversial basis of the new income tax project. The risk of massive fraud, the administrative impossibility to check taxpayers’ returns and the lack of reliable data on national taxable bases seemed to be insuperable problems.

What was the degree of expertise in political economy of the MPs taking part in the debate on the personal tax? Following their interventions in Parliament, it seems that they had sound knowledge of economic principles (in the framework of classical liberal paradigm), and of the fiscal policies developed by more advanced European countries. Active participation in the income tax debate required at least a minimum qualification in fiscal issues, for the discussion sometimes involved technical aspects that, if not of great difficulty, required some familiarity with taxation questions. Naturally, the economic substance of their interventions varied; some MPs made remarks of a political, even demagogic, nature, whereas others showed fiscal competence. No doubt, some doctrinal statements in the debate were merely instrumental. The discussion on who can be considered a parliamentarian economist in the liberal age is open. Augello and Guidi (Reference Augello and Guidi2003, pp. xxii-xxvii) have adopted two objective criteria issued by Fetter (Reference Fetter1980, pp. 12-13), namely «profession» and «authorship», adding three more subjective criteria: self-consciousness, behaviour in parliament and public recognition of the status of economist. Following these criteria, the list of Spanish MPs with a significant degree of expertise in political economy at that time could perhaps include around fifteen names, a circumstance that would not be matched in the rest of the liberal ageFootnote 36. The expertise of some MPs is indubitable; this was the case of economic professors (Figuerola, Moret, Rodríguez and Echegaray), or civil servants with major experience in economic posts. The competence of others probably demands more in-depth assessment, although evidence from their background, professional activities and parliamentary discourses seems to suggest some competenceFootnote 37.

The position of the majority of these MPs who were economic specialists was to support government policy — therefore the income tax — as an accurate tool to modernise the Spanish tax system. However, not all of them backed Figuerola's original project, as seen in the commissions. Others maintained a relativist position, accepting the income tax doctrine, but rejecting it for Spain because of the country's economic and fiscal structure (no doubt, their parties’ positions marked the orientation of their final votes). The tax reform found most support among MPs who were members and sympathisers of the Economist School. Three of its most renowned representatives, Echegaray, Moret and Rodríguez, addressed a document to the Chamber contending that one of the keys for the economic regeneration of Spain was an increase in public revenues, which demanded taxing sources of incomes that had so far remained untaxed, especially yields on financial assets. In their opinion, this called for a general income tax in Spain, following the British income taxFootnote 38. As previously mentioned, behind Figuerola's plan to reform the tax structure, there was an enthusiastic confidence in political economy as a science of government. The economistas were very keen, profiting from the opportunity furnished by the new Parliament, to put across their doctrines and faith in economic science. Figuerola, in the tax decree, had stated that the characteristics of his personal tax fitted well with the new era opened by the Revolution: the era in which scientific political economy, rather than arbitrariness, should rule national financeFootnote 39. In the debate, Ruiz Gómez, MP, from Figuerola's team in the Ministry, also stated that the science of public finance should guide the fiscal system of the countryFootnote 40. Echegaray, Moret and Rodríguez, in the aforementioned document, also proclaimed an outstanding optimism in economic liberalism and parliamentary democracy as key factors for Spain's economic progress: «Spain will prove that freedom and individual initiative are the only true origin of wealth, morality and progress»Footnote 41.

The personal tax debate was the longest on economic matters that the Constituent Assembly held in 1869. Eventually, and despite last minute movements of the opposition trying to block the final vote, the personal tax with the new bases of the Budget Commission was passedFootnote 42. However, those who forecasted difficulties for the income tax in Spain were right; the revenues it supplied quickly fell and it was suppressed as early as 1870. Eventually, the consumption tax had to be restored, first in order to finance the local and provincial councils, and then as a revenue for the National Treasury in 1874.

4 Influences on Economists in the Income Tax Debate

All MPs taking part in the debate on income tax shared the common economic thought framework of classical liberalism, differences lying only in their degree of attachment to this body of ideas. The majority of classical economists dealt with the problem of taxation, although their judgements on the ideal tax structure were much less unified than on other matters. Many of them made statements on the hypothetical ideal taxation system and its characteristics only to acknowledge that, in the end, fiscal policy should be built on feasible taxes depending on national economic structures and fiscal traditions. Spanish contemporaneous economic writers were not an exception; their works explained the ideal characteristics of a nation's fiscal organisation (nearly all of them following Smith's fiscal principles) and then considered their applicability to Spanish circumstances. There are no direct quotations from the debate, but the ideas that appeared in Parliament can be found in the authors of the 19^th century Spanish liberal tradition: Flórez Estrada, Jaumeandreu, Canga Argüelles, Pastor, Colmeiro, etc. Some MPs (particularly the economistas) knew the main liberal economic works, through direct readings (mostly French works), translations or journals such as the Journal des économistes. As for other MPs in the debate, it is safe to say that they would have known at least the main Spanish economic works of the 19^th century.

Both sides in the debate had plenty of sources to sustain their respective positions; they could even resort to the same authors to defend and attack the income tax. MPs supporting the income tax (once again especially sympathisers of the Escuela economista) defended the position that liberal principles were the driving force behind the income tax and the basis of a modern tax system. The idea that a sound fiscal system should tax personal income appeared in works by Flórez Estrada (Reference Flórez Estrada1828, pp. 304-314), Canga Argüelles (Reference Canga Argüelles1833, pp. 48-52), Jaumeandreu (Reference Jaumeandreu1816, pp. 297-301), Del Valle (Reference Valle1842, p. 493), López Narváez (Reference López Narváez1856, pp. 50-54), and Pastor (Reference Pastor1856, I, pp. 220-225; II, pp. 2-15). However, some of these authors considered this to be theoretically desirable but unfeasible in practice. MPs who were detractors of the income tax did not deny its suitability and soundness, but put forward applied fiscal literature to discard its establishment in Spain. In this regard, they also had a good amount of credited economic works to sustain their positions. Leaving aside the idea of restraint in public expenditure, a precept accepted by all liberal authors, the lines of reasoning these MPs used matched the fiscal thought of many Spanish authors, who supported the doctrine of the income tax but believed that it was very difficult to establish in Spain: Alcalá Galiano, for instance, highlighted the difficulty of ascertaining individuals’ income. Flórez Estrada stated that a single tax on income would be the ideal tax; however, the lack of reliable information on income made it unfeasible. An efficient taxation system should include a variety of taxes. Colmeiro shared the opinion that the problem was assessing individual wealth, which had to be done either through imperfect systems or inquisitorial enquiries. Domenech also believed that the impossibility of assessing income rendered it impracticable to set up a single tax on net income, the scientific ideal. Toledano defended a system consisting of several direct taxes on different sources of income (Alcalá Galiano Reference Alcalá Galiano1788, pp. 66-67; Flórez Estrada Reference Flórez Estrada1828, pp. 304-314, 331-332; Colmeiro Reference Colmeiro1873, pp. 464-472; El estudiante de Barcelona 1869, pp. 235-240; Toledano Reference Toledano1963, pp. 593-594, 600-603)Footnote 43.

Figuerola's first project is particularly interesting. Although he claimed that he was inspired by the British income tax, both taxes were formally quite different. Nevertheless, Figuerola's specific proposal had some precedents, which he probably knew, in that authors were aware that taxing overall incomes entailed major difficulties. Smith, in the Wealth of Nations, conceived the capitation tax not as a simple poll tax, but on a more complex basis, as a levy on all revenues accruing to the individualFootnote 44. However, assessment difficulties as well as dislike for indirect taxation seem to have caused him to support a tax on housing (Shehab Reference Shehab1953, p. 33). In fact, Smith (Reference Smith1976, pp. 840-842) considered that, concerning expenditure, housing rent was the best indicator of a taxpayer's wealthFootnote 45. In 1778, Britain adopted a tax on housing rent, taking the annual rent as a manifestation of ability to pay (instead of the number of windows or hearths). When establishing it, the difficulties of devising an equitable tax and of ascertaining the individual's real ability to pay was admitted. McCulloch (Reference Mcculloch1975, pp. 250-251) also praised a tax on housing rent, highlighting its advantages in terms of assessment and the difficulty of tax evasion, whereas J. S. Mill also believed that housing was, in general, a good indicator of incomeFootnote 46. Passy, a disciple of Bastiat, is an interesting case. He was an enthusiastic supporter of the single income tax, but, in order to assess net income, he believed that the most secure indicator was housing rent, as this was an expense that reflected citizens’ wealth and income accurately (El estudiante de Barcelona 1869, pp. 235-240)Footnote 47. Some Spanish authors also recommended a tax on housing rent. Alcalá Galiano (Reference Alcalá Galiano1788, pp. 61-62), following Smith, supported a tax on «the rent of the houses or of any ground» as the most convenient form of tax. Muchada (Reference Muchada1847, II, pp. 13-14), in his 1847 handbook, proposed the replacement of taxes on consumable commodities with a tax on housing rents in the form of a capitation that actually resembled Figuerola's 1868 personal tax scheme quite closely. Figuerola's tax was also reminiscent of the Contribution personelle-mobilière, one of the four direct taxes created in France after the Revolution. It was based on several items, the main one being housing rent. General and local councils fixed quotas for every town, whereas local assessors were in charge of allocating the individual tax burden (Schnerb Reference Schnerb1973, p. 73; Piketty Reference Piketty2001, p. 235). However, an essential difference was the generality of Figuerola's personal tax, one of its key characteristics.

5 The British Income Tax Model

By the time income tax was being debated in Spain, it had already had a long history in Britain. Many related issues had been discussed and tested (tax bases, graduation, differentiation of incomes, collecting procedures, etc.). First instituted in 1799 by Pitt during the Napoleonic Wars, it was repealed in 1816 and re-established in 1842 by Robert PeelFootnote 48. The quest for a durable method of fair allocation of the tax burden is to be found behind Pitt's attempt. Income tax would be a crucial feature of Victorian fiscal constitution, becoming a significant characteristic of British identity and a mark of the secure relationship between state and individuals, in contrast with continental states. However, O'Brien (Reference O'Brien2004: 301) believes that «it found little enthusiastic support among the classical economists»Footnote 49. The structure of the income tax restored by Peel was that devised by Addington in 1803. Pitt's previous 1799 model required the assessment of taxpayers’ total income, which was then taxed as a whole. Addington divided the tax into five different schedules corresponding to diverse types of incomeFootnote 50.

Such a complex structure was not to be found in Figuerola's project or in the Budget Commission's version. Figuerola's personal tax procedures were completely different from those of British income tax sharing, at most, two core features: personalisation and generality. Figuerola designed a tax which was direct, personal, general, and which was levied on individuals’ incomes assessed through a simple external indicator that was not difficult to check. Fairness was one of its problems; it could be regressive for large families with low incomes. Concerning collection procedures, the system of quotas prevented real proportionality. However, this was probably the only feasible system as there were no reliable statistics on national, provincial or local wealthFootnote 51.The personal tax designed in the Budget Commission was closer to Pitt's model, as it taxed individual income as a whole. The taxable base was personal income assessed through personal declaration after payments corresponding to other direct taxes had been deductedFootnote 52. The quota system to allocate tax shares subsisted, which in fact cancelled the equality principle. An interesting feature was that this tax, unlike the British version, made a rough differentiation between temporary and permanent incomes in the interest of tax justiceFootnote 53. A feature that both Figuerola's model and the Commission's income tax shared with the British tax was the involvement of taxpayers in the procedures to solve complaints addressed to the Treasury, an attempt to «create in our country free peoples’ habits», as the decree of 12 October stated. Regarding the administration of the personal tax, Figuerola's expectations that its costs would be much lower than consumption tax were well grounded; the British example showed that, in the mid-19^th century, the bureaucracy required for income tax had been reduced substantially.

Income tax was eventually accepted in Britain, but not without criticism. Pitt's bill faced tough opposition in the Commons, MPs’ complaints being not very different from what would be heard in the Spanish Parliament 70 years later. Income tax was established as an emergency measure; hence, once the war was over, it was difficult to justify its continuity. Peel re-established it in 1842 on a temporary basis, as a tool to fight budget deficit, expecting that it would foster industry and trade and reduce the cost of livingFootnote 54. However, criticisms were fierce: radicals and free trade supporters demanded a policy of retrenchment while they saw the tax as a threat to personal liberty. There were also advocates of establishing differentiation between the origins of income to overcome the unfair incidence of the tax. This latter debate lasted until the 1860s so that when Spain began to discuss personal tax, the British model was not yet fully established. It would not be until the last quarter of the century that it became consolidated as a permanent element of the fiscal system.

War circumstances in Britain were essential to the introduction of income tax in 1799. Levi (Reference Levi1988, pp. 137-144) put forward a suggestive theory that stresses an essential factor that contributed to its establishment: a widespread «quasi-voluntary compliance» of taxpayers with the income tax, without which transaction costs of managing the tax would have been too high. The British government managed to convince citizens that, despite the fact that it represented a new burden and a major intrusion into privacy, this tax was necessary and would be well managed. This would not have been achieved without a contemporary evolution of representative institutions and citizens’ control of government. This process took place in the framework of a relatively highly advanced economy with a well-developed and trained fiscal bureaucracy. In fact, a sound fiscal administration was crucial: the liberal principle of privacy excluded old inquisitorial proceedings, giving rise to a taxation system in which the tax burden was assessed through external indicators. Some of the income schedules allowed tax collection at source, a procedure that many considered as the key factor for the success of income tax after its re-introduction in 1842 and a safeguard against fraud. The rest of the revenue depended on the taxpayer's tax return and on the accuracy of control systemsFootnote 55.

Why did income tax not succeed in Spain? Certainly, there was a widespread admiration for the British income tax, and Figuerola's idea of promoting industrialisation and trade resembled that of Peel in 1842. However, extensive rejection of the tax, fiscal administration weakness and political matters contributed to its failure. British «quasi-voluntary compliance» was absent in the Spanish case. Figuerola's personal tax was rejected by most of the population (to whom it was merely a replacement for consumption taxes)Footnote 56. It was also rejected by local authorities, unable and unwilling to collect it, as reports addressed to the Parliament witnessedFootnote 57 and by the majority of MPs, who thought its foundations were defective. The Budget Commission's income tax bases were too ambitious and exceeded the capabilities of the Spanish administration, too inefficient and deprived of statistical information for this tax to succeedFootnote 58. Moreover, as some MPs underlined, there was no taxpaying culture in Spain, and fraud was widespread. The defence many MPs made of this unrealistic project shows ingenuity and doctrinaire positions, with which Figuerola's pragmatism clashed. Together with these elements, the political agenda of the new government was also significant; this may be seen by comparing the success of the tariffs policy with the failure of income tax. Trade liberalisation through a reduction in customs duties was a top priority on the political agenda. This had been the main concern of the Escuela economista during the previous years and was continuously present in public debate. Despite opposition, this bill was passed without major difficulties, representing Figuerola's most important success. A tax on incomes was another of Figuerola's targets in fiscal reform; however, this had been included in the agenda after the juntas’ abolition of consumption taxes. It also then became a policy priority because its revenues were indispensable for the Treasury. Contrary to tariff reform, there had been no previous process of debate and diffusion of its advantages to public opinion, which meant that it was hard to understand and difficult to accept. In any case, Figuerola became personally involved with the income tax. At the beginning of the debate, he declared that he linked his continuance in the cabinet to Parliament's passing of the personal tax bill (he had done the same only concerning the tariff reform)Footnote 59. Figuerola's model of income tax might have had a chance of success but the tax on incomes finally passed was unfeasible.

6 Concluding Remarks

Surprisingly, Figuerola's tax and the Budget Commission's reformed version have, in general, been ignored as attempts to set up an income tax in Spain. Moreover, they seem to have been soon forgotten as contemporary fiscal handbooks ignored them or simply mentioned them in passingFootnote 60. Later, only Ballesteros (Reference Ballesteros1933) and Sardá (Reference Sardá1944) considered Figuerola's project as a precedent of income tax. In general, authors have been quite unsympathetic, pointing out its flawsFootnote 61. A recent exception is Comín (Reference Comín2010: 230), who accurately noted that this tax was «too advanced for its time», stressing that «had it been consolidated, Spain would have pioneered the establishment of income tax».

Evidence suggests that this was a serious attempt to establish a tax on income in Spain. Its point of departure was accidental, but Figuerola became engaged with the introduction of the new personal tax. On the one hand, the revenues formerly provided by consumption excises were essential (therefore, a new tax was needed), but on the other hand, he believed in the long-term benefits that the introduction and development of a tax on incomes could bring to the Spanish tax system and the nation's economy in general. Figuerola's economic thought had much to do with this process. His faith in economic classical liberal principles (shared by the membership of the Escuela economista, the intellectual elite that was the main force behind the presence of economic thought in the political sphere), made him argue that their implementation would foster economic development and lead the country into the group of advanced European nations. Income tax, the ideal tax according to liberal political economy, would then be a keystone in the economic modernisation of the country. The British example showed the way. In line with his gradualist strategy and forecasting difficulties both of acquiescence and execution, Figuerola designed an imperfect, but plausible, income tax grounded on fiscal scientific principles.

Figuerola's tax raised major concern in Parliament (and also among economistas), provoking discussions on the form it should take. Eventually, the Parliamentary Budget Commission reformed its bases and turned it into a pure income tax, to be debated in the chamber. Two positions confronted each other. On the one side, income tax supporters defended the government's long-term plan to foster economic development, in which income tax was an essential part, as the British case had proved. On the other side, the opposition acknowledged its doctrinal soundness, but considered it impossible to set up in Spain. Their only alternative was cutting expenditure. Economic ideas played an important role in the debates. Both positions shared a common background, economic liberalism, whose principles they appealed to in their discourses. Differences lay in each party's considerations about how to apply theory effectively.

The debate showed that a considerable number of MPs had a good degree of economic competence, displaying their knowledge of economic liberal doctrines and policies put into practice in other countries. Economic debates aided the development of the process of institutionalisation of political economy in Spain. The expansion of political economy in society was considered (particularly, but not exclusively, by the economistas) as something to be encouraged, and Parliament was an instrument in this regard as discussions were widely publicised. As Ruiz Gómez, MP, said, complaining that the population should have a better awareness of economic issues, a deeper implication of MPs in fiscal debates would foster the spread of knowledge on these mattersFootnote 62.

The government plan to establish an income tax in Spain did not succeed with several causes interacting in this failure. Most of the population rejected a tax that came to replace the detested consumption taxes, abolished by the Revolution. The authorities were also very reluctant to apply the tax and the eventual bases of the income tax made it almost impossible to control by fiscal authorities (this leaves the doubt whether Figuerola's more feasible primitive bases would have had a better chance). There was also a factor connected to the political agenda; contrary to tariff reform, income tax rapidly became a political objective, without previous presentation and discussion in public opinion, which decreased its likelihood of being accepted.