Part
1
David R. HendersonHow
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.
