Transcript Has the United States Paid off the Budgetary Cost of World War II?

Paying for World War
American Taxes and Debt during World
War I and II
Supplemental Lecture for Chapter 2
1
Organization of Lecture
I.
Discuss whether Taxes or Borrowing is
the better method to finance war.
II. Look at how taxes were used to finance
World War I and World War II.
III. Look at how borrowing was used to
finance World War I and World War II.
IV. Explore if Debt from World War II has
been repaid?
V. Conclusion
2
I. The Great Debate: Taxes or
Borrowing?
3
Taxes v. Borrowing
• Major debate in war economics
– Focuses on basic question: Since war is fought
currently, should it be paid for currently?
• Four criteria for judging which financing method
is better?
–
–
–
–
Fairness
Avoidance of wartime inflation
Disruption of industry production incentives
Impact on postwar economy
4
Taxes v. Borrowing
• Fairness
– Basis for judging: To what extent does method place
disproportionate burden on a part of society?
– Taxes
• Current civilians pay for the war
– Borrowing
• Postpones payment.
• However, when debt redeemed at later time, it will be partially
paid for members of armed forces who also fought in the war
(doubles the burden of war on soldiers).
– Edge goes to Taxes
5
Taxes v. Borrowing
• Avoidance of wartime inflation
– Basis for judging: To what extent does method divert
purchasing power away from private sector? (don’t
want the government and households to compete
over scarce resources)
– Taxes
• Reduce disposable income
• Compel households to place a part of existing income in savings.
– Borrowing
• Leads households to believe they are already saving (since purchasing a
bond is considered a form of saving for households)
• Consequently, household is likely not to save any portion of the rest of its
income.
– Edge goes to Taxes again
6
Taxes v. Borrowing
• Production Incentives
– Basis for judging: To what extent does method compel
a household to work more?
– Taxes
• Make households feel poorer.
– Borrowing
• The purchase of bonds makes a household feel richer.
• Does not take income from businesses who need funds to
reinvest in capital.
– Edge goes to borrowing
7
Taxes v. Borrowing
• Postwar Effects
– Basis for judging: To what extent does method
continue to impact the economy after the war?
– Taxes:
• Can be lowered after the war
– Borrowing:
• Can create debt overhang that could provoke the
government to impose an inflation tax.
– Edge goes to taxes
8
Limits to Taxation
• Despite the apparent superiority of taxes
over borrowing, there are limits to the
ability of a government to tax during war:
– Political limit: Taxes can make war unpopular
– Psychological limit: Only so much burden a
household is willing to bear.
– Economic Limit: Most important because
patriotism can not override it.
9
Economic Limits to Taxation
• There are two economic limits.
• First Limit: Diminishing returns to
patriotism motive.
– Appealing to people’s patriotism as a
motivation to work will only go so far.
– People need financial incentives to work long
hours at tedious task.
– Taxes can remove this incentive.
10
Economic Limits to Taxation
• Second Limit: Uniform tax increases have
limits because income growth is highly
asymmetric during wartime:
– Income grows for firms in defense related
industries
– Income stagnates or declines for non-defense
related industries.
11
II. Tax Financing the Budgetary
Costs of World War I and II
12
Taxes During World War I
–See page 21 of text
–Taxes paid for 30% of the war’s
total cost
–Income tax begun in anticipation of
possible European War.
–Intended initially to be tax on rich,
expanded when war began
13
Brackets widened during war
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
LOWEST BRACKET
(In 2005 dollars)
Begins
$59,181.82
$58,590.00
$58,009.90
$53,752.29
$15,257.81
$12,933.77
$11,289.02
$9,765.00
$10,910.61
$11,625.00
$11,421.05
RATE IN BRACKET
Ends
$394,545.45
$390,600.00
$386,732.67
$358,348.62
$30,515.63 WWI and Immediate Aftermath
$51,735.10
$45,156.07
$39,060.00
$43,642.46
$46,500.00
$45,684.21
1.0
1.0
1.0
2.0
2.0
6.0
4.0
4.0
4.0
4.0
3.0
1913
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
HIGHEST BRACKET RATE IN BRACKET
(In 2005 dollars)
Begins
$9,863,636.36
7.0
$9,765,000.00
7.0
$9,668,316.83
7.0
$35,834,862.39
15.0
$30,515,625.00
67.0
$12,933,774.83
77.0
$11,289,017.34
73.0
$9,765,000.00
73.0
$10,910,614.53
73.0
$2,325,000.00
58.0
$2,284,210.53
435.0
Rates rose during war
Source: Tax Brackets and Rates from United States Internal Revenue Service. Table A.--U.S. Individual Income Tax: Personal Exemptions and
Lowest and Highest Bracket. Tax Rates, and Tax Base for Regular Tax, Tax Years 1913-2003. Available on-line at http://www.irs.gov/pub/irssoi/03inta.xls. Consumer Price Levels from Minneapolis Federal Reserve Bank. Available at
http://minneapolisfed.org/Research/data/us/calc/index.cfm
14
Taxes During World War II
• Paid for 47% of the cost
Rockoff, Hugh. In Harrison, Mark. The Economics of World War II. 1998. p. 108
• Started Tax withholding (taking taxes out
of every paycheck, rather than once a
year)
– Done to give people an incentive to file taxes!
– A Treasury Department official testified in early
1943 (U.S. House Hearings 1943: 2):
“Up until 1941 we never received as many as 8,000,000 individual income-tax returns
in a year. In 1941 that number increased to 15,000,000; in 1942 it increased to
16,000,000. This year we expect 35,000,000 taxable individual income-tax returns.”
Source: Twight, Charlotte. “Evolution of Federal Income Tax Withholding: The Machinery of Institutional Change.” Cato Journal. Winter
1995. p. 370.
15
Brackets widened during war
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
LOWEST BRACKET
RATE IN BRACKET
(In 2005 dollars)
Begins
Ends
$14,255.47 $57,021.90
4.0
$14,050.36 $56,201.44
4.0
$13,562.50 $54,250.00
4.0
$13,851.06 $55,404.26
4.0
$14,050.36 $56,201.44
4.0
$11,160.00 $55,800.00 WWII and Immediate Aftermath
4.4
$9,964.29 $26,571.43
10.0
$5,990.80 $23,963.19
19.0
$5,644.51 $22,578.03 Introduce Tax withholding
19.0
$5,548.30 $22,193.18
23.0
$5,425.00 $21,700.00
23.0
$5,007.69 $20,030.77
19.0
$4,378.92 $17,515.70
19.0
$4,862.24 $32,414.94
16.6
$4,923.53 $32,823.53
16.6
$4,862.24 $32,414.94
17.4
$4,506.92 $30,046.15
20.4
$4,421.89 $29,479.25
22.2
$4,388.76 $29,258.43
22.2
$4,356.13 $29,040.89
20.0
$4,372.39 $29,149.25
20.0
1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
1953
1954
1955
HIGHEST BRACKET RATE IN BRACKET
(In 2005 dollars)
Begins
$14,255,474.45
63.0
$70,251,798.56
79.0
$67,812,500.00
79.0
$69,255,319.15
79.0
$70,251,798.56
79.0
$69,750,000.00
81.1
$66,428,571.43
81.0
$2,396,319.02
88.0
$2,257,803.47
88.0
$2,219,318.18
94.0
$2,170,000.00
94.0
$2,003,076.92
86.45
$1,751,569.51
86.45
$3,241,493.78
82.13
$3,282,352.94
82.13
$3,241,493.78
84.36
$3,004,615.38
91.0
$2,947,924.53
92.0
$2,925,842.70
92.0
$2,904,089.22
91.0
$2,914,925.37
91.0
Rates rose during war
Source: Tax Brackets and Rates from United States Internal Revenue Service. Table A.--U.S. Individual Income Tax: Personal Exemptions and
Lowest and Highest Bracket. Tax Rates, and Tax Base for Regular Tax, Tax Years 1913-2003. Available on-line at http://www.irs.gov/pub/irssoi/03inta.xls. Consumer Price Levels from Minneapolis Federal Reserve Bank. Available at
http://minneapolisfed.org/Research/data/us/calc/index.cfm
16
Taxes During World War II
– Impact of tax withholding, raising tax
rates, and expanding brackets:
• Increased federal receipts from $8.7 billion in 1941 to
$45.2 billion in 1945.
• Federal taxes as a share of GDP grew from 7.6 percent
in 1941 to 20.4 percent in 1945.
• Increase in the number of income taxpayers from 4
million in 1939 to 43 million in 1945.
17
Source: United States Department of the Treasury. “History of the U.S. Tax System.” Available at: http://www.treas.gov/education/factsheets/taxes/ustax.shtml
III. Debt Financing the Budgetary
Costs of World War I and II
18
Debt Financing of WW I
• 58 percent of war’s budgetary cost
financed through debt issuance.
• Debt issued primarily over a series of four
“Liberty Bond” loans and two “Victory
Bond” loans.
19
The Liberty and Victory Loans
Issue Name
First Liberty
Loan
Second Liberty
Loan
Third Liberty
Loan
Fourth Liberty
Loan
First Victory
Loan
Issue Dates
15-Jun-17
15-Nov-17
9-May-18
24-Oct-18
1-Apr-19
1-May-19
30 years
25 years
10 years
20 years
4 years
4 years
3.5
4
4.25
4.25
4.75
3.75
Maturity
Rate
Second Victory
Loan
Source of Data: Rockoff, Hugh. “When It’s Over, Over there: The U.S. Economy In World War I.” NBER Working Paper 10850. 2004. Table 6.
20
Funds obtained through Borrowing
• Bonds Offered (Billions of 1917 $)
• First Liberty Loan: $2
• Second Liberty Loan: $3
• Third Liberty Loan: $3
• Fourth Liberty Loan: $6
• Total Victory Loan: $4.5
21
Source: Rockoff, Hugh. “When It’s Over, Over there: The U.S. Economy In World War I.” NBER Working Paper 10850. 2004.
Debt Financing of WW I
• More limited debt financing obtained
through $4.12 “War Certificates” and $0.25
“Savings Stamps” (figures in 1917 dollars).
• However, these only accounted for
approximately 3.5% to 4% of the total debt
issuance.
22
Patriotism = Affordable Debt
• Despite the large quantities of Liberty
bonds issued by the government, Yields
on Liberty Bonds remained low because
public demand stayed high (thanks to
bond rallies and celebrity endorsements).
23
Patriotism = Affordable Debt
• Hugh Rockoff (2004) points out that the
interest rate on Municipal Bonds was
higher than Liberty Bonds, indicating that
the public was eager to purchase them.
24
Debt financing of WW II
• War budgetary cost was $288 billion in
current dollars.
• $156 billion of bonds issued (54.2% of
total cost).
Sources: Nofi, Al. Statistical Summary: America’s Major Wars. The United States Civil War Center. Louisiana State
University. Available on-line at www.cwc.lsu.edu/cwc/other/stats/warcost.htm and Murphy, Henry. National Debt In
War and Transition. McGraw-Hill: New York. 1950. Table 8. p. 154
25
When was the debt Issued and
when did it mature?
• Seven War Loans and 1 Victory Loan from
1942 through 1945.
26
When The Debt Was Issued and
When It was to Mature
First War
Second Third War
Fourth
Fifth War Sixth War Seventh
Issue Name
Loan
War Loan
Loan
War Loan
Loan
Loan
War Loan
Issue Dates
1-Dec-42 15-Apr-43 15-Sep-43
1-Feb-44 26-Jun-44
1-Dec-44
1-Jun-45
Maturity 7/8 percent
Dates
certificates
1-Dec-43
1-Apr-44
1-Sep-44
1-Feb-45
1-Jun-45
1-Dec-45
1-Jun-46
1 1/4
percent
certificates
15-Mar-47 15-Sep-47
1 1/2
percent
certificates
15-Jun-59
1 3/4
percent
certificates
15-Jun-48
2 percent
certificates
15-Sep-50 15-Sep-53
2 1/4
percent
certificates
15-Sep-59 15-Jun-54 15-Dec-54 15-Jun-62
2 1/2
percent
certificates
15-Dec-68 15-Jun-69 15-Dec-69 15-Mar-70 15-Mar-70 15-Mar-71 15-Jun-72
Victory
Loan
3-Dec-45
1-Dec-46
15-Dec-62
15-Dec-72
27
Source of Data: Murphy, Henry. National Debt In War and Transition. McGraw-Hill: New York. 1950. pp. 134, 139, 146 – 152.
Debt Issued with Each
War Loan
(Billions of Current US $)
Debt
Second
First War
War
Loan
Loan
$12.90
$18.60
Third
War
Loan
$18.90
Fourth
War
Fifth War
Loan
Loan
$16.70
$20.60
Sixth
Seventh
War
War
Loan
Loan
$21.60
$26.30
Victory
Loan
$21.10
28
Source of Data: Murphy, Henry. National Debt In War and Transition. McGraw-Hill: New York. 1950. Table 9. p. 155
IV. Have we Paid off World
War II?
29
Have we Paid off World War II?
• Question difficult to answer because, as
the next figure shows, government debt
has continually risen since 1950s, thereby
making it difficult to identify just WWII
debt.
30
8000000
Nominal and Real Public Debt, 1861-2003
($ millions)
7000000
6000000
5000000
4000000
Public Debt
Public Debt (2003 Dollars)
3000000
2000000
1000000
2001
1996
1991
1986
1981
1976
1971
1966
1961
1956
1951
1946
1941
1936
1931
1926
1921
1916
1911
1906
1901
1896
1891
1886
1881
1876
1871
1866
1861
0
31
Maturing Debt
• Technically, World War II should have
been completely paid off from 1968
through 1972 (when longest term bonds
matured).
• However, was debt rolled over?
32
Does it matter if WWII has been
paid off?
•
Probably Not
(1) Inflation has diminished the real value of the
debt.
(2) Economy has grown, so burden of debt has
diminished.
33
Inflation
• Interest Rate on Longest Term bonds was
2.5 percent.
• Average Inflation rate from 1945 through
1972 was 3.189 percent.
• Plug into Real Interest Rate Equation:
ireal = inominal + po
• Real Interest rate is – 0.689 percent
Source of Inflation data: Federal Reserve Bank of Minneapolis, Consumer Price Index, 1913 – 2005.
Available at http://minneapolisfed.org/Research/data/us/calc/index.cfm
34
19
45
19
46
19
47
19
48
19
49
19
50
19
51
19
52
19
53
19
54
19
55
19
56
19
57
19
58
19
59
19
60
19
61
19
62
19
63
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
Billions of US $
Inflation
Real Value of United States World War II Long-Term War Debt
160
155
150
145
140
135
130
125
120
Year
35
V. Conclusion
36
Main Points
• Many methods to finance a war
• For major wars, taxes are better than borrowing
(within limits).
• WWI and WWII employed both taxes and
borrowing.
• Many features of the current U.S. tax system are
a product of the two world wars.
• Even if U.S. still has debt acquired from WWII, it
doesn’t appear to be a major concern.
37