Paying for Bush’s War

Over at the Wall Street Journal op-ed pages former W economic adviser Glenn Hubbard is sounding the alarm. “[We] stand on the verge of a very large tax increase” he says, referring the expiration of certain provisions of the 2001 and 2003 legislation known as the Bush tax cuts.

“it would be the largest increase in personal income taxes since World War II. It would be more than twice as large as President Lyndon Johnson’s surcharge to finance the war in Vietnam and the war on poverty.”

This is wrong on multiple levels. One, he’s a little late to the party. Bush already raised taxes. As Milton Friedman taught us (maybe Hubbard missed school that day): when government spends, it taxes. Once the money is spent, the only question is who will pay, and when. Therefore when W launched the Iraq War and kept it going for five years, he raised taxes. He could have collected taxes to pay for it, but he didn’t. He punted. But someone will pay.

There are several ways to pay for government spending. All of them are effectively taxes. Among the options are: a) raise personal income tax rates, or b) impose a surcharge on other government programs. There are many others, but the point is we aren’t talking about increasing taxes or not. We are talking about how to pay for taxes already imposed.

So how will this war effort be financed? Bush and Hubbard favor option “b”. They want to impose a surcharge on other government programs, primarily Medicare and Social Security. How do we know those programs are targeted? For the same reason Bugsy Malone robbed banks, “that’s where the money is”; or as Hubbard puts it

nondefense spending growth needs to be restrained to 2% per year

Indeed. Since inflation will take 3% an healthcare cost are rising 7% “nondefense” spending will be slowly strangled.

Ultimately this isn’t complicated. Either you believe the beneficiaries of social programs should pay for Bush’s War, and in the process weaken the programs themselves. Or you believe its more appropriate for the wealthy to pay for the majority of it. If the latter, then personal income tax rates need to go up. Not to the monumental proportion depicted in Hubbard’s chart. Just to the level they were in the 1990’s, about 9.5% of GDP.

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