War and Taxes: The Impact in the 2008 Presidential Election

Since the modern tax code was put into effect in 1913, the marginal tax rate has risen in times of war in the United States... except under the current Bush Administration. Both Republican John McCain and Democratic candidate Barack Obama have proposed some form of tax cuts when taking office. With the war in Iraq seemingly winding down and a shift in resources back to Afghanistan in the works, it may seem like the appropriate time to provide tax relief to stimulate a fledging U.S. economy. However, with the prospect of a record climbing national debt, rising inflation, runaway energy costs and skyrocketing health care premiums coupled with the housing market recession, the middle class appears doomed to foot the bill created by the last 8 years.

Irresponsible fiscal policy, incompetency and mismanagement of Hurricane Katrina and the Iraq War has damaged the current administration's credibility, even among conservatives. Soon after the events of September 11, 2001, the president asked the American people to come together, sacrifice, and go shopping! With two active wars, our all-volunteer military resources have been overstretched due in large part to bungling fiscal policy and military tactical mismanagement from the civilian leadership, most notably former Defense Secretary Donald Rumsfeld. The underestimation of the resources required and the sheer difficulty of establishing a new government in place of the deposed Saddam Hussein in Iraq were key in placing an undue burden on our military and their families. Unfortunately, fiscally speaking that burden has not been shared by the rest of the American people for the most part. The entire war has been financed by deficit spending, therefore passing the costs off to future generations.

In WWII, Korea, Vietnam, and even the Cold War economic sacrifices were asked of the American taxpayer. Even as far back as the War of 1812, special taxes were imposed to help pay for military operations. The Civil War saw a return of the excise tax and a tax on personal income was first introduced to the American taxpayer. Again, most of these taxes were repealed at the conclusion of the war. Liquor and Tobacco taxes were the primary source of Federal revenue, even throughout the Spanish-American War when they doubled, and which also saw new taxes placed on chewing gum and work place recreational facilities. The War Revenue Act also enacted the sale of war bonds, which combined with high tariffs and the previously mentioned excise taxes accounted for most Federal funds.

That act of 1899 was in part a reaction to the failed proposal to impose a flat rate income tax, which was deemed unconstitutional because it was a direct tax without any relation to State population. Primarily, however, the War Revenue Act was passed in response to the need to pay for the Spanish-American war. Eventually, the income tax was established via the 16^th Amendment in 1913, just prior to WWI. The tax rates were far more modest, however, than today's standards. Therefore, a need for additional Federal revenue arose again in 1916 when Congress passed the Revenue Act, raising the lowest tax rate and imposing new taxes on businesses and estates in order to fund the war effort. Two more acts in the subsequent years hiked tax rates substantially each time, yet by 1918 only 5% of the population paid income taxes,which covered about one-third the costs of war. By the 1920's an economic boom created enough federal revenue to allow for tax cuts on five occasions up until the stock market crash of 1929. Taxes were raised once again in 1932 and 1936 to increase federal revenue. The advent of the Social Security Act in 1935 should be saved for an entirely separate discussion. The Revenue Act of 1942 is what really established the modern system of taxation and when it became socially acceptable to the American public as a necessary and fair tax, due to our involvement in WWII.

However, in most of these instances, the War of 1812, the Civil War, and later on the Vietnam War, there was initially significant resistance to new war taxes by political leaders and lawmakers. However, the need for shared sacrifice grew strong enough that they eventually relented. Perhaps this idea was helped along by the presence of a military draft when it was created during the Civil War, but which then ended following the Vietnam War due to its tremendous unpopularity.

So will shared sacrifice in 2008 become an issue for the American taxpayer? The politicians? The all-volunteer military personnel? Are either Obama or McCain proposing a return to this American value? It would not appear so. The national debt and our financial solvency is a complex issue left for the economists to sort out, but common sense would seem to suggest we simply cannot continue along on a path of deficit spending to fund a perpetual "War on Terror."