Debt and deficit lessons from 1917
By Walter Pincus,
As some Republicans again threaten to use the debt limit statute next year to leverage protection of tax rates for the wealthy, it’s worth going back 95 years to see how Americans viewed taxes and spending when that law passed.
The statute was born out of the need to pay for government spending from our entrance into World War I. George W. Bush’s White House didn’t consider such an issue when it launched its war on terrorism after the Sept. 11, 2001, attacks or undertook the more costly invasion of Iraq in 2003.
America in 1917 did not fight on a credit card. In 1917, President Woodrow Wilson, with Congress’s support, raised taxes and sold Liberty Bonds to cover costs. Bush, by contrast, had just lowered taxes and underestimated the costs of his military efforts. Borrowing to pay for the war helped lead to the current fiscal crisis.
It was a different story in 1917.
On April 6, 1917, the United States declared war on Germany. Wilson quickly sought help from Congress to raise the war funds.
At first, the question was how: Sen. Furnifold Simmons (D-N.C.) argued, “It has been the custom of this country to pay war bills by bond issues, and I see no reason for a change in that policy.”
Financier J.P. Morgan said up to 20 percent should come from taxes. Treasury Secretary William McAdoo thought raising taxes for half was best, while some members of Congress said taxes the first year should provide 75 percent of war costs.
Eighteen days after the war declaration, Congress unanimously passed the largest bond bill in U.S. history, which authorized sale of $5.5 billion in bonds. The first $2 billion in Liberty Bonds went on sale in May and almost were oversold as 5 million people offered to buy $3 billion worth.
It took five more months to pass the War Revenue Act which was designed to raise $2.5 billion annually. As the Treasury Department noted in a report, “This amount was believed by Congress to be as large as could be levied reasonably and fairly at this time. Every effort was made to distribute the burden of taxation where it could most easily be borne without hardship to the individual or injury to the productive power of the nation.”
More than $1 billion was to come from an excess-profits tax on corporations, individuals and partnerships whose profits “have been increased enormously by war business, or business incident to the war,” Treasury said.
Rates were also raised on corporations and the wealthy, personal exemptions for married and single taxpayers were reduced slightly and excise taxes were raised on liquor and tobacco products. Everyone paid something to support the war.
With the Second Liberty Bonds Act in September 1917, Congress put limits on bonds and certificates of indebtedness (short-term interest-bearing notes such as Treasury bills) in a move meant to give Treasury a better way to manage raising funds. The limit was set above the debt so the government was free to raise funds when needed. For example, in 1919 the debt limit was set at $43 billion when the debt was $25.5 billion.
In March 1939, with World War II looming, President Franklin D. Roosevelt asked Congress to raise the debt ceiling to $45 billion. With rising costs, it grew to $300 billion by April 1945. Overall war costs were paid by raising $135 billion in seven War Bond drives and increasing taxes under the Revenue Act of 1942. The tax burden, again, was spread across the population. The income tax for the first time hit 37 million low- and moderate earners and rates rose for corporate, estate, excess-profits and gift taxes.
In 1946, the debt limit was reduced to $275 billion, where it remained through 1954. It did not rise during the Korean War since that conflict was mostly financed by increased taxes. In 1968, President Lyndon B. Johnson pushed through Congress a 10 percent surtax on individual and corporate filers to help pay for the Vietnam War. The debt limit was raised $73 billion that year.
In June 1990, President George H.W. Bush, faced with a budget deficit and the debt limit, reversed his 1988 promise — “Read my lips: no new taxes” — and negotiated revenue increases with the Democratic Congress. On Aug. 5, 1990, Iraq’s Saddam Hussein invaded Kuwait, and, faced with an obvious need to intervene, Bush agreed in September to a deficit- reduction package that included spending cuts of $324 billion over five years and a 3 percent increase in the top income tax rate, to 31 percent, that raised $159 billion.
The wars in Iraq and Afghanistan represented the first time that a U.S. president did not seek new taxes to cover the fighting. Supported by a GOP-led House and Senate from 2001 through 2006, and then just the GOP-run House, Bush raised the debt ceiling seven times through 2008, almost doubling it, from about $6 trillion to $11.3 trillion.
President Obama followed suit. In November 2009, Rep. David R. Obey (D-Wis.) and others introduced a bill for a surtax to help pay for the war. They had no support from leaders of either party or Obama.
The fiscal cliff is just weeks away, and the debt limit will come up probably next month.
Where are leaders like those in 1917? Where are the American people who willingly shared new tax burdens, at least to pay for their forces fighting overseas?
For previous Fine Print columns, go to washingtonpost.com/fedpage.