The Party That Failed
An Insider Breaks With Beijing
To understand the staggering proportions of economic inequality in the United States today, take your pick from a long list of dizzying statistics. In 2016, the top 0.1 percent of households owned about the same share of wealth as the bottom 90 percent.” While the average wealth of the bottom 90 percent of households has remained at the same level since 1986, the average wealth for the top one percent has more than tripled. As The Economist noted in 2014, current conditions in the United States make a modern passenger plane, where business travelers stretch out their legs while the less fortunate squeeze into economy seats, look like a “socialist utopia.”
We know how we got here. The United States’ descent, since the late 1970s, into quasi-oligarchic levels of wealth concentration is a story of globalization, declining union membership, and technological change, among other factors. But one explanation is often missing from this list, and that is the fact that the United States is a country at war.
The U.S. military intervention in Afghanistan is currently in its seventeenth year. Together with the Iraq war and an array of “War on Terror” operations spanning the globe, such military engagement has cost the United States dearly in both blood and treasure. By one estimate, the United States’ post-9/11 military campaigns have cost the country all of $5.6 trillion.
When a bill is that large, the means by which a country chooses to pay it will profoundly affect its economy, to the point of helping determine who gets rich and who stays poor. In the twentieth century, the United States financed some of its biggest wars with direct taxes and bond campaigns. These measures were progressive in nature, distributing the war burden according to citizens’ means. For this reason, many twentieth century wars had an equalizing effect on U.S. society. In recent decades, however, U.S. leaders have preferred to finance war by borrowing money while cutting taxes. This method is politically expedient, but it exacerbates inequality by benefitting wealthy citizens while burdening those with lower incomes. Unfortunately, there is little indication that lawmakers will embrace a different funding method anytime soon.
The global “war on terror” that followed the 9/11 attacks ushered in not only a new kind of warfare, but also a stunning shift in the way that war would be financed in the United States. Almost every previous administration had raised taxes during times of war. The George W. Bush administration did the opposite. Having already cut taxes in 2001, Bush doubled down with the Jobs and Growth Tax Relief Reconciliation Act of 2003, cutting the government’s revenue by $320 million over the course of a decade.
If it was to invade Afghanistan and Iraq, while also creating an anti-terror apparatus with global reach, the U.S. government would need to build up its military. To underwrite this project, Washington relied almost entirely on borrowing money at home and abroad. Bush’s successors did not change this strategy: the Bush-era tax cuts were mostly extended under Barack Obama, and in 2017 the Trump administration lowered taxes even further, particularly for the wealthy.
Financing war through debt rather than taxes makes political sense. Borrowing money takes less time than collecting taxes, and this allows the government to gear up quickly for conflict. Deficit spending also keeps leaders from having to choose between military spending and domestic programs when they face budgetary constraints. Officials can more easily manage public opinion and hold on to their posts when they don’t raise taxes or ask citizens to make financial sacrifices.
But for all their short-term political advantages, such “credit-card wars” are a recipe for economic inequality. This is especially true when part of the debt is held domestically. The government borrows money from citizens or institutions with the promise of repaying with interest. Those who can afford to extend loans to the government are necessarily wealthy, and these people and institutions will later recover their investments along with interest. Low- and middle-income households, meanwhile, must eventually help pay off government debt, including interest, through taxes. Underwriting war in this way amounts to a significant transfer of wealth from the lower to the upper classes. Adding tax cuts for the wealthy, unsurprisingly, does not make matters any better.
Yet raising taxes is not always a preferable option. In fact, paying for war through an increase in indirect taxes, such as sales, value-added, excise, or customs taxes, also exacerbates inequality. Such taxes lead to price increases that particularly hurt low- and middle-income households, for which such spending accounts for a significant percentage of disposable income.
The Bush administration may have broken with recent precedent in financing its wars with deficit spending, but the United States had tried similar strategies in the more distant past. The War of 1812, the United States’ first major war after independence, was mostly underwritten by a small circle of wealthy citizens, including through a banking syndicate created by David Parish, Stephen Girard, John Jacob Astor, and Jacob Barker. That syndicate bought up most of the government’s debt. What need remained was met through indirect taxes. The Mexican-American War and the Civil War followed more or less the same formula. All three wars increased economic disparities among U.S. citizens.
History abounds with examples of less destructive ways to pay for war. During the two World Wars and the Korean War, the U.S. government, hoping to combat inflation and to distribute costs of war more evenly, resorted to extremely high progressive income and corporate taxes. For top earners, income taxes reached up to 77 percent (World War I), 94 percent (World War II), and 91 percent (Korean War). Unlike indirect taxes, which would have disproportionately burdened poorer households, these direct taxes increased the burden for the wealthy. And unlike debt, they did not transfer the cost of war to future taxpayers, rich or poor.
During World War I and World War II, the government supplemented this tax strategy with war bond campaigns that appealed to poorer citizens with patriotic appeals, including in Disney cartoons.The campaigns encouraged ordinary citizens to save by buying bonds, which were later paid back with interest, in a boon to middle- and low-income households. The combined effect of direct taxes and war bonds was that inequality declined during each war, and in the years immediately after it. The share of income going to the top one percent declined by three percent during World War I, three percent during World War II, and two percent during the Korean War.
Those wars differed from today’s in part because they rested on a widespread consensus that the United States was fighting an existential battle that required shared sacrifice. Public acceptance of this belief allowed the government to demand high levels of financial sacrifice, including from the wealthy. During the Korean War, the United States’ only war paid entirely through taxation, poll after poll indicated that citizens were ready to contribute financially to the war effort. In July 1950, a Gallup survey found that a majority of people felt that the government did not ask Americans to make enough sacrifices in support of the war. In another poll that same month, 70 percent of respondents stated that they would be “willing to pay more money in taxes to support a larger army.” A month later, 51 percent agreed that the government must increase federal income taxes immediately to pay for the war. Respondents also clearly indicated that they preferred higher taxes to government borrowing.
Yet the U.S. government has not always seen it fit to instill such a sense of emergency in its population. During the Vietnam War, for example, the Lyndon B. Johnson administration actively tried to shield the public from the war’s intensity. For that reason, the administration avoided tapping citizens for direct financial contributions and relied instead on borrowing. U.S. Secretary of State Dean Rusk explained the government’s logic at a staff conference in October 1967:
“The Administration made a deliberate decision not to create a war psychology in the United States. There have been no war bond campaigns, etc. The decision was made because it is too dangerous for this country really to get worked up. Maybe this was a mistake; maybe it would have been better to take steps to build up a sense of a nation at war. The course we have taken has meant expecting a great deal of our men in Vietnam, against the background of a home front going about business as usual.”
The Bush administration's approach was strikingly similar. Two weeks after September 11, 2001, George W. Bush encouraged families to "go down to Disney World." And in 2003, rather than imploring citizens to make sacrifices, House Majority Leader Tom DeLay stated that "Nothing is more important in the face of war than cutting taxes."
Little suggests that a more progressive approach to funding the United States’ wars would run up against public opposition. In fact, recent survey research suggests that citizens' support for war taxes depends in part on whom such taxes target: a regressive national sales tax made people less enthusiastic about going to war, but a progressive tax hike aimed at Americans earning more than $400,000 a year had no adverse effect on public support for war.
The United States’ modern, debt-driven warfare is, in other words, a political choice, not a necessity. Yet given the Republican lawmakers’ track record on tax cuts, it is eminently unlikely that they would support an approach relying on higher income taxes. As the left considers what a neo-progressive foreign policy would look like, it should make equitable war finance policy a part of its agenda. Barring such a partisan shift, however, we should expect borrowing to fund America’s wars to continue, exacerbating inequality in the United States for the foreseeable future.