Cutting Taxes During Wartime Defies American Tradition

Is America at peace or at war? The Bush administration seems to want it both ways.

Vice President Dick Cheney spent last week warning that the United States faced a mortal threat from Iraq and strongly suggesting the nation would soon have to mount a full-scale war to depose Saddam Hussein. That followed months of President Bush asserting--correctly--that America is already in a state of war against international terrorism.

But, as the New Republic recently reported, Mitch Daniels, the administration’s shrewd budget director, took a very different tack on PBS’ Charlie Rose show the other day. Defending the $1.35-trillion tax cut Bush pushed through Congress last year, Daniels argued that, “Americans are being taxed at the highest peacetime rates in history.”

So which is it, wartime or peacetime? Daily life may still feel like peacetime. But the federal budget is definitely moving toward a wartime footing. After Sept. 11, Bush proposed and Congress approved a rapid increase in defense spending; by the middle of this decade, Bush wants to spend over $100 billion a year more on the Pentagon than President Clinton proposed in his final budget.

A war in Iraq would add to those costs. The last war against Hussein cost about $60 billion. Lawrence J. Korb, an assistant secretary of Defense for manpower under President Reagan, says a second Gulf War wouldn’t cost as much initially because it would probably require fewer troops.

But an unexpectedly long war would increase the financial (not to mention, human) cost. And, Korb notes, the cost of reconstructing a post-Saddam Iraq would add to the final bill--to the point where he believes a second war in the Gulf would ultimately cost as much as the first.

Then there is the cost of hardening American defenses against terrorism. This year, Bush is seeking $38 billion in federal spending for homeland security, about double the amount two years ago. Thumbing through the national strategy for homeland security the White House published this summer, it’s clear the administration envisions those numbers rising further.

The plan is filled with big-ticket ambitions: developing “smart borders,” “recapitalizing” the Coast Guard, inventing a new generation of vaccines and massively increasing federal support for local emergency agencies. None of that will be cheap.

Why then does Daniels want to pretend the nation is at peace? Because the administration is engaged in a project unprecedented in American history: trying to cut taxes in wartime. In all previous conflicts, Washington has raised taxes to pay for the war. Americans may have grumbled, but they have unfailingly accepted that burden as the contribution they make to support those on the front line.

The first income tax was imposed to pay for the Civil War. To fund World War I, the top income tax rate was increased from 7% to 77%. In World War II, the income tax was deepened and broadened. Washington hiked the top rate to 91% and exposed more Americans than ever before to the tax by limiting deductions and exemptions. Before the war, just 4 million Americans paid income taxes.

By 1945, the number was 43 million. Income taxes rose again for the wars in Korea and Vietnam. That’s how ordinary Americans contribute when their neighbors are under fire.

Compare that to Bush’s posture today. Even after 9/11 precipitated all of these huge new costs, he’s rejected all calls to delay the further installments of his tax cut due in 2004 and 2006. Instead, he’s pushing to make the tax cut permanent (in a bit of fiscal legerdemain, Congress voted to let it expire after 2010).

And now, he’s mulling a new wave of tax cuts aimed at investors, including increased deductibility for stock market losses, reduced taxation on corporate dividends and possibly a cut in the tax rate on capital gains--a proposal his campaign rejected through the 2000 election for fear it would be seen as benefiting the wealthy. Just the capital gains cut could cost an additional $50 billion over 10 years.

All of this comes against the backdrop of what might be the most rapid deterioration in the government’s balance sheets in the nation’s history. When Bush took office, the nonpartisan Congressional Budget Office projected that Washington would run surpluses totaling $5.6 trillion from 2002 through 2011. Last week, the CBO reported that the tax cut, the war and the recession have shriveled the cumulative surplus over that period to just $336 billion. Siegfried and Roy or David Copperfield couldn’t make the money disappear that fast.

And even that bleak figure understates the damage. The CBO estimate assumes the tax cut expires in 2010. If it’s extended, the agency calculates the government would take in nearly $700 billion less through 2012--enough to push Washington into the red over the full decade.

All of these figures would look far worse if Congress and Bush weren’t tapping the funds raised for Social Security to run the rest of government. Remember the lockbox? In 2000, Bush, Al Gore and both parties in Congress pledged to set aside the surplus in Social Security to pay down the national debt. Now, the operating portion of the federal budget has fallen so deeply into the red that Washington through this decade will have to divert more than $2 trillion in taxes raised for Social Security to fund general government operations, everything from education to homeland security to defense.

That broken promise means the Social Security money isn’t available to pay down the debt.

When Bush took office, the CBO projected that the United States could pay off virtually all of the publicly held federal debt--for the first time since Andrew Jackson’s administration in the 1830s--by this decade’s end. Its latest figures show the federal debt will remain above $3 trillion through at least 2011.

More debt means higher federal interest costs ($1.3 trillion more in the next decade alone, the CBO calculates). In time, that will mean higher taxes on our children.

This is a form of generational robbery. It’s bad enough when we choose to cut taxes on ourselves rather than lighten the burden of debt on our children. But it’s breathtaking to pass on to our children, through a larger national debt, the cost of defending our country. Are we really that much more selfish than the generations of Americans who paid their fair share to defend freedom every time it was threatened before?

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Ronald Brownstein’s column appears every Monday. See current and past Brownstein columns on The Times’ Web site at: www.latimes.com/brownstein.