Where's our wartime tax increase?

Posted: Feb 09, 2004 12:00 AM

Bush critics have a question about his conduct in the war on terrorism almost as pressing as the ubiquitous "Where are the WMD in Iraq?" It is "Where are the tax increases here at home?"

Tim Russert announced in his "Meet the Press" interview with President Bush -- in a disapproving why-can't-you-get-with-the-program tone -- "Every president since the Civil War who has gone to war has raised taxes, not cut them." As former Clinton Chief of Staff Leon Panetta writes, capturing the critique perfectly, "While our fighting men and women are making the greatest sacrifice of all on the battlefields of Afghanistan and Iraq, the rest of us are encouraged to enjoy new tax cuts." So, is it a national scandal that American servicemen are fighting abroad when the capital-gains tax rate is 15 percent instead of 20 percent, and the child tax credit is $1,000 per child instead of $500?

No. It's not true that taxes always increase during wars. Taxes went up during World War I and World War II (although Franklin D. Roosevelt had already increased many taxes in the 1930s, in a misbegotten attempt to fight the Great Depression). But during conflicts that require less than total national mobilization, taxes don't necessarily increase. There weren't tax increases to pay for the Persian Gulf War (the first President Bush raised them for different reasons), or for Bosnia and Kosovo.

In the Cold War, John F. Kennedy and Ronald Reagan -- both devoted cold warriors -- cut taxes. Reagan increased defense spending by 35 percent, while the top income tax rate declined from 70 percent to 28 percent, in a strategy meant to restore at once American military power and the economy. The resulting budget deficits were worth it. They were economically inconsequential and disappeared as a growing economy produced more revenue during the next two decades.

Indeed, all the tut-tutting Bush critics who say taxes inevitably go up during wartime fail to note that borrowing goes up as well. The budget deficit was 30 percent of the gross domestic product in 1943. Today it is 5 percent of the GDP, a relatively tiny number and comparable to that of France, which is busy trying to obstruct our war on terror. Borrowing to fight an important war is almost the definition of a good investment, a short-term expenditure to make America and the world safer in the long run.

Bush is basically following the Reagan approach, investing to win a war and revive the economy. Consider the timing. His critics argue that in 2001, with the economy sinking, a stock-market bubble bursting and a massive terror attack rocking America, Bush should have raised taxes. But by no plausible economic theory does it make sense to hike tax rates in such circumstances. Even liberal Keynesian economists favor cutting taxes and running deficits during times of economic distress.

Where Bush has fallen down is in controlling nondefense spending. According to Heritage Foundation budget analyst Brian Riedl, if domestic discretionary spending had been held to its 2001 level, it would be roughly $270 billion less today, making for a budget deficit of roughly $200 billion. That's a very reasonable number, and one Bush now hopes to achieve in about five years.

But here's the rub: Bush's liberal critics want to increase all that domestic spending even more. So they wrap their advocacy of a tax increase in patriotic garb -- "We're at war; taxes have to increase" -- when they want to fund spending having nothing to do with the war. It is true that the United States faces a long-term fiscal crisis when the baby boomers retire and begin to enjoy the bounty of our generous Geriatric State. But that has been the case for a long time and won't change until Social Security and Medicare are scaled back and modernized.

Maybe now is the time to ask seniors and soon-to-be seniors to make the painful sacrifice of seeing their favorite programs changed. We're at war, after all.

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