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May 19, 2011
Tax History: Soak the Kids: Taxes, Debt, and Intergenerational Equity
Joseph J. Thorndike

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When it comes to fiscal policy, is there anything more righteous than "pay as you go" financing? Who can object? Shouldn't we all be willing to foot the bill for our own spending? And for our own tax cuts, for that matter?

Leaving aside the countercyclical utility of Keynesian demand management, the common-sense version of fiscal balance -- a dollar of spending for a dollar of taxes -- seems eminently reasonable. Spend too much or tax too little and you end up passing the bill to your children. And who's prepared to defend that?

More than a few past politicians, that's who. For centuries, public debt has been a fixture of modern government (indeed, it may be its defining characteristic). And while many politicians have treated it as an unpleasant necessity, others (like Alexander Hamilton) have defended it as a "national blessing."1

In American history, debates over debt -- and the taxes necessary to pay it -- have sometimes been prompted by campaigns for public investment, especially involving transportation infrastructure. But more often, wars have been the catalyst for these arguments.

Some degree of borrowing is almost inevitable during wartime. But Americans have argued long and hard about the proper mix of taxes and debt used to finance conflicts. Even more striking, they have argued with particular passion after wars have ended about how to retire the leftover debt. If patriotism inhibits self-indulgence during the fighting, it loses much of its potency once the shooting stops.

War Finance

Over the past decade, Democrats have made a lot of hay about the non-taxes used to pay for America's recent wars. (By non-taxes, of course, I mean tax cuts.) Years ago, politicians felt compelled to cough up some cash for expensive wars. But that kind of fiscal responsibility seems old-fashioned nowadays. In 21st-century America, hawks avoid taxes because they don't want to make unpopular wars even more unpopular, while doves avoid taxes because they don't want to pay for wars they opposed in the first place.

This sort of fiscal self-indulgence is not a modern innovation. Enthusiasm for war taxation has waxed and waned over the past couple of centuries. As Steven A. Bank, Kirk J. Stark, and I pointed out a few years ago:


    [America's] 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.2

Still, most wars in American history have been funded, at least in part, by new taxes. Driven by economic necessity, moral imperatives, or political expedience, politicians have usually responded to the call for fiscal sacrifice. As Rep. Joseph Bailey declared in 1898:

    If I were rich and prosperous, I would contribute of my abundance to my country in this time of stress because I would not want it said in the history of these times that the poor gave more of their blood than the rich were willing to give of their treasure.3

War finance doesn't end when the fighting stops. Assuming that loans have been used to pay for at least part of the cost (a safe bet, even in wars marked by heavy taxation), then someone will be servicing that debt when peace returns. And that's when the arguments over debt, taxes, and intergenerational equity start to get interesting.

Pay It Back

George Washington was one of the first American politicians to engage this issue. In his farewell address, he famously warned his countrymen to avoid saddling the future with the debts of the present:


    As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible: avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it; avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertions in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear.4

Washington presided over the nation's first fiscal crisis, as his Treasury secretary, Alexander Hamilton, convinced lawmakers to make good on the nation's enormous Revolutionary War debt. But Hamilton's effort made Washington's point: Debt was sometimes unavoidable, but it was tolerable only if managed responsibly. Speedy repayment was the key.

Washington's view of debt enjoyed broad support, in theory if not always in practice. But the Civil War prompted political leaders (and editorial writers) to challenge the need for prompt repayment of emergency loans. The sheer scale of the debt seems to have prompted the rethinking. "The war will leave us a national debt of about three thousand millions [emphasis in the original]," observed The New York Times. "Shall the republic be relieved of this great burden by the people now on the stage, or shall the bulk of it be devolved upon succeeding generations?"5

That was the question. Did the current generation have a responsibility to discharge this debt themselves, since they had actually incurred it? Or had they paid enough already, both in dollars and blood?

At least for editors of the Times, the answer was clear. "Neither the national credit, nor the future national prosperity, in any manner requires [speedy repayment]," the paper asserted. "And equity certainly forbids that a generation which has already borne so much in carrying through a war for the benefit of all coming generations, should assume every remaining burden, simply that our successors may have no encumbrance."6

The issue, in other words, was twofold. First, the current generation had paid its fair share.


    The present system of revenue bears very hard not only upon the comforts but upon the necessaries of life. A man with a less income than six hundred dollars may, indeed, escape the income tax, but there is not a man in the country so poor as not to use articles which have to pay an excise. Nobody can wear a short, or a coat, or a hat, or a pair of shoes; can wash himself with soap, or shelter himself with an umbrella, or sleep on a bedstead, or take medicine when he is sick; can burn gas or a candle; can advertise for a situation; can buy a shovel to dig with, or a mug to drink from; can mustard his meat or salt his potato; can put coal into his grate, or a hinge upon his door, or glass into his window, without having to pay something in the shape of excise. The items singly may amount to little; but in the aggregate they trench severely upon slender means.7

It was time to relieve taxpayers of this burden (or at least part of it). "We have made immense progress towards paying off the debt," the editors wrote in 1871, "and now the people require a little breathing space."8

More important, however, taxpayers weren't the only ones who would reap the benefits of victory. "Without desiring to transfer the burden to a remote posterity, it is only reasonable to hold that the expenses of a war which was fought for the benefit of all future comers should not be endured by a single generation," the editors contended.9

Politicians ultimately agreed. Most of the war's extraordinary taxes disappeared within a few years, and the income tax expired in 1872 -- long before the war's debt was retired.

A War of Volition

The Spanish-American War brought different issues to the table. This time, political leaders felt compelled to pay for a larger share of the war's cost on a current basis, avoiding debt for a conflict that Americans were not -- strictly speaking -- compelled to fight.

In the jingoistic spirit of the era, The New York Times again spoke for the establishment, arguing that war against Spain should be fought on a pay-go basis. Americans joined the fray solely in the interest of justice, determined to save a subject people from their colonial oppressors, the paper declared. "The war with its sacrifices is the contribution that we of this generation are making to civilization," the editors wrote. "It is a considerable and valuable contribution, but it is not overwhelming or one for which we need to send the bill to our children, or even one that we need meet on the installment plan."10

In other words, the cost of an optional war could not legitimately be passed to succeeding generations. Rep. Jonathan Dolliver made the point even more explicitly:


    If the war upon which we are about to enter was to secure new National possessions, or any other acquisition of material assets, the case might present a view somewhat different. But here for the first time in the history of the world a Nation has of its own volition thrown away any prospect of aggrandizement, and has based its action upon disinterested grounds, so that what we are about to do, however much it may minister to the satisfaction and moral comfort of the community, concerns posterity vastly less than it does us.11

Setting aside the disingenuous and paternalistic elements of this argument, it did establish a new standard for war finance. Later generations were only liable for payments to support necessary or profitable wars -- wars of national survival or imperialistic expansion. Of course, the Spanish-American War turned out to be the latter, delivering to the United States quite a bit of new real estate. But nonetheless, the argument managed to cast intergeneration responsibilities in a new light.

A War of Compulsion

World War I revived arguments for cost sharing across generations. Once again the United States was embarking on a war of compulsion (or so editorial writers believed). Champions of debt finance began making their case well before American entry into the war. "'Pay as you go' is the reply of those who insist that present-day taxpayers shall carry the whole burden of present and future preparedness," said The Washington Post. "But the role of 'pay as you go' is broken when one generation pays everything. Posterity will not pay as it goes if the bill is already paid."12

The key here, as before, involved the benefits accruing to later generations. If the kids were going to reap material benefits -- as opposed to the psychic reward inuring to a war of evangelical imperialism, like the conflict with Spain -- then the kids could help pay. "This is an expenditure of the most permanent sort," wrote The New York Times. "The principles established will be more enduring than any material work of man. They will be bequeathed to descendants of this generation as truly as we received our Government from our forebears. It is only our duty to bear our share in taxation in war. It will be no harder for them to bear their share in peace."13

As it turned out, Americans paid quite a few taxes during World War I. But the argument for intergenerational assistance in footing the bill survived the war largely intact. By 1918, with peace on the horizon, champions of slower debt repayment began agitating for a tax cut. Their hopes were complicated by a still-swollen budget; military expenditures were expected to drop quickly, but other expenses were likely to stay high (demobilization wouldn't be free, and neither would postwar relief for stricken European nations). Nevertheless, lawmakers were committed to tax relief, insisting that current taxpayers had already done enough. It was time, The Washington Post argued, to ask the kids for a hand:


    This radical change in war revenue legislation is based on the double theory that the present generation, which has borne the burden of carrying on the war, should not carry the entire financial burden, and that the future, for which the war has been fought, should carry its share.14

Then, as now, fiscal scolds were quick to object. "Continuing the process of borrowing, in order to pay interest on war debt, is, of course, a cowardly shirking which must aggravate the catastrophe a little later on," The Nation magazine observed.15 But cowardly or not, that shirking had precedent. And broad political appeal.

"Posterity will receive more benefit from the struggles of living and dead Americans of this age than has been conferred upon the present generation," insisted the Post. "Posterity should inherit some of the burdens as well as the blessings of present-day sacrifice. Posterity cannot pay in blood, as so many of the present families have paid, but it can pay in moderate taxation."16

The case for tax cuts proved irresistible. Taxes fell in the years after World War I and throughout the 1920s. However, prosperity kept revenues high, and Republican presidents made a point of speedy debt retirement. (This was notable, since Democrats had been the loudest champions of maintaining wartime tax levels to help speed repayment.) Nonetheless, the case for the intergenerational sharing of war costs -- bolstered by the high price of World War I in terms of both lives and money -- proved compelling.

An End to Easy Finance

World War II was marked by heavy taxation during the years of fighting and heavy taxation in all the years after. Following the war's conclusion, there was a brief flirtation with wholesale tax relief, but a combination of fiscal rectitude (President Truman staked out the ground of speedy debt repayment) and continued military spending (especially after the start of the Cold War) kept taxes from sliding.

Even so, editorial writers felt compelled to argue against the suggestion that Americans were due a tax cut. Marquis Childs, a Post columnist, made the case for continued austerity. He warned:


    We must not expect to escape so lightly the consequences of the war.

    We escaped the physical destruction of Europe. We escaped the hunger and the terror that cut deep into the lives of millions all over the world. If we now attempt to pass on the financial cost to another generation, we shall be asking for trouble -- and trouble not alone for ourselves but for succeeding generations. Cutting taxes is easy. Cutting the debt is a lot harder.17


In the immediate aftermath of World War II, cutting debt actually proved fairly easy, if only because the total debt burden was small compared with federal revenues. As two scholars of public debt have noted, "Interest on the national debt consumed 53 percent of federal revenues in 1789, 25 percent in 1866, 20 percent in 1919, and 37 percent in 1933, at the bottom of the Depression. By 1945, the federal government's interest bill was just under 10 percent of its revenues, well below the 13.2 percent level of 1941."18

A Different Debt Debate

Since World War II, political arguments over war finance have not involved much discussion of intergenerational responsibilities. To be sure, the wars in Korea and Vietnam involved new taxes and additional debt. But there was little apparent interest -- or at least, little stated interest -- in sharing costs with future taxpayers. No doubt, the relative unpopularity and uncertain resolution of these wars played a key role. Sharing the cost of victory is one thing, but sharing the cost of stalemate and retreat is something else entirely.

The wars in Iraq and Afghanistan, by contrast, have been fought almost entirely on credit. But if the politicians of today have embraced the argument for intergenerational cost shifting, their decision has been tacit, not explicit. When politicians of the past were unwilling to give their kids a free ride, they had the courage to say so. Today, the decision to soak the kids goes unspoken and unacknowledged.


FOOTNOTES

1 See, for example, Alexander Hamilton, "First Report on Public Credit," 1789, in "A Century of Lawmaking for a New Nation: U.S. Congressional Documents and Debates, 1774-1875," American State Papers, House of Representatives, 1st Congress, 2nd Session, 15-25, available at http://memory.loc.gov/cgi-bin/ampage?collId=llsp&fileName=009/llsp009.db&Page=15.

2 Steven A. Bank, Kirk J. Stark, and Joseph J. Thorndike, War and Taxes xiii (2008).

3 "Debating War Tax Bill," The New York Times, Apr. 28, 1898, at 4.

4 Washington's Farewell Address 1796, available at http://avalon.law.yale.edu/18th_century/washing.asp.

5 "Shall This Generation Pay the National Debt?" The New York Times, May 11, 1865, at 4.

6 Id.

7 Id.

8 "The Taxes," The New York Times, Apr. 12, 1871, at 4.

9 Id.

10 "A Cash War," The New York Times, Apr. 28, 1898, at 6.

11 "Debating War Tax Bill," supra note 3.

12 "Financing National Security," The Washington Post, July 6, 1916, at 6.

13 "Financing the War," The New York Times, Apr. 4, 1917, at 14.

14 "Heavy Cut in Revenue," The Washington Post, Nov. 11, 1918, at 3.

15 Quoted in The Living Age, Volume 298, Eliakim Littell and Robert S. Littell, eds., available at http://bit.ly/m6lcIF.

16 "Time to Lift the Burdens," The Washington Post, Oct. 3, 1920, at 26.

17 Marquis Childs, "Washington Calling," The Washington Post, Jan. 10, 1947, at 8.

18 John H. Makin and Norman J. Ornstein, Debt and Taxes (1st ed. 1994).


END OF FOOTNOTES