War tax?

There's been much discussion recently of the idea of a "war tax" to pay for the costs of ongoing fighting in Afghanistan. Specifically, David Obey and others in the House of Representatives have introduced the Share the Sacrifice Act of 2010, under which income tax rate increases would be used, starting in 2011, to pay for the costs of the Afghanistan surge.

How should one evaluate this? I feel reasonably well qualified to chip in given my interest in both tax policy and budget deficits (as per this and this).

First point of interest concerns budget deficits. I believe we have a very grave long-term problem that, more likely than not, will lead to a catastrophic federal government default or quasi-default. The fact that we are headed this way is unambiguous in the projections, and has much less to do with the current recession (or the stimulus package) than the long-term path of projected outlays, for entitlements (especially healthcare) and otherwise relative to revenues. Key problems include the unsustainable growth of healthcare and the fact that American voters are simply unwilling to come anywhere close to paying for the government services they want.

The reason I expect a cataclysm is pure political economy, however. The Democratic and Republican parties of the 1980s probably would have been able to solve this, but things have changed (particularly on the Republican side). As always, California will get there first, in terms of totally unnecessary failure caused by political paralysis driven by lunatics playing chicken games, but I believe the U.S. will eventually follow. But again, this all depends on the course of national politics - how the parties behave, what legislative rules apply in Congress, and so forth.

From that perspective, any tax increase helps by narrowing the gap a bit, and the fact that it's targeted to Afghanistan war expenses is mere detail.

But the counter-argument, to my view decisive for now, is that this is the wrong time for implementing a move towards budgetary balance. Just as FDR taught us the hard way in 1937 that returning to budgetary balance needed to wait until the economy had fully recovered, so we would learn the same lesson now. Indeed, I agree with Krugman's column today about the need for a jobs bill.

But keep in mind the key word in the above paragraph - now (including 2011) is the wrong time for IMPLEMENTING, not for enacting, tax increases. I believe that tax increases moving us back towards fiscal balance are an inevitable part of what's needed, and that the sooner they are enacted the better. Only, the implementation needs to be a bit more delayed - not to the extent of making it clearly hypothetical and politically unrealistic, but sufficiently to permit recovery, and indeed to encourage moving economic activity up in time so that it will precede the effective date of pre-announced tax increases.

Some of the more interesting issues here, however, go to the specific targeting of the revenues in the proposed legislation. Earmarking of revenues is fundamentally a fiction unless revenues and outlays are indeed kept in lockstep. For example, Social Security earmarking arguably is fictional, to the extent that, if the Social Security Trust Fund were deemed to have run out, Congress would simply add general revenues to keep it going. It's all one big stomach, as the saying goes. But targeting or earmarking can make an important political economy difference.

If politics in Congress were less poisonously dysfunctional, and the war lobby in Washington less dedicated to endless military adventures abroad, the virtue of this proposal (at least, with more delayed implementation) would be its providing a fig leaf for moving tax policy in the needed direction, by suggesting that it's for the patriotic cause of supporting the troops. But that's not really what's going on here, as the proponents would be the first to say.

Rather, they are trying to create more of a sense that wars have costs, so that cost-benefit analysis will apply to decisions to engage in and prolong them.

The response from people such as Senator Even Bayh (who denounced it) is entirely nonsensical. They say: there's no room for cost-benefit analysis when it comes to national security. But this of course is false, especially with a relatively discretionary war like that in Afghanistan is right now. (To call it discretionary is not to oppose continuing it, though in fact I do - even if one supports it, no one in his right mind could compare it to, say, fighting Japan and Germany after Pearl Harbor.)

A better way to make their point is to say that, in cases where going to war is really important - I'd count here not only World War II but also the initial decision to go to Afghanistan and kick out / try to destroy Al Qaeda after 9/11 - it is guaranteed to win out in cost-benefit analysis.

There's an old Jack Benny joke, where he's asked by a robber; "Your money or your life?" Dead silence. "Well?" the robber asks after a long pause. -- "I'm thinking! I'm thinking!" [Note of personal privilege to readers - I'm too young to have heard this - I merely heard ABOUT it.] But the rest of us don't think that way.

So yes, war for vital national self-defense, like anything else, should be subject to cost-benefit analysis, only in that case it easily wins.

In theory, whenever expected future outlays increase, financing should immediately be implemented to pay for it over the infinite horizon, leaving aside the counter-cyclical problem that makes implementing (as opposed to announcing) an offsetting tax increase unwise today. But that, too, isn't really the main issue posed by the proposed legislation. It goes rather to political economy.

The proper question, in evaluating the proposal from this perspective, is the following: Is the political system prone to error in the form of going to war too readily, or not readily enough? In other words, will bringing forceful direct attention to the cost (which always should be considered in principle) do more to reduce errors of commission, in the form of fighting wars when it isn't worth it, or to induce errors of omission, in the form of undervaluing the benefits and thus mistakenly not going to war?

In the 1930s, perhaps one could have reasonably argued, as the German and Japanese threats kept rising and the majority in the U.S. didn't want to do much about it, that dedicated financing (say, for war preparations) would have led to worse decisions. But when you look at the post-World War II era in the U.S., I believe it's overwhelmingly clear that there's immense political bias in favor of war.

The causes are complex and beyond my subject matter expertise. They include (1) the rise of the military-industrial complex of which Eisenhower so presciently warned, (2) the fact that we haven't been soured on war and military adventure to the same extent as the Europeans (whose horrific experiences from 1914 through 1945 finally had an impact), and (3) the fact that it is so emotionally shocking for the U.S. to face genuine threats today after centuries when the oceans largely protected us. Hence the urge to lash out angrily even if that isn't the wisest course. Racial and cultural chauvinism also may play a role. And also, as Lord Acton would understand, the insidious, morally corrupting influence of being a global hyperpower.

A pervasive political bias in favor of going to war, and then prolonging unwise wars because no one wants to be responsible for admitting to misfires, suggests that dedicated financing would tend to improve decisions. This presumably is why people like Evan Bayh so vociferously oppose it. They don't want a fuller and more honest debate, because they realize they would not be guaranteed to win it.

UPDATE: Eric Posner opposes the war tax, and not just for the business cycle reasons I note. But it seems to me that he totally misses the political economy point, and has a half-baked argument to the effect that, if continuing the war in Afghanistan is a good idea, future generations should benefit, so why transfer wealth from us to them via a tax to pay for it. This is a bit blind to (a) the predominant trend of budget policy, which, for good or bad, is to transfer lifetime consumption from them to us, and (b) the need for a much less ad hoc approach. Even if one believed in generational "balance" (if that could be defined), shouldn't we look at the whole picture rather than just item by item?

FURTHER UPDATE: I would actually be prepared to endorse the war tax with the Megan McArdle proviso (one year delay in enactment, tax to remain in place for one year after the war's end).