An American Model for Europe? Tax Policy and Federalism in the United States

By requiring fiscal contraction in nations facing high and rising unemployment, the economic crisis in the Eurozone has renewed interest in establishing a European fiscal union to match monetary union so that a federal treasury could support countries in economic difficulties. Fiscal union is opposed by those who fear that some countries, especially poorer ones, will use a central treasury to subsidize imprudent fiscal policy. Advocates have pointed to the United States as an example of a successful fiscal federalism, a union that has provided support for poorer regions and those facing economic difficulties but without imposing undue burdens on others. Even while democratic procedures have allowed needy regions to obtain significant national help, checks on majority rule built into the American constitution have protected affluent regions from demands for excessive transfers. One should be careful, however, not to exaggerate the success of the American model. Distributional disputes have contributed to some of the nation’s most bitter conflicts, including the Civil War of the 1860s; and the system of checks and balances not only contradicts democratic values but has often prevented effective government. With greater variation in economic circumstances than in the United States, a European fiscal union may face even greater pressure to redistribute income, possibly leading to the establishment of even more checks on democratic action than in the United States, even to the point of rendering moot the promise of fiscal union