Tax cuts are generally good because they allow people to keep more of their money, but the best kind also provide good incentives to everyone.
The ongoing controversy over the United Kingdom’s withdrawal from the European Union raises a basic question: Should federations have exit (secession) clauses? To elaborate, how does a right of regions to secede, like the one EU member states enjoy, affect the development of federalism, particularly with respect to personal rights and freedoms?
The majority of federalism scholars have opposed the inclusion of exit clauses in federal constitutions. Certainly, if one values the continuation of the federation as an end in itself, providing a means by which the federation can be dissolved is harmful, but political institutions are designed for people, not people for institutions. Another argument against such clauses is that they allow regions to blow up everyday policy disputes into threats to leave, holding the federation hostage to unreasonable demands. But the threat to secede is risky as a tactic. An exit clause is a giant, red EJECT button on the constitution, and rational regions will push it only in direst need.
A more persuasive argument holds that central governments make very long-run investments in particular places, but they might fear doing so if those investments could be stranded by secessions. But this is an argument merely for placing some limits – or perhaps a “price” – on secession, rather than proscribing it altogether.
Secession clauses have some desirable properties. Providing for a legal path to independence encourages secessionists to eschew extra-legal protest and rebellion and to work through the political system. Such provisions also provide clear criteria in advance of controversies and give private actors more guidance about the legal future.
Central governments tend to overpower subcentral governments in federations over the long term. This has happened in the U.S., Germany, Austria, Mexico, India, Malaysia, and Russia, often with the connivance of at least some of the regional governments (not, notably, in Canada, where there is a credible exit threat). An exit right protects each region to some extent from central exploitation, even when it is not exercised.
Another way to protect minority regions is to give them a veto right over federal policies. The European Union had this constitutional feature during the many years of unanimity rule in the Council. Preference outliers like Great Britain certainly got a European Union more to their liking under this regime, but unanimity also got in the way of effective decision-making and would have been unworkable after enlargement.
An exit right is therefore a moderate constitutional alternative to both the radical solution of veto rights on the one hand and the status quo situation in most federations of gradual central government usurpation. But exit rights are actually closer to the status quo on this spectrum of alternatives than to veto rights. Vetoes are nearly costless to exercise; exits are costly, as Great Britain is discovering. Vetoes can be exercised on an issue by issue basis; the exit alternative amounts to an all-or-nothing, take-it-or-leave-it choice. Exit rights will be rarely exercised where available.
In support of this last claim, I have investigated the frequency and intensity of secessionist support around the world in my book Secessionism and a recent paper. In all the high-income democracies of Europe, North America, and the Pacific Rim, there is only one region in which parties clearly favoring near-term independence have won an absolute majority votes in any recent election: Scotland. And even here, “Yes” lost the 2014 Scottish independence referendum, and polls still show that a majority of voters oppose independence. Around the world as a whole, only about 40 percent of ethnonational minorities have a secessionist organization of any kind, however small. In India, where secessionist parties and candidates are banned by law, we can use election boycott data to estimate support for independence, since secessionist movements there routinely call for such boycotts. I find that there is no plausible interpretation yielding a figure greater than 20 percent support for independence in any state (and that is reached in Jammu and Kashmir, which was coerced into the union).
The example of the European Union also shows how exit rights can help federations grow to include new members. The clear specification of an exit right in what would become Article 50 certainly helped Central and Eastern European (CEE) states decide to continue with accession after the adoption of Qualified Majority Voting. The evidence for this is that delegates from CEE countries were far more likely to vote in favor of Article 50 than other delegates at the European Convention.
But what kind of federation will exit clauses generate? Regional governments are far from the “good guys” in the federalism story, after all. To answer this question, we need to know which regions are most likely to want to secede.
My research shows that, apart from obvious factors like regional language and history of independence, regions that are far from the capital, especially by water, richer regions, and ideologically distinctive regions are more secessionist. These are precisely the regions most likely to seek fiscal autonomy.
The model of competitive or market-preserving federalism championed by many political economists depends critically upon the fiscal autonomy of the subunits – their right to raise significant tax revenues and their duty to fund own expenditure largely out of own resources, not grants from the center – but fiscal autonomy remains the element of a federal order that central governments are least likely to concede. Fiscal autonomy gives regions an incentive for fiscal rectitude: they have to tax their own citizens for most of what they spend. It also provides the possibility of beneficial fiscal competition among jurisdictions, as in Switzerland.
If central governments had to try a little harder to appease secessionist regions due to a codified exit right, then they would have to concede more fiscal autonomy, just as Westminster has done for Scotland and to a lesser extent Wales in the four years since the Scottish independence referendum, leading not by conscious design but by political necessity to a more functional and prosperous federal system.
Regions that want to feed off the central fisc or handicap regional competition in order to maintain corrupt or damaging economic policies at lower cost cannot get what they want by threatening exit, because the exit threat in their case is not credible. They would get less of what they want with independence.
In my own work, I have investigated the statistical relationship between states’ constitutional stance on secession and their governments’ willingness to decentralize taxation powers. I find that governments operating under constitutions that explicitly proscribe secession, such as France, Spain, and Italy, are much less likely to decentralize taxation in response to secessionist challenges than governments operating under constitutions that are silent on secession, such as the U.S., U.K., Canada, Denmark, and Belgium.
Only two constitutions in the world expressly authorize a secession procedure in an operative clause that their governments actually respect: Saint Kitts and Nevis and Liechtenstein. (The Union of Serbia and Montenegro used to have such a clause, before it broke up.) Perhaps more federal constitutions should have such a clause.