In Time Of War, Who Pays?

There's an old saying among economists that in time of war, governments pursue egalitarian policies in order to retain popular support. For example, during World War I, World War II, and the Korean War, the federal government imposed an excess profits tax on businesses-in part because it needed the revenue, but also so that people didn't get the sense that firms were profiteering on the war effort. Personal income tax rates were also boosted at the high end during the two World Wars.

Not this time. In this grand struggle against terrorism, a struggle the Bush administration tells us could last 40 or 50 years, it looks like Daddy Warbucks is running the show.

The display of callousness and opportunism is stunning even to someone accustomed to watching Congress in action.

Within days after the World Trade Center came down, Congress had passed a $15 billion bailout for the airline industry. For the 100,000 or so laid-off airline workers-not a dime. And now that Congress is debating an economic stimulus package, the pigs are really lining up at the trough, and our legislators are eager to feed them royally.

There's little question that we need a big fiscal stimulus. The U.S. economy was already sagging going into September 11. It wasn't clear whether it was a full-blown recession or not, but overall job growth was stalling out, and the manufacturing economy had been shrinking for over a year. Between March 2000 and September 2001, over one million manufacturing jobs disappeared. The service sector had been picking up some of the slack, but it too was flagging.

The underlying cause of the slowdown was the bursting of the high-tech bubble. When giant speculative bubbles burst, they usually leave behind seriously weakened economies that can take years to recover. This is just what happened in the U.S. in the early 1990s, and in Japan for the last 12 years.

The 9/11 attacks were a serious economic and psychological blow to an already weakened economy that almost certainly tipped it into formal recession.


The classic remedy for recession would be a big fiscal stimulus package-tax cuts for low- and middle-income households and an increase in government spending. The logic behind this is simple. In troubled times, people with money are reluctant to spend it, and people who normally don't have much money find themselves with less, as layoffs, shortened workweeks, and pay cuts take their toll. And businesses, faced with shrinking sales and profits, cut back on their investment plans and fire workers en masse.

So what's Congress up to? Contemplating tax cuts for the very rich, and economically useless business tax cuts-almost the very opposite of what's needed, but nonetheless very pleasing to their paymasters.

In October, the House passed a $100 billion package that would allow businesses to take bigger deductions for investments they would have made anyway, make it easier for companies like GE and GM to shelter profits in offshore tax havens, and offer billions in refunds to profitable corporations.



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The rationale for these moves is that they would encourage firms to invest, expand, and hire, but there's no evidence that these sorts of tax breaks have those desirable effects. Companies invest, expand, and hire when they see their sales rising, and tax considerations are secondary at best.

The House bill would also accelerate Bush's tax cuts for the richest taxpayers, bringing their effective date forward to 2002 from 2006, and cut the tax rate on investment profits. According to estimates by Citizens for Tax Justice (CTJ), 41 percent of the tax cuts would go to the richest one percent of taxpayers, and almost three-quarters would go to the top 10 percent.

The Bush administration likes this approach very much. But rich people wouldn't spend enough of their windfalls to have a proper stimulative effect.


Things are a bit more divided in the Senate. The Republicans have proposed even fatter tax breaks for the rich, with CTJ estimating that more than half the benefits would go to the top one percent. Unlike the House, though, they don't have the votes to pass their bill. Democrats are-unusually-making lots of critical noises.

Jim Jordan, director of the Democratic Senate Campaign Committee, told the New York Times that he was amazed by "how the Republicans go out of their way to prove they are the party of rich folks and corporations." GOPers denounce this sort of talk as "class warfare," as if their own tax schemes weren't.

The Dems have proposed increased spending on domestic security, health coverage for displaced workers, and increased unemployment benefits-good as far as they go, but hardly ammunition for class war, and probably not much of an economic stimulus. And the Democrats would go along with business tax cuts.

If something like the Republican plan goes through, the rich will be paying a smaller share of the cost of government-including the war-and everyone else will pay a larger share. It's not enough that working people are losing their jobs by the hundreds of thousands.

The only good news is that both parties agree that poorer people who didn't qualify for the $300 tax rebates over the summer would finally get a $300 check. Unfortunately, those rebates didn't have much stimulative effect; it seems that people saved their checks, or used them to pay off some debts, rather than spending them. That tendency to save in nervous times is exactly the reason government spending would be an important part of a serious stimulus package.

What might such a package include? Here's a start: an expansion of coverage and lengthening of unemployment benefits (just 47 percent of the unemployed draw benefits today, compared with 75 percent in the mid-1970s); a revival of revenue sharing, killed during the Reagan years, to provide grants to states, which are experiencing sharp declines in revenues because of the recession; aid to Amtrak, to promote energy-efficient travel and provide an alternative to flying; and tax cuts (more generous than $300!) for low- and middle-income households.

Sadly, the groups who should be fighting for such a package, like the AFL-CIO, have largely given up on the fight.

Doug Henwood edits the Left Business Observer, a newsletter on economics and politics.