David R. Henderson, Ph.D. Economics

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David Henderson on Why Canadian-U.S. Union is a Bad Idea

canadiansintheus.com, January 3, 2003

The main problem with the union of Canada and the 
United States is that it reduces 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 
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. 

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 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 wrecks 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, this is a far smaller danger than it 
was when the U.S. states were merged in 1787.       

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