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Bush Breaks 150-Year History of Higher U.S. Taxes in Wartime
Bloomberg
By Brian Faler
January 12, 2007

Jan. 12 (Bloomberg) -- It was once considered Americans' patriotic duty: enduring extraordinary tax increases in wartime to help finance the fight.

Not today. Iraq is the only major U.S. conflict, except for the 1846-48 Mexican-American War, in which citizens haven't been asked to make a special financial sacrifice. President George W. Bush opposes tax increases, even as the costs escalate far beyond predictions and he calls for more troops.

"It's a reflection of either a lack of public support for the war or perhaps an unwillingness of the Bush administration to test its popularity, said Elliot Brownlee, an economic historian retired from the University of California, Santa Barbara.

The Bush administration, which says any tax increase would harm the economy, is financing the Iraq conflict with borrowed money. That spares policy makers and pro-war politicians from riling voters already soured on the war.

Arizona Republican Senator John McCain said that while he's "not averse to asking for more sacrifice, he rejects a tax increase, even one on wealthy Americans, to help pay for the war.

"I'm not sure what the point would be, said McCain, who supports Bush's troop buildup and may run for president in 2008. "I would ask them to make other sacrifices, but I'm not sure I would want to raise their taxes just because we're in a war, he said in an interview last week.

Payback With Interest

At the same time, using borrowed money pushes the cost onto future taxpayers, who will have to pay it back with interest.

The war "is being fought on our children's shoulders, said Judd Gregg, the top Republican on the Senate Budget Committee. "You're probably talking about around $750 billion that is going to be spent on this war that will end up not being funded.

Bush is likely to ask Congress next month for $100 billion more in emergency war spending this year. That would bring fiscal 2007 spending on the conflicts in Iraq and Afghanistan to $170 billion, and push spending on the war on terror to more than $600 billion. The federal debt increased by $2.8 trillion from 2001 to 2006.

The cost in Iraq has been growing rapidly and now runs about $8 billion per month, the independent Iraq Study Group estimated last month. The final tally, the group said, could reach $2 trillion once all the bills for caring for disabled veterans and replacing military equipment are counted. That would be more than 30 times what the White House estimated ahead of the March 2003 invasion.

Early Estimate

In December 2002, Bush's then-budget director Mitch Daniels said a war with Iraq would cost close to the $61 billion spent on the 1991 war in the Persian Gulf. In April 2003, Vice President Dick Cheney predicted Iraq's oil output would generate an annual income of $20 billion, which could be used to offset the costs of a post-war recovery.

Bush announced on Jan. 10 that the U.S. will send more than 20,000 additional troops to Iraq to help quell sectarian violence. The administration estimates the cost of the additional troops at $5.6 billion in fiscal 2007.

While wars almost always cost more than expected, historians say it's unusual for the administration not to seek additional revenues to cover the costs.

Individual states raised taxes to finance the Revolutionary War. The young federal government increased a variety of tariffs and taxes on consumer goods to pay for the War of 1812. President Abraham Lincoln imposed a temporary income tax, the first of its kind, to help finance the Civil War.

Top Rate

By World War I, the income tax was a permanent fixture in American life; President Woodrow Wilson increased the top individual tax rate from 7 percent to 77 percent, while subjecting all corporations to an "excess profits tax.

During World War II, President Franklin D. Roosevelt increased the number of Americans subject to the income tax by tenfold, from fewer than 4 million in 1939 to more than 42 million in 1945. He also raised the top rate to 94 percent; the top rate is currently 35 percent.

Americans also lent their government money, through purchases of Liberty Bonds in World War I and War Bonds in World War II. During the Korean War, President Harry Truman imposed excess-profit taxes and increased individual income and corporate taxes.

President Lyndon Johnson attempted to buck the trend, refusing for years to seek a tax increase to pay for the Vietnam War. He eventually sought -- and received -- a 10 percent war surcharge on individual and corporate tax liabilities, which helped balance the budget in 1969.

A Smaller Share

To be sure, the Iraq war has placed a much smaller burden on the economy than previous major wars, giving the administration more flexibility when it comes to financing it.

Military spending during World War II reached 37.9 percent of the nation's economy in 1944, according to the Congressional Research Service. In 1968, during the height of the Vietnam War, military outlays reached 9.4 percent of the nation's gross domestic product. By contrast, military spending during the current war reached 4 percent of GDP in 2005, according to CRS.

Whether for economic or patriotic reasons, most presidents in wartime have linked the need for sacrifice at home with the sacrifices made by U.S. troops on the battlefield. Johnson, like war presidents before him, portrayed the Vietnam surcharge as the least the public could do in wartime.

Perilous Skies

"The inconveniences this demand imposes are small when measured against the contribution of a Marine on patrol in a sweltering jungle or an airman flying through perilous skies or a soldier 10,000 miles from home, waiting to join his outfit on the line, Johnson said in a Aug. 3, 1967 message to Congress.

Americans in wartime generally were encouraged to make personal sacrifices to help support the soldiers. Many in World War II followed advice from the Agriculture Department and grew their own fruits and vegetables -- personal backyard "Victory Gardens to leave more of the nation's produce for the troops. Gasoline, meat and other goods were rationed and millions of people were drafted into service.

The Bush administration, along with Congress, hasn't cut other spending to help offset the cost of the war, according to the nonpartisan Congressional Research Service. By contrast, by the end of World War II, non-military expenditures were cut to less than half their pre-war levels, CRS said.

Non-military spending was cut by nearly as much during the Korean conflict -- from 7.8 percent of the nation's economy in 1949 to 4.9 percent in 1953. During Iraq, non-military spending has grown from 14.4 percent of the economy in 2002 to an estimated 14.7 percent in 2006.

`Deficit-Financed'

"The increase in military outlays was not financed through higher tax revenues or lower non-military outlays, the CRS said of the Iraq war. "Therefore the war can be thought to be entirely deficit-financed.

While some lawmakers express their discontent with the way the Iraq conflict has been financed, few have called for a surcharge to pay for it, or used it as a justification to propose other tax increases.

"Some way has got to be found to pay for this war, said Senator Kent Conrad, a North Dakota Democrat who heads the budget committee. "The president's plan is to continue to put it on the charge card. That's no longer a viable strategy.

To contact the reporters on this story: Brian Faler in Washington at bfaler@bloomberg.net
Last Updated: January 12, 2007 00:04 EST

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