By Benjamin Studebaker
In the last entry in this series, I emphasized that modern states create the conditions for commercial society but lack the capacity to manage its consequences.[1] This produces the contradiction of commerce – the tendency for ungoverned economic integration to produce political disintegration. Instead of producing a supranational society, ungoverned commerce diminishes sociability. Instead of encouraging technological growth, ungoverned commerce encourages labor-intensive production processes, reducing growth rates. Over time, commerce reintroduces the possibility of great power war.
To receive the benefits of commerce in full, it’s necessary to achieve political union as soon as possible, before commerce destroys the conditions that make commerce possible. Mere internationalism is insufficient. A federal republic must be constructed that goes beyond the level of the national, that is supranational in character. This supranational federal republic (SFR) must be large enough and strong enough to govern flows of money and people. It cannot be subject to the squabbling, rivalrous nation-states. By making it possible, for the first time in human history, to govern transnational flows, the SFR creates new cooperative possibilities, securing for individuals the freedom to act on the basis of human values that ungoverned flows of money and people foreclose.
In this piece, I’ll discuss how, at the level of policy, an SFR unlocks these possibilities. Without political integration, flows of money and people are powerful and overdetermining. Modern states are pushed into competition with each other to attract money and to repel unwanted migration. Such competition results in tax rates and wages that are too low to support citizens’ projects.[2] It leads to punitive, inhumane immigration policy.[3] An excessive, one-dimensional kind of competition crowds out other ways of thinking and acting, attacking pluralism and limiting the ability of citizens to discover new ways of cooperating with one another. It is lethal to social and political innovation, and it produces nothing but path dependency.
In academic literature, these tendencies are described as “glocalization” and “fiscal federalism.”[4] As economic integration creates political and social problems – as the weak tax base erodes state capacity and poor wage growth undermines the felt security of consumers – citizens tend to become opposed to economic integration and to transnational commerce in general. They demand devolution and localism. But regional and local governments have very limited ability to control mobile flows of money and people. They are, in practice, even weaker than the nation-states and international institutions. While they are good at dealing with problems that begin and end in their territory, they are very bad at dealing with commercial flows. But if citizens cannot find a way to govern the flows – if they feel it is inevitable that they will be subject to the flows – they prefer to have their subjection mediated by more proximate structures. This point goes all the way back to Tocqueville – if there isn’t enough felt mediation, citizens recoil from the central government, which they come to regard as despotic.[5]
Our task is to show that there is a real possibility of governing the flows. We can do more than change the way subjection is mediated. We, as citizens, really can reappropriate the flows to realize our values, understood in our terms. Consider the mobile flows of money and people as a fierce, flowing river. The federal principle must make it possible for these flows to be directed and managed. A large river can look placid when it is allowed to flow from point A to point B. But if you make interventions – if you insert boulders and obstacles to change the river’s flow – its power becomes clear. Whitewater rapids emerge. It almost seems as if the river possesses a will to overcome you. To create and sustain these points of political entry – these cataracts – it requires an enormous amount of state capacity, far more than any one country can provide. But this capacity must be realized as individual capacity. It must be experienced as an increase, rather than a decrease, in the citizen’s powers.
Fiscal Cataracts
Suppose you are a scientist or an artist who wishes your work to be available even to the poorest of the poor. You don’t want your work to be commercialized – you don’t want to sell it. You also want to avoid audience capture. You want the freedom to develop, and you know that if you depend on your audience for financial support, that will limit your ability to experiment and develop in new directions. But, like everyone else, you need to make a living. How do you proceed?
You might apply for a position at a university. You think you’ll teach a few classes to pay the bills and spend the rest of the time creating art and doing science. But as states cut tax rates to attract mobile capital flows, there is less and less money to create jobs for artists and scientists in the university system. So, even as the world gets richer, it becomes more difficult to be an artist or a scientist. More artists and scientists are forced to commercialize their work, and that commercial competition limits their freedom to create. They can only sell work that has obvious, immediate value to consumers or investors. And the artists and scientists who stay in the university system increasingly find that they are subject to different competitive logics. They are forced to leverage identity signifiers to make the case that they deserve funding. They must apply to external organizations for grants. They have to demonstrate that they are getting referenced and cited. All these forms of competition instrumentalize their work and estrange artists and scientists from the love of their crafts and areas of study. It results in a very large amount of inaccessible drivel, made to appease bureaucrats.
A large number of artists and scientists are unable to make it in the university system or in private enterprise. They have to go get other jobs, and they resent this. Their resentment is eventually expressed politically, often in and through cultural antagonisms. The artists and scientists become both woke and anti-woke. They become hostile to China or they adopt a Maoist posture. Their cultural production generates and thrives on anger and enmity. Because they were deprived of the freedom to be artists and scientists, they become warmongers.
An SFR solves this problem by taxing mobile wealth. Thomas Piketty famously proposed a global wealth tax in 2013. Even very low tax rates on mobile wealth, on the order of 1% on fortunes between $1 million and $5 million, and 2% on fortunes above $5 million, would bring in more than 2% of GDP in the developed world, providing more than $1 trillion in annual revenues from that part of the world alone.[6] There are three key reasons why Piketty’s proposal has gone nowhere, politically:
1. While in principle nation-states are free to impose this kind of tax on their own, in practice the mobility of wealth makes these taxes easy to avoid or evade.
2. In confederal systems like the European Union, there is insufficient coordinating capacity to bring such a program about.
3. When states attempt to negotiate tax rates at the international level, they fail to agree upon rates that sizably increase revenues. Instead, they manage only to forestall further erosion of fiscal capacity.
Only an SFR can tax mobile wealth and sustainably raise the effective corporate tax rate. But because the horizon of political possibility remains internationalist, theorists like Piketty are unable to argue for the political transformation that is required. Instead, he largely argues for the wealth tax as a policy, amongst other policies that would, in theory, restore fiscal capacity, but which, in practice, cannot be implemented within the confines of the present international system.[7] There is only brief consideration of “social federalism” and this discussion never rises to a political level. All Piketty is able to do is make abstract reference to the need for transnational justice.[8]
The problem with an emphasis on transnational justice is that it reinforces in the minds of citizens the notion that our purpose is to take wealth from the rich states and give it to the poor states. International redistribution creates enormous opposition within rich states, and the expectation that an SFR will involve interstate transfers creates unrealistic expectations within poor states. In practice, invocations of justice reinscribe the distinction between the core and the periphery, between the west and the rest. What is needed is a wealth tax that takes place into account. Taxes must empower the citizens who live in the countries where the wealthy were born, where they live, and where their businesses are located.
Rather than transfer wealth from the rich states to the poor states, the SFR should use its taxation powers to empower the neighbors of the rich, the people who live in the same places. Revenues from the wealth tax and corporate income taxes could be distributed to the nearest political units.
Consider someone like Elon Musk. Musk was born in South Africa. He then immigrated to Canada, and finally to the United States. Today, his companies operate in the US, Canada, Mexico, the UK, Germany, the Netherlands, Ireland, Singapore, and China.[9] The people who live in each of these places plausibly have some claim to any revenue the SFR takes in by taxing Musk’s wealth and his companies’ corporate income. They are the ones who work for his companies, who provide infrastructure to service his businesses, who provide education and healthcare to him and to his employees.
If this wealth is instead redistributed globally on the basis of the theories of global justice that draw the greatest attention within the academy, the people who live and work in the shadow of the billionaires will in many cases fail to receive the benefits of the wealth tax. They won’t be any better off than they are now, and they won’t be sufficiently motivated to organize for federalism. Place matters for political reasons – it matters if we want to generate new cooperative possibilities and prevent commerce from producing war – regardless of whether we take place to be relevant for justice.
The revenues should not be distributed to national governments, but instead to the government that is nearest to the places where corporations and billionaires physically operate. This means that often cities would receive the benefits of these taxes. By invigorating cities, the SFR would make the global local in a thick, material sense. The SFR would be a vehicle for empowering people at the local level to more effectively dispose of the wealth and income they socially generate. It would create “free cities,” cities that have a significant degree of fiscal autonomy from national governments.
The free cities could continue competing to attract mobile investment, secure in the knowledge that the SFR will collect the revenue they fail to collect. But in some cases, there would be no municipal government immediately proximate to the places where economic activity occurs. In these situations, a county or administrative region might receive the funds instead. This would allow the SFR to help develop services in areas where agriculture and resource extraction remain prominent, qualifying the tendency for this wealth to be transferred elsewhere. SFR funds could empower these counties to reduce environmental impacts without undermining living standards for local workers. The inclusion of the counties in the system could help generate political support for the SFR, as this would explicitly commit the SFR not merely to the growth of the cities, but to the welfare of those who live outside them.
Since national governments would not receive revenues directly from the SFR, they would need to negotiate with the free cities and counties for access to this funding. As the fiscal capacity of national governments declines, their need to cooperate with the free cities and counties would grow. They would increasingly function as advocates for underdeveloped regions, for places where corporations and billionaires do not operate. In this way the national governments would facilitate political dialogue between highly developed and underdeveloped regions. Free cities and counties will need national governments to help them manage flows of people, incentivizing revenue-sharing. The SFR will be able to mediate negotiations between free cities and counties and national governments, ensuring these revenue-sharing arrangements remain reasonable for both sides.
Compensation Cataracts
While the free cities could continue to compete on tax, secure in the knowledge that the SFR will collect revenue for them, we do not want the free cities competing on wages. If there are fiscal cataracts without compensation cataracts, this will produce large cities with enormous amounts of economic inequality. Such cities will be politically unstable and suffer from continuous demands for welfare state expansion and redistribution.
This problem can be avoided through predistribution imposed at the sectoral level by the SFR. The SFR should make a distinction between tradeable and non-tradeable sectors, between sectors that are mobile and those that are not. High minimum wages should be imposed in the sectors where there is a real possibility of firms relocating to gain access to cheap labor. This arrangement will prevent cities from suppressing wages to attract investment. As the SFR distributes tax revenue to the places where economic activity takes place, it is pivotal that cities are not incentivized to try to game the tax system by offering wage breaks.
There are some sectors that are not mobile, but where labor remains a dominant factor of production. These sectors will tend to dominate in the free counties, where agriculture and resource extraction still dominate. For instance, it is only possible to mine lithium in the regions where there are large lithium deposits. But mining companies may prioritize operating lithium mines in the regions of the world where labor costs are lower, delaying mining operations in the regions where the costs are higher. In such sectors, there is good reason to impose a limited minimum wage, so as to reduce or eliminate the disadvantage for regions with high labor costs.
There are other immobile sectors where labor is a less significant factor of production. In these sectors, automation has often diminished the need for labor, without eliminating it outright. A limited minimum wage in these sectors can encourage further automation, accelerating technological development.
By keeping labor costs relatively high in many sectors, the SFR pushes corporations and billionaires to prioritize labor-saving innovations. In time, compensation cataracts may lead to an economy where much less work needs to be done. Currently, when labor is saved, it creates a problem for workers, who need employment to obtain the means of subsistence. Alone, compensation cataracts accelerate this process, causing unemployment. But in combination with the fiscal cataracts, the compensation cataracts open up new possibilities.
Through /these fiscal cataracts, the SFR will enable the free cities and counties to collect large amounts of revenue as more sectors are automated. Citizens in the free cities and counties will have political choices about what to do with these funds. They can use these funds to create for themselves the lives they want, instead of the lives necessity once imposed. The free cities and counties could use SFR funds to create opportunities in the arts and sciences. Instead of creating unemployment, automation could empower citizens to become artists and scientists. Instead of generating economic inequality, technological change would facilitate an expansion of human possibility. By freeing the citizens from necessary labor, it could create a citizenry able to decide for itself what ends are worth pursuing. It would make it possible to realize the dreams of theorists like Aristotle, without the slavery and domination on which those dreams formerly depended.
There would, of course, be intense debates about what kinds of art and science ought to be funded. Different cities and counties could reach different conclusions on these questions. They could organize the arts and sciences in different ways. This would allow for a plurality of competing funding models and for diverse artistic and scientific schools to be established. Cities and counties would become known for the particular kinds of art and science they produce, and in time this would cause them to become more distinctive. But it would be their unity within the SFR that would create the conditions necessary for this distinctiveness. Only through the SFR can the cities and counties obtain the resources they need to support these new kinds of activity. Artists and scientists in different places can dialogue with other only through the peace the SFR maintains.
Migration Cataracts
Now, as you can imagine, when the fiscal and compensation cataracts work together, they create situations where there are large numbers of high-paying jobs in highly desirable free cities and counties. Concentrations of economic opportunity will produce a strong desire on the part of people living outside these areas to move to them for work. The free cities and counties will need some of these workers, but not all of them. If too many people move to the free cities and counties too quickly, local infrastructure will be overwhelmed. Even the revenues provided by the SFR cannot accommodate an unlimited amount of migration into the free cities and counties. There will, therefore, be a need to limit the number of people who can move into these places in a given period of time.
The need to throttle migration could provide national governments with a means of negotiating for funding for underdeveloped regions. National governments could provide immigration controls for the free cities and counties, and in exchange the free places could invest in the development of their hinterlands.
But these negotiations will only take place if both sides are bound to participate in them. Left to their own devices, the free cities will attempt to transform themselves into free castles and avoid investing in neighboring regions. And, conversely, if the nation-states can, they will extract revenue from the free counties at gunpoint. The SFR creates conditions under which the free places and the nation-states can have social relations. Bargaining between the free places and the nation-states is mediated by the SFR, which has the right to reject deals that extract too much from the free places or provide insufficient investment in the hinterland.
Technology Cataracts
The SFR can also be a vehicle for pushing corporations and billionaires to implement new technology. When expensive new technologies emerge, decisions need to be made about whether those technologies are worth implementing. Often, implementation leads eventually to further investments in technology, substantively improving it and reducing the cost. But individual firms and billionaires are often reluctant to implement technology that will increase the cost of the goods and services they provide in the near-term. And so, when countries like the US or the EU attempt to regulate these things, they have to weigh the long-term benefits of implementing new technology against the costs of making their products less competitive in the near-term. By implementing standards across the board, leaving firms with no option to relocate to a territory where the rules don’t apply, the SFR allows for a greater harmonization of standards, improving outcomes for the environment, worker safety, and innovation.
Maintaining the Cataracts
When corporations, billionaires, free cities, and nation-states violate the rules of the SFR, there must be a disciplinary mechanism. But if this mechanism takes a militarized form, this will raise concerns among the citizens, who will understandably become concerned that they’re living in an empire. A regression to the militarized logic would ultimately be self-defeating – it would prevent the SFR from developing into a genuinely new type of polity. Instead, it would degenerate into just another modern nation-state.
Those who violate rules governing commerce should pay a commercial price, such that their incentive to violate the rules disappears. The SFR should impose fines on tax avoiders, wage suppressors, rogue cities, rogue states, and retrograde production processes.
Revenues raised through fines should not be returned to the cities that are proximate to places where economic activity is taking place. After all, the corporations, billionaires, cities, and states in those areas are breaking the rules. Instead, these revenues should be used to build up the capacity of the SFR to pursue the particular individuals responsible for the rule-breaking.
Persistent violators should be arrested and charged, as individuals, with having violated supranational law. This would include both the individuals who exercise decision-making power in corporations as well as the individuals who exercise decision-making power in cities, counties, and nation-states. Illegal actions taken by these units as corporate persons would be understood as criminal acts committed by the particular individuals proximate to those acts. The more rules are violated, the more SFR revenue would be collected via fines, and the stronger the law enforcement capabilities of the SFR would become.
Corporations, cities, counties, and nation-states should be strictly prohibited from spending money on military forces. Military expenditure by the SFR becomes necessary only in so far as the SFR is unable, ultimately, to integrate some areas of the world into its structure. If such forces do indeed become necessary to protect the SFR from external states, the SFR should draw the revenue to pay for these forces from the funds it would otherwise disperse to free cities and counties. That is to say, the funds would come directly from individuals that possess large amounts of wealth and corporations that possess large amounts of income, bypassing cities, counties, and nation-states.
The more states remain external to the SFR, the more the SFR will have to behave like a conventional large nation-state. If very large, powerful states remain external, a large percentage of SFR revenue will have to be spent on union defense, leaving only a limited amount of funds for cities and counties. Such an SFR will struggle to make a positive case for itself, as it will be too militarized to create the conditions under which its citizens will be able to choose their own lives. It is therefore necessary to limit, as much as possible, the set of states and territories that are excluded. Those who hope that security threats will create the conditions for a federal union do not grasp the positive purpose of such a union – they misunderstand the federal principle. The whole point of a federal union is for it to be something other than a mere empire, something other than a device for collective defense.
It's for this reason that, in the essays to come, I will put such a strong emphasis on legitimation. To succeed, the union needs to be as inclusive as it can possibly be without compromising its ability to create and maintain the cataracts that create the conditions for free places. This means that many different kinds of states need to join the union, but not on terms that will destroy the union’s ability to perform its functions. This is a needle that needs to be carefully threaded. Otherwise, the union will drown in fines and militarism, never achieving its goals.
Over time, the objective would be to reach a stage at which fines are rarely necessary and military expenditures are reduced to a bare minimum. But for this to happen, the SFR must be politically structured in such a way that the rules it issues have legitimacy. In the next three entries in this series, I’ll offer a detailed account of legitimacy. I’ll lay out how the SFR can be structured procedurally to meet the legitimation demands of core constituencies that have the power to prevent the SFR from being formed. But I’ll also discuss cases in which legitimation demands are likely to conflict with the union’s core functions and objectives. In these situations, accommodation is not possible, and a concerted effort must be organized to overcome resistance. I’ll consider three different constituencies – the liberal democratic nation-states, the citizens of these states, and the People’s Republic of China. While citizens can be fully accommodated, nation-states can only be accommodated to a point. In some cases, citizens will need to organize to overcome resistance from nation-states. They will only undertake the struggle for a federal union if they see its positive value, and therefore the fate of any union proposal depends, ultimately, on its ability to motivate them.
[1] Benjamin Studebaker, “Why Federalism: The Problem that Needs to be Solved,” Streit Council, 2024, https://www.streitcouncil.org/post/why-federalism-the-problem-that-needs-to-be-solved.
[2] Harry Garretsen and Jolanda Peeters, “Capital Mobility, Agglomeration and Corporate Tax Rates: Is the Race to the Bottom for Real?” CESifo Economic Studies 53.2, 2007, pp. 263-293. But see also the more recent changes in public policy in the rich states, e.g., Lukas Haffert and Philip Mehrtens, “From austerity to expansion? Consolidation, budget surpluses, and the decline of fiscal capacity,” Max Planck Institute for the Study of Societies, Discussion Paper No. 13/16, 2013, https://hdl.handle.net/10419/90166.
[3] Graeme Boushey and Adam Luedtke, “Fiscal Federalism and the Politics of Immigration: Centralized and Decentralized Immigration Policies in Canada and the United States,” Journal of Comparative Policy Analysis 8.3, 2006, pp. 207-224.
[4] David R. Agrawal, Jan K. Brueckner, Marius Brülhart, “Fiscal Federalism in the 21st Century,” Annual Review of Economics 16, 2024, pp. 429-54.
[5] Alexis de Tocqueville, The Ancien Régime and the Revolution, ed. J. Elster, Cambridge University Press, 2011.
[6] Thomas Piketty, Capital in the Twenty-First Century, Harvard University Press, 2013, p. 528.
[7] Thomas Piketty, Capital and Ideology, Harvard University Press, 2020, pp. 966-1034.
[8] Ibid., pp. 1022-1025.
[9] Luisa Beltran and Nicholas Rapp, “One map that shows everywhere Elon Musk is doing business,” Fortune, 2023, https://fortune.com/2023/11/20/elon-musk-business-locations-map-tesla-x-spacex-boring-co-neuralink-xai/
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