
I came across this article that I wrote over 20 years ago for a Canadian audience. It’s a propos now. I’ve made only small edits.
The main problem with the union of Canada and the United States is that it would reduce the number of competing political jurisdictions in the world. This is almost always bad. The more political jurisdictions we have competing for residents, the less oppressive any one of them can be. That’s why no state in United States has dared to set a marginal income tax rate in excess of 15%. If one were to do so, it would lose a large percent of its high earners. It’s also what constrains state governments to restrict the level of welfare payments. [Since I wrote this, California has come close to 15%. The reason the state government can do so, I think, is that it can take a lot of people’s money before they’re willing to leave for more-hostile weather.]
If it raised them too high, it would gain residents, but the kind it would gain are those who want welfare, not those who are productive. Given how both state supreme courts and the U.S. Supreme Court have ignored many of the restraints on government in their Constitutions, this political competition is one of the few restraints left.
This might come as a surprise to Canadians, who don’t see much political competition among provinces to keep tax rates low. They’re right in observing the empirical fact, but the empirical fact is itself evidence of what I’m saying. What limits competition among Canadian provinces is a huge implicit tax that the federal government puts on those provinces that keep tax rates low and a huge subsidy to those who set them high. The tax is called “equalization payments.” A province like Alberta that keeps tax rates low will see its per capita income rise more quickly than that of other provinces and will thus be a bigger net payer of equalization. A province like Newfoundland, Quebec, New Brunswick, or Manitoba that sets tax rates high and also hurts its economy in other ways will see its equalization payments to itself rise. So the federal policy has limited tax competition. This, incidentally, is why it was so important for former Treasury secretary Paul O’Neill to oppose (which he, fortunately, did) the EU’s (or the OECD’s–I’ve forgotten which) attempts to limit tax competition among nations.
So those who want more economic freedom and the accompanying economic growth that goes with it should be pushing, not for mergers of countries, but for break-ups. That’s why, for example, I would like to see the United States break into smaller jurisdictions. We would get more political competition, lower tax rates, and, as a side benefit, a less powerful U.S. military (because there would no longer be a U.S.)
There is a downside. Political jurisdictions that are independent tend to restrict trade across borders, something that states and provinces cannot legally do. But in this era of negotiated trade agreements to reduce tariffs, that is a far smaller danger than it was when the U.S. states were merged in 1787.
READER COMMENTS
Mactoul
Jan 15 2025 at 10:39pm
Majority of the people worldwide do not find themselves being subject of competition among political jurisdictions. Rather the reverse.
As Mao is said to have told Nixon when the latter pressed him to allow emigration– how many millions do you want?
So there are plenty of people but few desirable jurisdictions. Hence intense competition for a Western residence permit.
In my opinion, gains from free trade within a particular jurisdiction is far greater than any putative loss in political or economic freedom.
Brandon
Jan 16 2025 at 12:36am
Prof Henderson has obviously never read The Federalist Papers. The driving force for federating was to prevent smaller jurisdictions.
Those smaller jurisdictions wouldn’t limit themselves to magically competing with each other in the realm of tax policy. They would also compete with each other militarily. The American federalists feared that, absent a federal (“peace”) pact, North America would end up in anarchy (balance of power geopolitics), just like Europe. And they were right.
The Prof makes a remarkable argument in favor of union between Canada and the US when he observes:
He sandwiches this in between observations about Canada’s uncompetitive tax regime and Cold War-era American libertarian dogmas about more countries equaling more political competition.
So Canadian provinces — uncompetitive and populated with far less productive workers – shouldn’t join the US as states because…US states are part of a federation that, among many other amazing things, enhances jurisdictional competition?
Jon Murphy
Jan 16 2025 at 9:16am
Do you have a citation? My reading is exactly the opposite. The Federalist system is precisely one that promotes competition among the various polities. The Constitutional Convention did not create larger jurisdictions. It aimed to prevent harmful forms of competition (tariffs, war, etc) while promoting good forms of competition (freedom of trade, freedom of movement, etc).
Plus, the Federalist Papers explicitly promote many competing jurisdictions and ideas (eg Federalist 10).
steve
Jan 16 2025 at 4:45pm
In Federalist #10 Madison makes the case for a larger republic. If you read on from this quote he amplifies his argument.
”
The question resulting is, whether small or extensive republics are more favorable to the election of proper guardians of the public weal; and it is clearly decided in favor of the latter by two obvious considerations:
In the first place, it is to be remarked that, however small the republic may be, the representatives must be raised to a certain number, in order to guard against the cabals of a few; and that, however large it may be, they must be limited to a certain number, in order to guard against the confusion of a multitude. Hence, the number of representatives in the two cases not being in proportion to that of the two constituents, and being proportionally greater in the small republic, it follows that, if the proportion of fit characters be not less in the large than in the small republic, the former will present a greater option, and consequently a greater probability of a fit choice.
In the next place, as each representative will be chosen by a greater number of citizens in the large than in the small republic, it will be more difficult for unworthy candidates to practice with success the vicious arts by which elections are too often carried; and the suffrages of the people being more free, will be more likely to centre in men who possess the most attractive merit and the most diffusive and established characters.”
Steve
Brandon
Jan 19 2025 at 6:14pm
Hey Jon, can you think of a single example of a large jurisdiction that was created via the constitutional convention? Just one?
I can! This jurisdiction “aimed to prevent harmful forms of competition (tariffs, war, etc) while promoting good forms of competition (freedom of trade, freedom of movement, etc).” This jurisdiction is still around today, and if the US were to make joining it the centerpiece of its foreign policy, the world would be in a much better place than it is today. Go ahead and say it aloud with me: it was a federal jurisdiction. Federation as a foreign policy was the libertarian position of foreign policy for centuries before Rothbard sought to fusion with US isolationists during the Cold War.
Prof Henderson is verklempt with my tone, so perhaps you can answer my simple question: “So Canadian provinces — uncompetitive and populated with far less productive workers – shouldn’t join the US as states because…US states are part of a federation that, among many other amazing things, enhances jurisdictional competition?”
David Henderson
Jan 16 2025 at 6:51pm
You write:
You would get more favorable treatment from me if you didn’t make charges about what I have read or not read. You don’t even know me.
Craig
Jan 16 2025 at 4:34am
“Article XI. Canada acceding to this confederation, and joining in the measures of the united states, shall be admitted into, and entitled to all the advantages of this union: but no other colony shall be admitted into the same, unless such admission be agreed to by nine states.” US Article of Confederatiom 1777
Who are you to question nearly 250 years of Manifest Destiny? 😉
MarkW
Jan 16 2025 at 3:42pm
Unfortunately, that seems like a much greater risk than it was 20 years ago, to the extent that if the US were broken into multiple jurisdictions, trade barriers would seem almost inevitable.
David Henderson
Jan 16 2025 at 6:50pm
I agree.
MarkW
Jan 17 2025 at 8:56am
Compounding that problem, the barriers to migration between nations are much tighter than in the past, so breaking the US up would probably not mean just greater barriers to trade but also to foot voting. Given the apparent human inclination toward nationalism and ‘us vs them’ thinking, we’re probably best off with larger nation states and competition between territories within them, with the territories having as much autonomy and responsibility as possible.
David Henderson
Jan 17 2025 at 11:37pm
Fair enough.
On the issue at hand, though, would you advocate a merger of the U.S. and Canada?
Mike Burnson
Jan 17 2025 at 8:38pm
Thank you, Dr. Henderson, for another interesting and thought-provoking commentary. In reading it, I recalled the “definition” of a think-tank from years ago: they study reality to see if it works in theory.
The USA is already proving the destructive effect of high taxes among its competing entities. California, Illinois (my home state, a Chicago boy), and New York have been losing populations as Texas, Florida, Tennessee, and both Carolinas are growing faster than their housing stocks can handle. Excessive taxation has yielded clearly destructive effects. (NOTE: Illinois gained population in 2024, first time in 12 years, solely because Texas bussed some 130,000 illegals there. The state “grew” by only half that number.) Competition is working as low-tax states are booming.
Perversely, voters in the loser states still keep voting for the exact same politicians who wrought their crushing problems. High taxes have resulted in high deficits and debt, lost jobs, lousy roads, lousy schools, etc.
Herb
Jan 21 2025 at 12:33am
“Perversely, voters in the loser states still keep voting for the exact same politicians who wrought their crushing problems. High taxes have resulted in high deficits and debt, lost jobs, lousy roads, lousy schools, etc.”
Not I, but that does not appear to matter in CA.
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