TCS Daily

Taxes, Deficits and War: the History Lessons

By Jerry Bowyer - October 22, 2004 12:00 AM

John Kerry has repeatedly accused George W. Bush of being the first president in American history to cut taxes during a time of war.

First, let's deal with Senator Kerry's factual error before we get on to his philosophical ones. George W. Bush is not the first president in American history to cut taxes near or at the beginning of a war. Just looking at wars in the past 70 years of American history, we find the following: FDR cut capital gains rates (in those days a tax overwhelmingly levied on the rich) at the beginning of WWII; John Kennedy cut taxes near the beginning of the Vietnam War; and that's not counting various minor military actions, such as Grenada and Kosovo, that occurred near significant tax cuts.

The deeper problem here, however, is philosophical. The anti-war left, seeking to wrap its position in conservative-sounding rhetoric about deficit reduction, has tried to reframe the war issue in economic terms. When they do this, they hold the president to a standard to which they are unwilling to hold previous war-time presidents. America finances wars through borrowing. So does virtually every other modern nation. In fact, our modern financial markets were born in the various open-air auctions at which the debt instruments of warring nations were traded. Nations that were expected to lose wars had their bonds discounted by the marketplace and vice versa. Powerful banking interests such as the Rothschilds became very adept at quickly ascertaining real-time war news and using it to receive an edge in the marketplace. Debt in times of war is not an unusual aberration; it is universal.

The United States is no exception in this regard. Our independence was won with borrowed money, and incidentally Alexander Hamilton argued for the nationalization of that debt, partially for the purpose of creating America's first credit markets. The Civil War, the Spanish-American War, and WWI involved extensive borrowing. As the chart above shows, WWII involved far higher borrowing levels than our current conflict and for extended periods of time. As you see also above, the Korean War involved substantial borrowing and the height of the Vietnam War involved higher levels of borrowing than now. Ronald Reagan finished off the Soviets with high levels of borrowing amidst incessant Democratic carping. As during the era of the Rothschilds, the danger signal is not that borrowing occurs, but that the marketplace begins to worry whether economic weakness or military defeat will harm the borrower's ability to repay. This can occur either in the form of outright default for the vanquished party or in the form of repayment in a debauched currency for the overstretched. What is the international marketplace saying about our borrowing? High degrees of confidence have caused them to lend to us at roughly 4%, the lowest rates in four decades.

Should we mind that some of this war will be paid for by our children? Not at all. Ronald Reagan ended a multi-generational threat through his military build-up in the 1980s. Soviet missiles are not pointed at us any longer. The collapse of the Soviets freed up enormous resources (remember the peace dividend?) which helped lay the foundation for the growth of the '90s. The generation following WWII reaped enormous benefits from the defeat of the Nazis. The generation following the demise of the Cold War reaped similar benefits from the demise of the Soviets. The generation following our own will reap enormous benefits from the defeat of the Jihadists and it is perfectly appropriate that they cheerfully pay their share of the debt that was incurred on their behalf like every other post-war generation in American history.


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