Constitutional Constraints on Governments in a Global Economy

Abstract

The continuing integration of Europe, the increasing mobility of its citizens and enterprises, and the globalization of the world economy place increasing pressure on Europe's redistributive regulations, taxes, and subsidies. The most attractive response for many European governments is to reduce the options of its citizens through tax and regulation harmonization, thereby avoiding the politically costly steps of taking away the subsidies and privileges to which the politically most powerful groups are accustomed. The danger Europe faces by responding to the pressure from globalization by tax harmonization, however, is that it preserves the resulting inefficiencies, and becomes increasingly unattractive for businesses to locate, people to work, and eventually for people to live. This paper examines the cases for a redistributive state and an allocative (efficiency) state from the perspective of constitutional political economy. A constitutional democracy is described in which the state engages in those sorts of redistribution that all people favor, and provides only those goods, services and regulations that make all citizens better off.

JEL Classification: H11, H20, D70