Tax Analysts®Tax Analysts®

Article Archive

December 5, 2005
Historical Perspective: Sacrifice and Surcharge
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM


    The test before us as a people is not whether our commitments match our will and our courage; but whether we have the will and the courage to match our commitments.

      -- President Lyndon Johnson, Special Message to the Congress on the State of the Budget and the Economy, August 3, 1967.
The United States has a tradition of wartime fiscal sacrifice stretching back to the nation's founding. From James Madison to Lyndon Johnson, presidents have asked the American people to foot the bill for national defense. As Franklin Roosevelt declared in 1942, "When so many Americans are contributing all their energies and even their lives to the nation's great task, I am confident that all Americans will be proud to contribute their utmost in taxes."

By contrast, President Bush has coupled sacrifice on the battlefield with self-indulgence at home. As critics are fond of pointing out, he is the first American wartime leader to champion sweeping tax cuts in the face of a sustained military commitment.

Seeking to underscore Bush's break with fiscal tradition, some observers have looked to the Vietnam War. In 1967 President Lyndon Johnson asked Congress for a special wartime surcharge on individual and corporate income taxes, citing the need to stem inflation and limit deficits. During a recent panel discussion, Isabelle Sawhill of the Brookings Institution and Maya MacGuineas of the New America Foundation both endorsed a similar levy to help pay for the war in Iraq and brighten the nation's gloomy fiscal forecast.

So what, exactly, was the Vietnam surtax? And does it deserve a place in the pantheon of home-front sacrifice?


Reluctant Request

Johnson was a reluctant champion of fiscal sacrifice. He resisted the notion of a war surcharge, even as military costs in Vietnam continued to mount. Eager to advance his plans for a larger, more comprehensive welfare state, he assured Congress that the United States could afford both guns and butter. "Time may require further sacrifices," he acknowledged in his 1966 State of the Union message, "and if it does, then we will make them. But we will not heed those who would wring it from the hopes of the unfortunate here in a land of plenty. I believe that we can continue the Great Society while we fight in Vietnam."

President Lyndon Johnson decorating a soldier at Cam Ranh Bay, Vietnam, 1966. (Photo Courtesy National Archives) In the abstract, new revenue might have bolstered Johnson's case for trying to have it all, but the politics of fiscal policy ran in the opposite direction. Johnson believed that any tax increase would endanger his cherished social programs, prompting a conservative backlash against the Great Society. As historian Julian Zelizer has observed, LBJ understood that "all hell will break loose on our domestic programs" once plans for a tax increase reached Capitol Hill.

Johnson's economic advisers continued to insist, however, that some sort of tax increase was imperative. Emphasizing the dangers of war-borne inflation, they gradually convinced the president. In January 1967 Johnson asked Congress to approve "a sensible course of fiscal and budgetary policy," including a 6 percent surcharge on personal and corporate income taxes. The special levy, designed to help pay for the war, would last a maximum of two years -- less if swift victory allowed U.S. forces to withdraw sooner. The surcharge, which administration experts expected to raise $4.5 billion in its first year, would exempt taxpayers in the lowest tax brackets. And for almost everyone else, Johnson insisted, it would amount to less than $5 extra per month.

Johnson reminded Americans that they owed him one. Recent tax cuts had relieved the burden for almost everyone, but now it was time to give back:


    Now if Americans today still paid the income and excise tax rates in effect when I came into the presidency . . . their annual taxes would have been over $20 billion more than at present tax rates. So this proposal is that while we have this problem and this emergency in Vietnam, while we are trying to meet the needs of our people at home, your government asks for slightly more than one-fourth of that tax cut each year in order to try to hold our budget deficit in fiscal 1968 within prudent limits and to give our country and to give our fighting men the help they need in this hour of trial.

Although not devoid of emotion, such rhetoric hardly represented a stirring call to sacrifice and self-denial. Johnson was eager to minimize the fiscal burden of the war and was determined to protect the Great Society from its congressional antagonists.

Johnson's most formidable opponent was Arkansas Democrat Wilbur Mills, chair of the House Ways and Means Committee and one of the most powerful members of Congress. An ardent fiscal conservative, Mills was determined to force cuts in discretionary spending. Only then, he told the president, would he agree to any sort of tax increase.

The surcharge proposal went nowhere. For months Mills and Johnson were caught in a standoff, neither willing to compromise. Johnson, moreover, was still reluctant to invest much political capital in the idea, well aware that congressional and public opinion was running against it. Editorials in leading newspapers were skeptical of the need for such a drastic anti-inflation measure. Opinion polls showed scant enthusiasm for any sort of tax increase; many respondents seemed to doubt that new revenue would be used for the war effort, instead of going to finance general expenditures.

By August 1967 Johnson was growing more concerned about the state of the economy, and he renewed his request for a surcharge. Now, however, he was asking for a 10 percent levy, and he embraced the moral rhetoric of wartime self-denial to justify the proposal. "Some may hear in this message a call to sacrifice," he declared. "In truth, it is a call to the sense of obligation felt by all Americans. The inconveniences this demand imposes are small when measured against the contribution of a Marine on patrol in a sweltering jungle, or an airman flying through perilous skies, or a soldier 10 thousand miles from home, waiting to join his outfit on the line."

Despite those impassioned appeals, the surcharge continued to struggle. Johnson was willing to accept limited spending cuts, but Mills continued to press his advantage, demanding deeper, more painful reductions. The turning point came in early 1968 when a growing balance-of-payments deficit raised economic fears to a new height. As historian Robert Collins argued in a valuable analysis of the 1968 crisis, inflation curbs were a central component of the administration's effort to bolster the dollar and stem the depletion of gold reserves.

Egged on by his economic advisers, Johnson acceded to Mills and his conservative cadre on the Ways and Means Committee. The president swallowed a 10 percent reduction in discretionary spending, and Mills gave him the tax surcharge.


The Surcharge

The Revenue and Expenditure Control Act of 1968, signed by Johnson on June 28, 1968, imposed a 10 percent surcharge on individual and corporate income taxes. Low-income taxpayers were entirely exempt. As Johnson pointed out in his statement when signing the bill, a family of four earning less than $5,000 (about $28,000 in 2005 dollars) would pay nothing additional. A family making $10,000 (about $57,000 in 2005 dollars) would pay just $2 extra per week (about $11.50 in 2005 dollars).

Individual taxpayers completed their returns as usual, but a new line appeared on Form 1040. After entering tax due on line 12a, an individual taxpayer was prompted by line 12b to consult a special surcharge table and add the appropriate amount to his or her regular tax liability. For tax year 1968, the surcharge amounted to 7.5 percent of a taxpayer's regular tax liability. (The 10 percent levy was prorated since it was in place for only nine months of the calendar year.) For corporations, the process was similar: A new line on Schedule J of Form 1120 required companies to add 10 percent to their regular tax bills (or a prorated amount, depending on the corporation's tax year).

In 1969 Congress renewed the surcharge through the middle of 1970 but reduced it to 5 percent. Still, the tax raised substantial revenue -- some 55 billion in constant 1992 dollars, according to a 2003 Treasury Department estimate. As legal scholar Kirk Stark pointed out in a paper examining Vietnam War tax policy, "The importance of the 1968 legislation to the U.S. budget situation in the late 1960s should not be underestimated."

Feel free, however, to underestimate its efficacy as an anti- inflation device. Skeptics at the time predicted that the surcharge would fail to stem consumer spending -- and not simply because it took so long to enact. In a critical article in 1971, economist Robert Eisner said temporary taxes were ineffective curbs on consumer spending. And according to Charles Steindel of the Federal Reserve Bank of New York, who has written on the effect of tax changes on consumer behavior, subsequent analysis has borne that prediction out. Inflation continued to rise throughout 1968, 1969, and the early 1970s.


Bush and Johnson

Lyndon B. Johnson and George W. Bush aren't exactly two peas in a pod. Their views of government and society couldn't be more divergent. But this unlikely pair shared an aversion to home-front sacrifice. Each sought to preserve his domestic accomplishments: Johnson his Great Society and Bush his tax cuts (no moral equivalence implied or assumed). While both were fluent in the rhetoric of sacrifice, neither rushed to make that ideal part of the nation's fiscal policy.

But any similarity ends there. Bush has remained implacably opposed to any sort of tax increase -- apparently convinced, as Rep. Tom DeLay, R-Texas, declared in 2003, that "nothing is more important in the face of a war than cutting taxes." Johnson, by contrast, was ultimately willing to face the fiscal music, convinced that unbalanced budgets would undermine not just the war, but his social priorities, too.