March 5, 2007
Part 1
David R. Henderson ~ How much is
the U.S. war on Iraq costing you? That depends on who you are. For Iraqis,
Americans, or Brits who were killed, it cost them everything. I say it in that
order because that is the order in numbers killed. So far, a conservative
estimate of the number of Iraqi civilians killed in the war is about 57,000,
the number of Americans (including contractors) about 3,800, and the number of
Brits 133. And if one were to add in the number of non-civilian Iraqis killed
– and one should – the number of civilian and non-civilian Iraqis
killed would likely be well over 70,000. Of course, other studies, such as the
Lancet study, have found a much larger number of Iraqi deaths, more than
650,000. But I cannot judge such studies without reading them carefully, so I'm
giving lower-bound estimates here.
But there is another cost to
which I can bring my economist's expertise, namely the cost in federal spending
and in higher oil prices to Americans. In this article, I'll consider only the
increase in federal spending and how that is paid for. In my next article, I'll
consider the increase in the price of oil. Let me give you a quick bottom line,
though: if you're a high-income person in the United States, you're paying a
huge amount for this war.
To estimate the cost of the
Iraqi war to the U.S. government, I'll assume, as most people do, that the war
started in late March 2003. It should be noted, though, that this is not quite
accurate. The war has actually been going on more or less continuously since
January 1991. In the 1990s, the U.S., British, and French governments
established a "no-fly zone" over which they patrolled so that the
Iraqi military would not go there, and they often bombed and strafed to enforce
this restriction. But put that aside for these purposes. The Congressional
Budget Office estimates that in fiscal years 2003, 2004, 2005, and 2006, the
U.S. government spent $46 billion, $68 billion, $53 billion, and $87 billion
carrying out the war. In other words, the U.S. government spent $254 billion
through Sept. 30, 2006 (the end of fiscal year 2006). It will almost certainly
spend a minimum of $400 billion before the U.S. role in the war is over.
Ironically, this $400 billion is well above the $100 to $200 billion estimate
that my former Council of Economic Advisers colleague, Larry Lindsey, gave
while a member of the Bush administration. This estimate got Lindsey into hot
water because various of his critics in the administration claimed it was too
high. The $46 billion in fiscal 2003 is really a $92 billion rate for the
calendar year because the period from late March to the end of September is the
last half of the fiscal year. So the average for the last four fiscal years is
$75 billion a year ($92b + $68b + $53b + $87b all divided by four.)
Let's assume an annual budget
cost of $75 billion. Billions, to most people, are abstractions. So let's put
it in individual or family terms. There are approximately 300 million
individuals in the United States and approximately 120 million families. So,
the average cost per American resident per year has been $75 billion divided by
300 million, or $250. The average cost per family has been about $625 per year.
And that has been for four years.
But averages are almost always
misleading. At the incoming Ph.D. student orientation at UCLA in 1972, when I
entered the economics program there, one of my professors, Axel Leijonhufvud,
told us that the average pay made by the graduating undergrad economics majors
at a particular university (I've forgotten which) was $40,000 in those year's
dollars (which would be about $190,000 today.) That got our attention. Then he
grinned and pointed out that one of the graduating economics majors was a
well-known basketball star who had just signed with an NBA team. So much for
averages.
So, let's go beyond averages
here. Who pays for the federal government's spending? A starting point is to
look at the percent of overall tax revenue paid by people in various income
groups. The federal tax system, taken as a whole, unlike the state tax system,
is "progressive." "Progressive" doesn't mean
"good"; it means that the tax system takes a higher percent of
income, not just a higher amount of income, from higher-income people. So, for
example, if, in 2003, you were in the bottom quintile, that is, the lowest
fifth of households (note: households are not always the same as families),
then, according to the Congressional Budget Office (CBO), you paid 4.8 percent
of your income in federal taxes of all forms. Why so low? Because most people
in the bottom quintile pay close to zero federal income tax, and many of them
get the "Earned Income Credit," which makes their federal income
taxes negative. Many of them pay the Social Security payroll tax (FICA) and the
Medicare tax, but many of them don't earn income and, therefore, don't pay even
these taxes. The main other taxes left to consider are corporate taxes and
excise taxes on such things as cigarettes, alcohol, and gasoline. Low-income
people pay a higher percent of their income on excise taxes than higher-income
people do because they spend a higher percent of their income on cigarettes,
alcohol, and gasoline. Lower-income people probably pay more of the corporate
income tax than the CBO assumes because the CBO assumes that the people who pay
the corporate income tax are the owners of the corporations. But decades of
theoretical and empirical work by economists bring this assumption into
question. The corporate income tax, all other things equal, causes less
investment in corporations, thus reducing the supply of capital. This means
higher prices for consumers and lower wages for workers because they have less
capital to work with. Still, a correction for this would probably not cause the
correct number for the share of income paid in federal taxes for the lowest
quintile to be above 6 percent of income. Moreover, the bottom quintile's share
of overall federal taxes paid was only 1 percent.
Consider the other end of the
income range – the top quintile. Using the assumptions about allocation of
tax burden noted above, the CBO found that households in the top quintile
(whose average income in 2003 was $184,500) paid 25 percent of their income in
all federal taxes in 2003. Moreover, the top quintile's share of all federal
taxes paid by everyone was a whopping 65.7 percent. This last estimate is
probably a few percentage points too high because of the above-noted assumption
the CBO makes about the distribution of the corporate-tax burden. Still, a
correct estimate of the top quintile's share of taxes would surely be above 60
percent, and a correct estimate of their income paid in taxes would surely be
above 23 percent.
So, assuming that the spending
on the Iraq war was paid for with taxes, the bottom quintile's share was 1
percent of $75 billion, or $750 million. Because there were 23 million
households in the bottom quintile, that quintile's share of extra taxes
averaged $33 per household. The top quintile's share of that annual $75 billion
was over 60 percent of $75 billion, or over $45 billion. Therefore, this top
quintile, which had 22.8 million households, paid an average of $1,974 a year
in extra taxes to finance the war. To this member of the top quintile, that is
a lot of money. The top quintile had substantially more members per household
than the bottom quintile. Indeed, this is one of the main reasons they were the
top quintile; not only did they have more members but they also had three times
as many workers per household as the bottom quintile. So, assuming an average
of four members per top-quintile family, the extra taxes amounted to just under
$500 per person per year.
If we go further up the income
range, we get even bigger cost numbers for two reasons: first, because there
was more income to tax, and second, because higher-income people are taxed at a
higher rate. So, for example, the top 5 percent, whose average income in 2003
was $377,300, paid an average of 28.4 percent of their income in taxes and paid
56.6 percent of all federal taxes. Reducing this percentage a bit to adjust for
the overstatement due to the CBO's methodology, this top 5 percent surely paid
at least 50 percent of federal taxes. So their share of the $75 billion was at
least $37.5 billion. With 5.8 million households in the top 5 percent, this
amounts to a whopping $6,466 per household per year.
In short, high-income people are
paying a very high share of the budget cost of the U.S. war on Iraq.
Given the size of the federal
budget deficit, one can challenge my assumption that the war was paid for out
of taxes rather than with debt. If the war is financed purely with debt, then
saying who bears the burden requires knowing how the future tax burden will be
allocated. Assuming that it's allocated roughly the same in the future as now,
we can say that future high-income people will bear an outsized share of the
tax burden. But now with a Democrat-controlled Congress, the assumption that
the war is financed by current taxes is less bad an assumption than you might
think. If, for every dollar of government spending, the Congress refrains from
extending a one-dollar tax break, then, in a sense, the war is financed by
current taxes. For example, what if Congress would have extended a $75 billion
annual tax break but, because of the war spending, refrains from doing so? Then
the result of war spending is that taxes are $75 billion higher than otherwise.
One large tax break that expired at the end of 2006 was the temporary relief
from the Alternative Minimum Tax (AMT). The Democratic Congress, whose members
come disproportionately from states whose residents will be disproportionately
bit by the AMT, might not extend the relief from the AMT. If they don't, the
main reason will be the deficit. The AMT hits people in the upper-middle-income
and upper-income brackets. So we're still back to higher-income people, though
no longer the highest-income people (because for most of them, their normally
calculated taxes exceed the AMT) bearing a large portion of the cost of
war.
There's one cost of the war that
falls disproportionately on lower income people – the cost of oil. In my
next column, I will address that.
Copyright © 2007 by David
R. Henderson. Requests for permission to reprint should be directed to the
author or Antiwar.com.
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