Since at least the 1950s, but with special intensity since the 1980s, state and local governments have offered tax abatements and other incentives to encourage firms to settle in their jurisdictions. Spurred by the possible jobs and investment — which according to policy analysts rarely justify the expense in terms of lost revenue — local and state governments have eagerly supplied abatements. In 2012, for example, local governments issued incentives worth $80 billion in revenue, money which might have been spent on public infrastructure or paying down some of the debt that has made many American localities cash-poor.
And that’s the real problem of such perks: Such seemingly innocuous privileges threaten the capacity of local governments to raise money and deliver essential social services. This failure corrupts the civic life on which U.S. democracy depends.
But a fuller understanding of the civic costs requires us to consider more than just the United States in modern times. Consider, for example, the earliest period in which a similar process of intra-urban competition unfolded: Italy between 1550 and 1850. Italy was the first large society in the West to experience decline (after the Renaissance) and resurgence (with the movement for unification), and its example offers some instructive lessons for Americans grappling with the specter of decline today.
The Italian peninsula during these centuries was fragmented into a number of independent polities. Spurred by trade rivalries, virtually all Italian port cities became free ports — places that eliminated taxes on firms operating in their midst. In some respects, the spread of free ports was good for Italy: It made it possible for merchants to trade in the peninsula more easily, and it kept Italian economies connected to international exchange in an age of increasingly global commercial networks. Free ports made fortunes not only for merchants but also for the stevedores, sailors, innkeepers and other personnel dependent on commerce.
Sounds good. So what was the problem?
The answer comes from the founder of economics, Adam Smith. Smith was deeply impressed by the liberties that Italian free ports offered. He even thought that Britain should be made into a free port. Smith had one caveat, however, and it was an important one: Britain should be made a free port only if “it were possible to defray the expenses of government by any other method” than the duties, customs and excise that were typical modes of taxation. In short, to compensate for the decline in trade taxes, a government must find some other way to raise revenue.
Renaissance Italy was a hotbed of creativity in all fields; politically, it was also a forum for intense civic participation. The decline of Italy had many causes, from Spanish domination to the excesses of the Counter-Reformation. In some ways, the spread of free ports was more of a symptom of decline than its root cause. Nevertheless, the inability to tax international trading firms — like the modern-day inability to tax corporations — was a serious threat to the sovereignty and civic integrity of Italian states.
Italian governments were well aware of the trade-offs involved in implementing free ports. They sought, through endless policy tinkering, to claw back as much revenue as possible. They also shifted the tax burden from progressive duties on luxury imports to regressive urban consumption taxes, which further exacerbated civic decline in Italy.
But the corrosive effects of free ports went beyond the loss of revenue, touching the very essence of state sovereignty. One official accused merchants of aiming “to import and export despotically and without bridle any kind of merchandise,” making it impossible for the government to enact a proper regulatory regime. This situation not only flooded Italian markets with foreign manufactured goods, but it also made it impossible to subordinate business power to the taxman. Thinkers during the Enlightenment accused Italy of “prostituting its commerce to foreigners” and lamented the effect of urban rivalries on policy independence; suddenly, it seemed as if tariff policy in Italy was being made in Paris and London. The free port became the prime symbol of Italy’s loss of political and economic status after the Renaissance.
The solution for Italy was federalism. The Italian movement for national unification, known as the Risorgimento, was a program for making Italy more competitive in a global arena dominated by large nation-states such as England and France. In part, that meant securing the revenue on maritime commerce that it had lost to free ports; above all, it meant recovering its sovereignty from the foreign business interests that had exploited Italy’s political weakness. For the first time Italy could implement a common fiscal, industrial and commercial policy. Within a decade after the unification of Italy in 1861, most of the peninsula’s free ports were eliminated.
The Italian experience provides lessons for the United States. To recapture power from corporations, the United States would likewise need to place tighter restrictions on the ability of states and cities to set their own policies. This would be impossible under present constitutional arrangements, which is why most commentators have focused on designing the least bad incentive structures. But more federal power — and a revival of civic participation in the United States — is the only certain means of controlling corporate power in the 21st century.
Failure to control corporate power directs our attention to another civics lesson from the Renaissance. The great political theorist Niccolò Machiavelli thought that “well-ordered republics have to keep the public rich and their citizens poor.” The fiscal policies of the United States have increasingly operated in the opposite direction, enriching private citizens while starving local and state governments of revenue.
America is increasingly coming to resemble one of Machiavelli’s nightmare republics: Genoa. Genoa was the wealthiest but also the most inequitable city in Italy. It produced none of the artistic or intellectual achievements of the Renaissance; it is famous (or notorious) mainly for pioneering European colonial techniques.
It was a city riven by factional disputes among the very wealthy, something seen in the current attacks by President Trump on Amazon’s founder and chief executive, Jeffrey P. Bezos (who also owns The Washington Post). Trump has railed against Bezos in recent months, falsely claiming both that he is a purveyor of “fake news” and that Amazon exploits the U.S. Postal Service. Americans have been treated to the spectacle of one business tycoon going after another in a political forum, something the Genoa experience helps us better understand.
But Genoa is a wretched model for the America of the future, and to avoid it we must turn our attention away from the theatrics of Trumpworld, and focus our efforts on revitalizing civic culture at the local and state levels.