Why the sovereign debt crisis could lead to a federal fiscal union: the paradoxical origins of fiscalization in the United States and insights for the European Union

ABSTRACT

This paper shows that the emergence of the federal power to tax is the result of a sovereign debt crisis at the state level. I analyse the fiscal history of the early United States (US) to demonstrate how the institutional flaws of the Articles of Confederation, mainly the central budget based on contributions from the states, so-called ‘requisitions’, led to a sovereign debt crisis on the state level, which triggered taxpayers’ revolts in 1786/1787. This social unrest, in turn, was perceived by the political élite as an endogenous threat to the union and paved the way for the fiscalization of the federal government, i.e., the creation of a fiscal union with the federal power to tax based firmly in the Constitution of 1789. This analysis concludes with four insights for the European Union (EU).

KEYWORDS:

• Euro crisis
• EU economic governance; fiscal federalism
• fiscalization
• fiscal union
• US power to tax

Acknowledgements

I am particularly grateful for discussions and valuable comments I received on this paper to Alexander Trechsel. I am also indebted to Stefano Bartolini, Wiesław Bokajło, Karolina Borońska-Hryniewiecka, Carlos Closa, Pepper Culpepper, J. Bradford DeLong, Roberto Dominguez, Max Edling, Robin L. Einhorn, Federico Fabbrini, Sergio Fabbrini, Johannes Fleck, Philipp Genschel, Katarzyna Granat, Adrienne Héritier, Markus Jachtenfuchs, Thorsten Kingreen, Amie Kreppel, Ramon Marimon, Karol Mazur, Katharina Meissner, Craig Parsons, Mark A. Peterson, Paul Pierson, Jack Rakove, Jonathan Rodden, Alberta M. Sbragia, Waltraud Schelkle, Jack Seddon, Emmanuel Sigalas, Martin Staniland, Sven Steinmo, Francisco Torres, Amy Verdun, Joseph H.H. Weiler, Barry R. Weingast, Anna Wenz-Temming, Olivier E. Williamson, Marijn van der Sluis, John Zysman, participants of the doctoral seminar ‘Making Sense of the American Revolution’ at the University of California, Berkeley in spring 2015, as well as three anonymous reviewers for their helpful feedback. The usual caveat applies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes on contributor

Tomasz P. Woźniakowski is a PhD candidate at the Department of Political and Social Sciences, European University Institute in Florence and was a Fulbright-Schuman Fellow at the Department of History, University of California, Berkeley (January-July 2015). Address for correspondence: Department of Political and Social Sciences, European University Institute, Via dei Roccettini 9, I-50014 San Domenico di Fiesole (FI), Italy. Email: [email protected]

ORCID

Tomasz P. Woźniakowski http://orcid.org/0000-0001-9475-7845

Abbreviations

DHCR	=	Kaminski, J. P. et al. (eds) (1976-), The Documentary History of the Ratification of the Constitution. Madison, Wisconsin.
PAH	=	Syrett, H. C. (ed.) (2011), The Papers of Alexander Hamilton: Digital Edition, Vol. IV-V, Charlottesville: University of Virginia Press.
PGWCS	=	Abbot, W. W. (ed.) (1995), The Papers of George Washington: Confederation Series, Vol. II-IV, Charlottesville: University of Virginia Press.
RFC	=	Max Farrand (ed.) (1911), The Records of the Federal Convention of 1787, Vol. I-IV, New Haven: Yale University Press

Notes

1 ‘New York Ratifying Convention. Remarks, 20 June 1788’, PAH V: 19.

2 See Tortola (2014), for an overview of this literature.

3 For instance Fuest and Peichl (2012) provide five different elements of a fiscal union - it is sometimes difficult to know which elements or definitions scholars use when they write about a ‘fiscal union' or ‘fiscal integration’ (see e.g. Daniele and Geys 2015).

4 See, however, Steinbach (2015) for an analysis of the pre-Constitution events related to the mutualization of sovereign debt.

5 I am grateful to Max Edling for this suggestion.

6 For the history of this rebellion see Richards (2002).

7 In total borrowed funds covered 33 per cent of the total cost of war, while fiat (paper) currency - 67 per cent (28 per cent in Congressional monies, and 39 per cent in States’ monies), Perkins (1994: 103): table 5.4.

8 ‘[It] is known that the State taxes have generally been very inconsiderable’ as Secretary of the Treasury Oliver Wolcott declared in 1796 (citation from Edling 2014: 52).

9 ‘To George Washington from John Jay, 27 June 1786’, PGWCS IV: 130–132.

10 ‘From George Washington to Henry Knox, 26 December 1786’, PGWCS IV: 481–484.

11 See Maier (2010: 11–26), where she provides excellent analysis of the letters Washington was receiving about the popular unrest from John Jay, James Madison and Henry Knox, among others, which confirmed his fears that the union is on a brink of collapse.

12 ‘The Federalist No. 33’, PAH IV: 466.

13 ‘The Federalist No. 21’, PAH IV: 397–398.

14 For instance, when Edmund Randolph presented the Virginia Plan, which opened up the Convention, he started with the analysis of the situation of the Union. Four out of six problems he identified concerned revenue: ‘inefficiency of requisitions’; ‘rebellion (…) as in Massts.’ led by Daniel Shays; urgency of foreign debt; and ‘the havoc of paper money’ (RFC, I: 18–19).

15 ‘first includes impost duties on all imported goods; this species of taxes it is proper should be laid by the general government; many reasons might be urged to shew that no danger is to be apprehended from their exercise of it. They may be collected in few places, and from few hands with certainty and expedition. But few officers are necessary to be imployed in collecting them, and there is no danger of oppression in laying them, because, if they are laid higher than trade will bear, the merchants will cease importing, or smuggle their goods. We have therefore sufficient security, arising from the nature of the thing, against burdensome, and intolerable impositions from this kind of tax’, Brutus V, New York Journal, 13 December 1787, DHRC XIX: 415.

16 ‘Europe will be forged in crises, and will be the sum of the solutions adopted for those crises’

17 See for instance: Macron and Gabriel (2015), where French Economy Minister and German Vice-Chancellor called for the creation of a Eurozone budget with the tax and borrowing powers.

18 See, for instance, a common statement of French and German foreign ministers issued few days after the referendum when the UK voted to leave the EU, where they called for establishing fiscal union by 2018: ‘these [fiscal] capabilities should start by 2018 at the latest to support investment in the member states most severely hit by the crisis’ (Ayrault and Steinmeier 2016: 9). Most recently, the High Level Group on Own Resources, composed of members appointed by the European Council, the Commission and the Parliament, in its final report emphasized that ‘the withdrawal of the UK from the EU and the discontinuation of the ‘British rebate’ (…) provide a unique window of opportunity to review how we measure the real costs and benefits of the EU’ (Monti et al. 2016: 7).

Additional information

Funding

This work was supported by the US State Department and the Directorate-General for Education and Culture of the European Commission, under Fulbright-Schuman Grant [25.04.2014], administered by the Commission for Educational Exchange between the United States and Belgium; the European University Institute under the Exchange Programme with University of California, Berkeley [04.02.2014]; Ministry of Foreign Affairs of the Republic of Poland, under PhD Scholarship [09.07.2012]; College of Europe and Arenberg Foundation under ‘College of Europe-Arenberg European Prize: Exploring Federal Solutions’ (24.02.2015); and Fondation Jean Monnet pour l' Europe under the Henri Rieben Scholarship (19.06.2015).