wow, almost 5 pages discussing about if USA could have declared war on Canada in the 30's or not, but guys... that issue was just an EXAMPLE, and you all know that USA is not the only democracy in the world, and Canada is not the only possible target for a war in the world, do you?
I mean, what the OP said is that many (if not all) the hard caps in the game could be replaced with severe (in some circumnstances VERY severe) consequences. And I agree with him.
For example, (EXAMPLE!!!) declaring war on ANY target country could give the attacker a penalty in NU, equal to double the diference between the threat of the target and the neutrality of the attacker.
So, back on your favourite case of USA vs Canada, an enormous neutrality (say 80) vs a null threat (say 0) would make a - 160 NU -> many bad things for USA's gov: army rebelling, internal turmoil, whatever.
But in other case, say a very imperialistic UK vs a menacing Netherland that threatens to ally Germany. UK has a neutrality of 40 and Netherland poses a threat of 20. so -40 NU to UK for that preventive war. a big punish, but one that the player (or a desperate AI) may accept.
There could be also other consequences, based also in circumnstances: increment in own threat, penalty to others opinion, increment of revoltrisk, etc.
That would prevent many of the absurd situations we all can read in "what if RL would be driven by Paradox rules" threads