Paying for War: The Revenue Half of Financial Management

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1 Paying for War: The Revenue Half of Financial Management shall we be more tender with our dollars than the lives of our sons? -Wm. McAdoo Secretary of the Treasury

2 Income tax in the US 1861 to finance Civil War; not permanent 16 th Amendment ratified in 1913 Congress given power to lay and collect taxes on incomes Income tax becomes permanent in 1913 How was revenue raised before then?

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6 What is a War Savings Stamp? If you bought a stamp in July 1918 for $4.18, you would have been paid $5.00 on January 1, You would fill a booklet with 20 of these, bought during the course of the year, for about $83 and get $100 in five years. (4% interest)

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12 Historical Practices How to pay for war is a policy decision with several considerations: Who pays? Rich or poor Domestic or International When is it paid? Now (tax) or later (borrow)

13 Paying for War Pay Now Pay Later Domestic Rich Domestic Working Class International Raise taxes to high rates. Impose excess profit taxes on defense businesses Lower the threshold for paying taxes. Increase tax rates. Impose sales taxes or ration consumption. Tariffs, spoils of war, lease equipment Sell large denomination bonds; borrow from big banks and wealthy individuals Sell small denomination bonds; have liberty loan drives Borrow from other nations

14 20 th Century Perspective 1:2 No corporate war profiteering Profits capped or punitive tax policies imposed Pay-as-you-go as much as possible Minimize intergenerational taxation Marginal income tax rates rose as high as 94% Revenue as % GDP: 7% (1940) to 21% (1945). Self-finance the war do not borrow overseas Since the American Revolution, no war has been financed primarily through international borrowing Fight or Buy Bonds everyone s patriotic duty

15 20 th Century Perspective 2:2 Shared pain and benefits Bonds were sold in very low denominations so everyone could buy and benefit The wealthy will not profit from buying bonds, the interest on which is paid by taxing the working class. Personal sacrifice rationing of goods women and minorities working non-traditional roles Political sacrifice New Deal programs scaled back in face of WWII Great Society programs reduced in face of Vietnam

16 Tax Rate History First Income Tax (1913) Talk about a tax hike!

17 WWII (1945)

18 WWII (1945) 1944 dollars 0-2, , , , ,000 43,000 - WWII tax rates were twice what they are today.

19 What s different since 9/11? Taxes were cut, repeatedly; not raised Public was encouraged to go back to normal activities, otherwise the terrorists have won. Financial & housing markets even experienced bubbles Coincidentally, Pay-as-you-go (PAYGO) budget deficit controls were retired, allowing domestic non-defense spending to rise Federal education spending doubled The largest entitlement program without a dedicated source of revenue in US history was created (Medicare Part D) and the $200B budget surplus of 2001 became a $1.6T annual deficit by 2011.

20 What s different since 9/11? Foreign-held US debt grew from $992B in September 2001 to $5.1T by March China s holdings up more than 15- fold from $72B to $1,250B Oil exporting nations holdings up 5- fold from $43B to $254B. Meanwhile, holdings of US Savings Bonds decreased from $179B to $169B. In contrast, in 1944, $16B in savings bonds were sold in the US (not adjusted for inflation). Federal Revenue as % GDP

21 Federal Receipts Over the past 50 years, the share of federal revenues from personal income taxes have held steady, but other categories have shifted. Sources of Federal Revenue, FY2014 Federal Revenues FY 1960 Excise & Other Taxes 17% Corporate Income Tax 23% Social Insurance Taxes 16% Individual Income Tax 44% Excise & Other Taxes 9.4% Corporate Income Taxes 10.6% Social Insurance Taxes 33.9% Individual Income Taxes 46.2% Blue = individual income and payroll taxes. (80%) Source: Table 2.2, Historical Tables, Budget of the United States of America, Fiscal Year Total, FY14 Budget $3,021 Billion

22 Structure of the Federal Debt $18,082 billion = $58,518 each 309 million Americans Total Federal Debt $18,082 billion GDP for 2014: $17,244 billion 3 Largest Accounts Intragovernmental Holdings $5,599 billion 31% 69% Debt Held by the Public $12,483 billion Social Security Trust Fund $2,739 billion Civil Service Retirement Fund $841 billion Military Retirement Fund $536 billion Foreign-Held $6,112 billion 49% 51% Domestically-Held $6,371 billion Foreign holdings are about 70% official, 30% private. China $1,250 billion Japan $1,241 billion Belgium $336 billion Carribbean Banks $332 billion Federal Reserve $2,460 billion Top 4 Foreign Holders of U.S. Debt as of 30 Nov 2014 Sources: Monthly Statement of the Public Debt, January 31, Except: Foreign-held debt as of 30 Nov 2014; Federal Reserve data as of 5 Feb 2015 available at:

23 Tax Rate History & Progressivity

24 Source: FY2012 Budget of USA, Historical Tables, Table 1.2 Burden of tax receipts Federal Tax Receipts as % of GDP ( ) Average = 17.8%

25 Interesting reading The Tax Foundation taxfoundation.org Center on Budget and Policy Priorities cbpp.org U.S. Senate, Joint Committee on Taxation Guy Peters American Public Policy, Ch 9 Tax Policy Linda Bilmes The Financial Legacy of Iraq and Afghanistan: How Wartime Spending Decisions Will Constrain Future National Security Budgets