Disorder, page 25
In a number of democracies, governments sought to return to Bismarck’s understanding that nationhood could at least in part be constructed by extending material protection to citizens through a welfare state. But these attempts ran into the constraints of bond markets, the demands of bank creditors, and the need to maintain a currency’s position on the gold standard. At times of financial crisis, this left governments choosing between a more full-blown economic nationalism that threatened international trade, or curtailing expenditure on the welfare state.
If economic nationhood proved difficult, appeals to a restrictive nationhood remained a readily available tool for politicians, particularly when it could be expressed as anti-Bolshevik. In Europe, some governments withdrew full citizenship from minorities. In the United States, amid the economic depression of the early 1920s. Congress passed laws to curtail immigration from Southern and Eastern Europe, including the countries from where the vast majority of American Jews had come, and forbade immigration from Japan.73
But democratic politics’ need for nationhood was also demonstrated during the interwar years, not least when it was nearly entirely absent. In the first Austrian republic, two evenly balanced parties, the Christian Socials (the Blacks) and the Social Democrats (Reds)—the Blacks dominating the countryside and the Reds Vienna—engaged in what now is termed a culture war centred around Catholicism and anti-clericalism. Each party sought to remake the Austrian republic according to the cultural and religious identity it cultivated, and each availed itself of paramilitaries. In 1933, the Christian Social chancellor, Engelbert Dollfuss, established a dictatorship that banned all the parties’ opponents in the name of an Austrian unity that was strictly Christian and Catholic. A year later, Austria descended into civil war. After the catastrophes that followed were finally exhausted, veterans of both sides of the Austrian culture war saw the only basis for post-war Austrian democracy in the idea, as one Socialist put it, that ‘we are Austrians…and we want to remain an independent people74.’
Meanwhile, the questions of who should pay taxes when all citizens could vote and how to finance war debts and welfare states under an international monetary system generated intense democratic conflict. Full-franchise democracy invoked fear among the wealthy about taxation. Assuming, as Aristotle had supposed, that government of the many meant government for the poor, the rich frequently saw in democracy a path to their income and wealth being confiscated. Tax havens—jurisdictions where non-residents and corporations that do their business predominantly elsewhere can be taxed at a much lower rate—had first emerged in the late nineteenth century. As states that had been neutral during the war, Switzerland and the Netherlands became after the war places where wealthy Europeans moved sizeable amounts of money to avoid taxes voted for by democratic legislatures. So too did the British Crown dependencies.75
Most graphically, the French democratic state’s ability to tax was eroded in the mid-1920s by these fears when, having been unable to restore the franc to the gold standard, the French government could scarcely borrow in capital markets. What, as governments came and went, appeared to be democratic chaos in France drove the rich to sell short-term financial assets and move capital abroad. Since this ensured that the franc kept losing external value, capital flight became a self-perpetuating phenomenon.76
Together, tax havens and the fear of capital flight meant that the tax systems that emerged under full-franchise democratic politics eventually generated as much a risk of aristocratic as democratic excess. By the mid-1920s governments were making fiscal decisions on the premise that the rich had the practical means to protect their wealth and income from taxation. Tax avoidance by the wealthiest Americans was so effective that Congress passed tax cuts in hope this would reduce avoidance, significantly diluting the intent behind the Sixteenth Amendment that the rich should pay a higher share of tax.77 In 1928, the French government also introduced a large cut in income tax, after a report that went to the French prime minister concluded that for large taxpayers income tax ‘tend[ed] increasingly to take the form of a voluntary contribution’.78
Nonetheless, the old notion that tied unsustainable debt to democracy hardened during the interwar years. Most infamously, the early Weimar Republic was cast as recklessly and disastrously irresponsible for printing money to cope with Germany’s debt problems. As a story about German democracy, this narrative oversimplified.79 Weimar Germany began with extremely high levels of debt from the war and reparations. Moreover, Germany’s central bank, the Reichsbank, which was legally independent from the Weimar governments, played its own part in the hyperinflation.80 But the old problem—where states’ ability to borrow money relied on creditor confidence that legislatures would authorize the taxes to service that debt—reappeared in Germany with some vengeance. Without confidence that the Reichstag would vote for new taxes to service German debt, creditors were not keen on lending new money or rolling over existing debt, which left the central bank to print money to cover the state’s expenditure.81
As it would in the 1970s, peacetime inflation ignited fears of both aristocratic and democratic excess, and spawned new appeals to restrictive nationhood. In Germany, the material shock to savers from hyperinflation rendered many who might reasonably have been expected by their previous class position to support the Weimar Republic sufficiently materially anxious during its later crisis years to prefer anti-democratic forces.82 But inflation created perceptions of aristocratic excess too. For those who wanted to end Weimar, inflation became another pretext for nativism, and in particular antisemitism. Most lethally, during the German hyperinflation, Hitler persistently attacked ‘the Jewification of the economy’, casting Jews as dual villains by making them both Marxists and profiteers.83
Before its termination, the interwar gold standard similarly destabilized democracies. By promising monetary stability, the gold standard could be perceived as a check against the fears of democratic excess. But by requiring governments to privilege financial stability over welfare states, it ensured a democratic rebellion against its foundational assumption that monetary policy did not belong in democratic politics. The post-1929 Depression strongly politicized central banks in Europe in ways that were familiar from the earlier American republic. Where, as in Britain and Sweden, governments took political control of monetary policy, and, as in the United States, a president confronted the banks, the gold standard was abandoned in the name of a national economic autonomy that democracy itself required. When Franklin Roosevelt took the dollar off gold in 1933, one banker damned the move as ‘mob rule’ and claimed that ‘I think we may find that we’ve been in a revolution more drastic than the French Revolution.’84
The New Deal
This was partisan hyperbole. But Roosevelt’s act did begin a qualitatively different way of conceiving democratic reform around economic nationhood that his Treasury officials later sought with Keynes to embed in the post-war international monetary system. For Roosevelt, the ability of banks and the rich to use an international economy where capital flowed freely to defend their material interests, not least with regard to taxation, was an aristocratic power, and one that in a democracy had to be curtailed.
Commanding a project to restore a lost class balance and the republic’s foundational values, Roosevelt was heir to the American Populists.85 His political coalition joined farmers and factory workers to the middle classes plunged into economic desperation. In his first inaugural speech, he declared that ‘the money changers have fled from their high seats in the temple of our civilization’. With the money changers gone, he proclaimed, the temple could be ‘restore[d] to the ancient truths’. That meant, he continued, addressing the ‘overbalance of populations in our industrial centres at the expense of the land’. International trade, he said, was ‘necessarily secondary to the establishment of a sound national economy’. The first sentence of that inaugural speech included the words ‘our nation’.86 The legislation that gave labour federal rights to form trade unions was the National Labor Relations Act. Together, labour and management became the economic nation. Their mutually dependent relationship was institutionalized in the National Industrial Recovery Act. In accepting the 1936 Democratic nomination in Philadelphia—the same city where ‘political tyranny was wiped out’ in 1776— Roosevelt said the 1932 election had been ‘the people’s mandate’ to end the ‘despotism’ of the ‘economic royalists’, and that ‘for too many of us the political equality we once had won was meaningless in the face of economic inequality87.’
Practically, the New Deal’s reforms were financed by new taxes on the richest Americans. Most required establishing federal sites of authority and power. These regulated banks, lowered borrowing costs for homeowners and farmers, increased agricultural prices, and delivered electricity to agricultural areas that the large energy companies had ignored. To exercise these new federal powers, Roosevelt claimed emergency powers for the executive as if the country were at war. After the Supreme Court struck down more than half of the New Deal laws passed by Congress, he tried, until stopped by the Senate, to pack the Court with six new judges.
But the New Deal also demonstrated the tension between the idea of nationhood as shared democratic economic fate and exclusionary languages of nationhood. In promising a national economic rejuvenation, Roosevelt included in the Democratic political coalition Catholic and Jewish immigrants from Southern and Eastern Europe who had been defined out of American nationhood by the restrictive immigration laws passed in the 1920s. But Roosevelt also acquiesced to what had become the prevalent political discourse of American nationhood defined in terms of those who were ethnically white and European in origin. In particular, his administrations used the array of federal powers over housing and mortgage finance established by New Deal legislation to support home ownership exclusively for white Americans; consequently, the New Deal intensified racial segregation in housing.88 Politically, he had little alternative if he was to pursue reform: without Southern Democratic support in Congress there would have been no New Deal.89 Yet—as will be shown in chapter nine—the long-term consequences for the distribution of wealth in the American republic still burden it today.
The politics of the New Deal was further tied to the American republic’s historical relationship to race via oil. Since an oil price slump for domestic American producers had been central to the American economic depression, oil was a fundamental part of the New Deal, with Roosevelt legislating to ensure strict production limits and allocating production quotas to push prices back up to profitable levels. This had consequences for the territorial balance of power within the American republic. The independent producers Roosevelt sought to help primarily operated in Texas. In 1935, six oil-producing states led by Texas formed the Interstate Oil Compact. In the name of the old Southern rhetorical cause of states’ rights—once used to defend slavery—these states defeated the New Dealers’ initial hopes that there could be a nationally regulated oil industry.90 Having won this political battle, Texas was able to use its oil regulatory agency, the Texas Railroad Commission, to set the world’s oil prices for the next forty years.91 This economic power gave the Texan congressional delegation outsized political influence, exemplified in the leadership positions held by a succession of Texans from Sam Rayburn to Lyndon Johnson. In igniting old conflicts about federal versus state authority in the part of the Union where states’ rights arguments were both historically resonant and still used to restrict voting rights, the politics of oil production placed direct pressure on deep fault lines in the American republic.
In this respect, as in others, the legacy of the interwar years was very different for American democracy than it was even for those European countries where democracy survived. From 1933, the American republic was economically reformed to rebalance the distribution of class influence, but it did not become a full-franchised democracy and, in an energy-producer country with a federal constitution, the states acquired some structural power in ways that qualified the idea of economic nationhood. If the New Deal became the economic and electoral basis of American politics for most of the next three decades, the New Deal republic could still be challenged in the name of democracy and eventually it would be at the same time as American energy power began to decline. By contrast, in Germany, Italy, and France, the interwar and wartime disasters had ensured that new democracies were founded, in Germany’s case in a truncated territorial state, without any of this particular historical burden around the franchise. The New Deal was indeed the harbinger of a world of democratic nation states and less internationalized and less financialized economies. But it was in Europe where that future would more straightforwardly materialize.
8
The Rise and Decline of the Democratic Tax State
There were few issues capable of uniting Donald Trump and the European Commission. The digital retail behemoth Amazon was an exception. Throughout 2018, Trump took to Twitter to attack the company, tweeting on one occasion that Amazon’s failure to pay tax was ‘doing great damage to tax-paying retailers’.1 More consequentially, the European Commission ordered Amazon in October 2017 to repay €250 million in what it deemed illegal state aid from Luxembourg gained as tax advantages as part of an agreement that allows Amazon to structure its business to pay little tax on its operations elsewhere in Europe. ‘Paying taxes’, the Commission insisted, ‘is part of doing business in Europe.’
But it is not easy for the EU to act on this notion. When, in May 2020, Angela Merkel and Emmanuel Macron unveiled their proposal for an EU Recovery Fund based on funds the European Commission would borrow in the EU’s name, they proposed no EU taxes to service the new EU debt, saying only that ‘improving the framework for fair taxation in the EU’ would ‘remain a priority’ and ‘ideally’ this would entail establishing a basis for common corporate taxation. The formal proposal that followed did propose an EU corporation tax tied to access to the single market and an EU digital tax on tech giants. But the actual agreement on the Recovery Fund, struck at the EU summit in July 2020, contained no EU tax on corporations and no commitment to harmonize national corporation tax rates. Instead, the EU would acquire the authority to tax non-recyclable plastic waste, and committed itself to future discussion on carbon and digital taxes, as well as a financial transactions tax that it had already been debating for a decade.
The EU’s inability to agree on anything like a common approach to corporation tax is just the beginning of the political difficulties the EU faces around taxation. What was absent through the debate over the Recovery Fund was any suggestion that EU citizens should be taxed as citizens to support the new debt authority. Indeed, the French European Commissioner, Thierry Breton, boasted on Twitter after the summit that this is precisely what would not happen: ‘For the first time, Europe borrows money for Europe and Europeans. And to finance this historic loan, no taxes for our fellow European citizens. It is only at the border of our internal market that we will put taxes.’2
Where the historical relationship between tax, debt, and democracy is concerned, the EU absents itself. What remains of the democratic tax state is to be found only at the national level. For the EU as a legal order, being a citizen has taken on a meaning entirely independent of debt or taxes. To understand how this disjuncture came about and its broader implications for democratic politics beyond the EU, we need to go back to the post-war representative democracies of Western Europe and the United States, and how some of their more democratic features around economic policy, including in relation to taxation, began to unravel in the 1970s.
Economic Nationhood
Where democracy was refounded after the Second World War, perceptions about where the decisive temporal risks lay varied with consequences that still matter for how the EU approaches debt. In France and Italy, where forceful Communist parties emerged from the war, the democratic impulse was strong. After a referendum, the Italian First Republic was established without a monarchy. The French Fourth Republic’s constitution was agreed in a constituent assembly, legitimated in a referendum, and established a strong legislature. By contrast, the West German constitution, imposed on the country by the Allies, contained strong safeguards against democratic excess.3 It did not allow for referendums except on a new constitution or redefining the constituent regional states of the West German Federal Republic—the Länder. It strongly protected individual rights and established a powerful constitutional court. No European democracy had ever given the judiciary the authority the German Federal Constitutional Court possesses. It has the sole right to declare parties unconstitutional, and, in the 1950s, the Court banned both the Neo-Nazi Party and the Communist Party. A 1958 decision by the Court meant effectively that any legal or political decision could be subject to judicial review, and the Bundesverfassungsgericht justices have subsequently ruled upon many charged political issues from their home in Karlsruhe, including public debt and EU treaties.4
Beyond these constitutional questions, the post–Second World War geopolitical and economic world was much more conducive for the future of democracies than the post–First World War environment. Structurally, the Bretton Woods system offered support to post-war Western European democracies by facilitating the idea of economic nationhood. Certainly, the story of Bretton Woods as a political safeguard for Western Europe democracies can be overdone. The driving impulse for the post-war international monetary order was—as discussed in chapter two—Harry Dexter White’s desire to create a dollar-based financial and trading order in which the United States could enjoy economic autonomy free from the risks of competitive devaluations and cross-border gold movements. He and his Treasury colleagues were primarily interested in American monetary power, American financial stability, and, in Dexter White’s case, helping the Soviet Union.5 The Bretton Woods system was then significantly compromised by the Truman administration’s unwillingness to stop illegal capital flight and willingness to use the Marshall Plan to circumscribe Italian democratic politics by shutting out the Communists from power. By the time the European currencies were actually convertible for trade purposes, the Eurodollar markets had begun and Bretton Woods’ eventual demise—as explained in chapter five—was set in motion.
