Introduction
In the early summer of 1967, veteran Washington journalist Peter Lisagor met with a senior Republican senator to discuss the deteriorating situation in Vietnam. The war had divided the country, triggering massive antiwar demonstrations in several major cities, and the senator agreed to talk only on condition of anonymity. But the topic of discussion was not troop levels or moral arguments over the U.S. presence in Indochina. Rather, the senator wanted to talk about something more mundane: taxes. As Lisagor later explained in a Los Angeles Times article, "Absence of Sacrifice at Home Spurs Guilt Feeling over War," the GOP senator considered taxes a question of conscience. "I went to the beach with my son and his children a few weeks ago," the senator explained, "and there we were, enjoying ourselves as if we didn't have a care in the world. We had no sense of a war, no sense of sacrifice. Yet this war is already bigger than Korea. I'll go for a tax increase now."1
A generation later, the senator's question of conscience has resurfaced in public debate. On March 19, 2003, the Bush administration launched Operation Iraqi Freedom, a military campaign to overthrow dictator Saddam Hussein. Administration officials defended the action as part of a broader "war on terror," including Operation Enduring Freedom in Afghanistan, which began shortly after the al Qaeda attacks of September 11, 2001. From that point forward, the United States has been actively waging a costly overseas military operation. Within six years, the Department of Defense had confirmed a total of 4,018 U.S. fatalities in Iraq and Afghanistan. And according to estimates from the Congressional Budget Office, by 2007, the budgetary cost of operations in the two countries exceeded $500 billion.2
Yet despite the country's great loss of blood and treasure, there is little sense of sacrifice on the homefront. Indeed, in its first six years, the Bush administration has requested, and Congress has approved, a series of major tax cuts.3 Lawmakers have lowered and flattened rates for the individual income tax, initiated a repeal of the estate tax, eased the burden on capital gains and corporate dividends, reduced the so-called marriage penalty, and enacted a slew of new deductions, credits, and other special-interest provisions.4 When combined with a steady increase in military, domestic, and entitlement spending, these cuts have turned a projected $5.6 trillion surplus over the 10-year budget window into a $2.7 trillion deficit.5
This contrast -- between an active war effort on one hand and substantial tax cuts on the other -- has no precedent in American history. Beginning with the War of 1812, special taxes have supported every major military conflict in our nation's history. Moreover, many levies have outlasted the wars they financed. Politicians like to talk about their plans for revamping the country's tax system, but important tax reform usually happens when it must, not when it should. War has been the most important catalyst for long-term, structural change in the nation's fiscal system. Indeed, the history of America's tax system can be written largely as a history of America's wars.
Enactment of the Bush tax cuts has called into question the once-axiomatic relationship between war and taxes. The historical incongruity of Congress reducing taxes while increasing spending on the war in Iraq has provided fodder to administration critics who, like the anonymous Senator calling for increased taxes to pay for the war in Vietnam, have wondered publicly if the country has betrayed its tradition of wartime fiscal sacrifice. As one pundit declared in a typical statement, "in his determination to cut taxes even while waging war in Iraq, President Bush is bucking history."6 Yet another bemoaned, "since 9/11, our government has asked no sacrifice of civilians other than longer waits at airplane security. We've even been rewarded with a prize that past generations would have found as jaw-dropping as space travel: a wartime dividend in the form of tax cuts."7
Underlying these comments is an inescapable fact: The United States has a strong tradition of wartime fiscal sacrifice, and the Bush tax cuts mark an abrupt departure from that tradition. As we hope to illustrate, however, America's history of wartime taxation is not quite the heroic tale that many Bush critics seem to imply. Although taxes have typically gone up during times of war, the claim that "we have always accepted heavier burdens as the price those at home pay to support those under fire on the front" misses much of the complexity of American history.8 Indeed, as a nation, our commitment to wartime fiscal sacrifice has always been uneasy -- and more than a little ambiguous. In some wars, political leaders have asked Americans to accept new taxes as the price of freedom and security. But in others, they have tried to delay, deny, and obscure the trade-off between guns and butter. And even when Americans have embraced the call for sacrifice, their elected representatives have often made room for self-indulgence, easing burdens for some constituents while raising them for others.
Exaggerating the American tradition of wartime fiscal sacrifice is understandable but unfortunate. History is most usable, at least for politicians, when it can be recast as a morality play. But it is most valuable, at least for the rest of us, when it honestly probes the inconvenient truths of human nature and political struggle. In our search for the historical context of current debates, we should be careful not to compare today's policies to some cardboard cutout version of an imagined past.
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This book explores the long history of American taxation during times of war. As political scientist David Mayhew recently observed, since its founding in 1789, the United States "has conducted hot wars for some 38 years, occupied the South militarily for a decade, waged the Cold War for several decades, and staged countless smaller actions against Indian tribes or foreign powers."9 The cost of these activities has been immense, with important and lasting consequences for the tax system, the economy, and the nation's political structure. By focusing on tax legislation, we hope to identify some of these consequences. But we are not interested in simply recounting statutory details. Rather, we hope to illuminate the politics of war taxation, with a special focus on the influence of arguments concerning "shared sacrifice" in shaping wartime tax policy. Moreover, we aim to shed light on a less examined aspect of this history by offering a detailed account of wartime opposition to increased taxes.
Historically, two features of wartime politics have prompted tax reform. The first is sheer necessity. There is simply no other government activity that requires as much revenue as fighting a war. Success on the battlefield requires economic resources, and taxation is the best means of marshalling those resources. While explicit taxes are not the only means of extracting resources from a nation and its people, practical limits on nontax forms of war financing (e.g., borrowing, seigniorage, conscription, expropriation) generally push tax changes onto the legislative agenda. Second, wars often create a new political atmosphere -- one characterized by feelings of solidarity and shared sacrifice. Wars may foster a feeling of "civic engagement" or a "public mood" as citizens "rally 'round the flag." Whatever term is used, war creates new political opportunities when it comes to tax policy. Taxes are never popular, but they are never more popular than during wars.10 In combination, these two features of wartime politics -- fiscal necessity and political opportunity -- set the stage for sweeping and durable tax reform.
The most compelling example of wartime fiscal sacrifice comes from World War II. In the months following the Japanese attack on Pearl Harbor, fiscal necessity and political opportunity converged to produce dramatic changes in the nation's tax system.11 Although authorized by the Sixteenth Amendment in 1913 and established by statute shortly thereafter, the income tax has its modern roots in the Revenue Act of 1942. That legislation, enacted less than a year after the official U.S. entry into the war, subjected millions of new taxpayers to the income tax, converting what had long been a "class tax" to a full-fledged "mass tax."12 More than just raising revenue for the war, the Revenue Act of 1942 gave rise to a whole new taxpaying culture. The federal government launched an all-out campaign to market the new tax changes, including Disney-produced animated shorts featuring Donald Duck touting the importance of "taxes to beat the Axis!" The campaign was a success. Asked in February 1944 whether they considered the amount of income tax they paid to be "fair," a stunning 90 percent of Americans answered yes.13
The experience of World War II, so important to the image Americans have of themselves and their place in the world, has no doubt also shaped our intuitions about the American tradition of wartime fiscal sacrifice. Yet in many ways, World War II is an outlier on the continuum of war tax politics. Taking a wider historical view, beginning with the nation's founding and continuing through the present day, we observe greater heterogeneity in the country's willingness to accept heavier burdens of taxation during times of war. While the World War II example has parallels in certain other conflicts -- most notably World War I and the Korean War -- the country's political instincts have often pushed in the opposite direction, prompting Americans and their elected leaders to resist the burdens of heavy wartime taxation.
Indeed, resistance and reluctance are recurring themes in the history of American wartime taxation. In the War of 1812, for example, congressional Republicans repeatedly balked at imposing new taxes to fund "Mr. Madison's War," with nearly disastrous consequences for the nation's fiscal health. Their reluctance stemmed from a widespread conviction that the war would be quick and relatively painless. It also reflected no small amount of fear that new taxes might be politically disastrous for anyone who supported them. Either way, at this early stage in U.S. history, the evidence hardly supports our cherished image of selfless Americans rushing to shoulder their wartime fiscal burdens.
In the Civil War, politicians again resisted the need for fiscal sacrifice -- at least initially. Eager to minimize internal opposition to the war, leaders of both the Union and the Confederacy predicted a short -- and relatively cheap -- conflict. Eschewing heavy taxes, they relied on other, less onerous forms of war finance, including loans. But as evidence of tangible sacrifice grew -- through the loss of life, liberty, and property -- that strategy faltered. The demand for fiscal sacrifice grew ever stronger, with lawmakers seeking to finance the war with taxes that spread the burden equitably among the populace. Notably, this call for shared sacrifice accompanied the creation of a military draft, with political leaders linking the conscription of able-bodied men with the conscription of national wealth.
The war in Vietnam reveals a similar experience. As with the War of 1812 and the Civil War, political leaders initially hoped to avoid new war taxes. The immediate political calculus was, of course, different; Lyndon Johnson refused to ask Congress for higher taxes to fight the war because he feared doing so might endanger his cherished "Great Society" programs, especially among conservative Democrats who controlled the two congressional tax-writing committees. When he eventually did submit a surtax proposal, it was held up for almost a year because Johnson refused to agree to congressional demands for corresponding cuts in domestic spending. Again, the historical experience departs significantly from the popular notion of a country eager to put its fiscal muscle behind its military might.
By highlighting this alternative tradition of wartime finance -- a tradition marked by reluctance and resistance, as well as willing sacrifice -- we do not mean to minimize the burdens that previous generations agreed to bear. The United States does, indeed, have a tradition of wartime fiscal sacrifice. But this tradition has been more complex -- and more hotly contested -- than might seem convenient for modern critics of the war in Iraq. America's wartime leaders, and its presidents in particular, have often been reluctant to demand much fiscal sacrifice from their fellow citizens, at least initially. Unwilling to risk domestic achievements, or fearful of eroding support for an unpopular war, they have shrunk from the tough decisions that wars invariably demand. Eventually, however, they all accepted the hard realities. Whether ardent tribunes of fiscal sacrifice (like Franklin Roosevelt) or reluctant champions of fiscal responsibility (like Lyndon Johnson), they all accepted the need for some sort of homefront sacrifice, as both an economic and moral necessity.
* * *
This book seeks to convey the rich, and sometimes problematic, history of wartime taxation in the United States. Organized into six chapters, it describes tax policy during the nation's major wars in chronological order. A brief note about coverage will help clarify certain decisions and assumptions made in structuring the book. First, we have chosen to focus on some wars while excluding others. We have omitted, for instance, any extended treatment of the Mexican- American War and the Spanish-American War. While both meet the most obvious, formal definition of a war -- having been declared by Congress -- they were quickly eclipsed by larger conflicts with more enduring effects on the nation's revenue system. By contrast, we have included several of the nation's many undeclared conflicts, including those in Korea, Vietnam, and the Middle East. Undeclared wars have become the rule rather than the exception since the end of World War II, yet their effects on the nation and its tax system have been indisputable. While somewhat arbitrary, our choice of wars reflects an attempt to use major historical episodes to shed light on the nation's current situation in Iraq.
We have also made important assumptions about what constitutes a "tax." The definition may seem obvious, but it's not. Many wartime practices, especially conscription, might reasonably be treated as a form of taxation. What difference is there, one might ask, between forcing citizens to fight in war and requiring the payment of taxes to finance a voluntary army? Similar questions arise with regard to the commandeering of industry and other wartime regulations of the economy. While not taxes in the common sense of the term, these devices still represent a means by which governments marshal economic resources. But tempting as it may be to include in our discussion every coercive device for enlisting scarce resources, we want to keep our analysis within certain manageable limits. Our principal focus is on explicit taxes -- or, more precisely, on wartime amendments to the nation's internal revenue laws.
Even with the more restricted focus, however, complications abound. Consider the question of whether the United States has ever "cut taxes" during a war. What if lawmakers cut taxes for some people while raising them for others? What if one type of tax goes up while another goes down? And what if taxes are increased during a time of war, but spending hikes outstrip the new flow of revenue, leading to higher budget deficits? These situations might be classed as tax cuts, after a fashion, but they might also be cast as tax increases. It depends on who is talking. We offer no single definition or methodological answer to the question of what constitutes a tax cut. Rather, we have focused on the complexities and historically rooted meanings of such "fiscal language."14 We have, in other words, let our subjects define the terms. If political leaders in a particular era called something a tax cut, then so do we. If they called it a tax hike, then we follow suit. And if they argued about what to call it, then we examine the argument. Indeed, such arguments lie near the heart of our fiscal tradition, illuminating the meaning and contours of homefront sacrifice.
Finally, while all fiscal language is subject to interpretation, "sacrifice" is perhaps the most malleable and important term for wartime tax debates. Politicians have never agreed on what it means to sacrifice through the tax system. Consider modern debates over taxes to pay for the "war on terror." While numerous commentators have criticized President Bush for failing to demand any sort of fiscal sacrifice, others -- including Bush himself -- have insisted that Americans have already sacrificed by paying "a lot in taxes." Indeed, during one interview, the president responded to a question about "shared sacrifice" by noting that Americans "sacrifice peace of mind when they see the terrible images of violence on TV every night."15 Although we use the term throughout the book, we have deliberately avoided assigning it any particular definition, choosing to let historical actors speak for themselves when invoking -- or refusing to invoke -- principles of shared sacrifice.
* * *
As we finish writing this book in early 2008, we cannot ignore its most obvious contemporary context: Is the war in Iraq somehow different from all the wars -- and taxes -- that preceded it?
Despite the huge expense and the lingering nature of the conflict, Congress and the president have refused to ask the American public for fiscal sacrifice in the form of higher wartime taxes. Indeed, they have reduced the overall tax burden multiple times. We may simply still be in the early stages of the pattern exhibited in the Civil War and Vietnam, mired in the initial reluctance to call for public sacrifice. If so, then fiscal policies may change as we tally the war's other forms of sacrifice -- lost lives, de facto conscription in the form of extended tours of duty among the regular military and the National Guard, higher gas prices, or even new terrorist attacks.
Or maybe we, as a nation, have decided to shift the fiscal sacrifice to future generations. In past wars, borrowing has been justified as a device to spread the fiscal burden forward in time. Perhaps Americans have embraced this unsung element of our wartime fiscal tradition, expecting our children and grandchildren to foot a larger share of the price we pay for security. If so, however, we will have also changed this tradition, not only asking future generations for more fiscal sacrifice, but explicitly reducing the fiscal burden on ourselves.
FOOTNOTES
1 Peter Lisagor, "Absence of Sacrifice at Home Spurs Guilt Feeling over War," Los Angeles Times, July 9, 1967, J3.
2 On fatalities, see U.S. Department of Defense, Operation Iraqi Freedom (OIF) U.S. Casualty Status and Operation Enduring Freedom (OEF) U.S. Casualty Status (http://www.defenselink.mil/news/casualty.pdf). On war costs, see the statement of Robert A. Sunshine, assistant director of the Congressional Budget Office, before the House Committee on the Budget, Jan. 18, 2007, 1.
3See the Economic Growth and Tax Reconciliation Relief Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, the Working Families Tax Relief Act of 2004, the Tax Increase Prevention and Reconciliation Act of 2005, and the Small Business and Work Opportunity Tax Act of 2007, which was enacted as part of the U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007. This does not include tax relief for disaster-affected areas, even though the tax reductions enacted benefited more than just those affected by the disasters. (See the Gulf Opportunity Zone and Katrina Emergency Tax Relief Act of 2005.)
4 For an overview and description of these most significant changes, see David L. Brumbaugh, "Major Issues in the 109th Congress" (Washington, DC: Congressional Research Service, 2005).
5 Alan J. Auerbach, William G. Gale, and Peter Orszag, "New Estimates of the Budget Outlook: Plus Ça Change, Plus C'est la Même Chose," Tax Notes, Apr. 17, 2006, p. 349.
6 David E. Rosenbaum, "Tax Cuts and War Have Seldom Mixed," New York Times, Mar. 9, 2003, N17.
7 Frank Rich, "Supporting Our Troops over a Cliff," New York Times, June 4, 2006.
8 Ronald Brownstein, "Bush Breaks with 140 Years of History in Plan for Wartime Tax Cut," Los Angeles Times, Jan. 13, 2003.
9 David R. Mayhew, "Wars and American Politics," Perspectives on Politics (Sept. 2005), 473.
10 On wartime sacrifice, see Mark H. Leff, "The Politics of Sacrifice on the American Home Front in World War II," Journal of American History (1991). On civic engagement, see Mayhew, "Wars and American Politics," 475 (citing Theda Skocpol and Robert Putnam). On the relative popularity of wartime taxes, see Naomi Feldman and Joel Slemrod, War and Taxation: When Does Patriotism Overcome the Free-Rider Problem? (unpublished manuscript).
11 During World War II, federal spending on national defense averaged 76.4 percent of total outlays, absorbing 37.8 percent of GDP in the final years of the war.
12 Carolyn C. Jones, "Class Tax to Mass Tax: The Role of Propaganda in the Expansion of the Income Tax during World War II," Buffalo Law Review 37 (1989): 685.
13See American Enterprise Institute, "Public Opinion on Taxes," AEI Studies in Public Opinion.
14 Daniel Shaviro, Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (Cambridge: Cambridge University Press, 2006), 3-14 (discussing concept of "fiscal language").
15 The News Hour with Jim Lehrer, January 16, 2007 (http://www.pbs.org/newshour/bb/white_house/jan-june07/bush_01-16.ht ml?mii=1).
END OF FOOTNOTES