From War to Welfare

How taxes and entitlements begin with militarism

By IVAN ELAND

Conservatives should be leery of jumping into wars not only because American power may become overextended—especially in a time of fiscal crisis—but because war makes government expand rapidly at home, even in areas outside of national security. Although conservatives routinely criticize Franklin Delano Roosevelt’s New Deal for ushering in the era of big government, the deeper origins of the American welfare state lie in the warfare state.

During wars—especially big conflicts that require mobilization of the entire society to fight them—interest groups see the government doing things it didn’t do, or wasn’t allowed to do, previously. After the conflict, newly empowered bureaucrats and constituency groups benefiting from wartime expansion lobby to keep at least some of the new measures in place. The creation of the Food Administration during World War I, for example, ultimately led to the expectation in the farm sector that government regulation could prop up farmers’ incomes.

Even more fundamental, however, is the impact that war has on a government’s ability to finance its expansion at home. The potential for tax revenues determines how big government can grow and the number and size of programs that can be supported. (Even deficit financing is based on confidence in the government’s ability to raise funds through taxes.) And war is the force that has most often led to new and greater sources of nourishment for Leviathan. According W. Elliot Brownlee, author of Federal Taxation in America: A Short History, “moments of sweeping change in tax regimes have come invariably during the nation’s great emergencies—the constitutional crisis of the 1780s, the three major wars [the Civil War, World War I, and World War II], and the Great Depression.”

A case in point is the income tax, one of the most intrusive and economically irrational taxes a government can impose. One commissioner of Internal Revenue went so far as to say in 1871 that the income tax was “the one of all others most obnoxious to the genius of our people, being inquisitorial in its nature, and dragging into public view an exposition of the most private pecuniary affairs of the citizen.” Unlike sales or excise taxes, which inhibit consumption, the income tax penalizes economically productive work and the just rewards for it—thereby dragging down prosperity.

The federal income tax originated during the emergency of the Civil War, the nation’s first modern conflict. During that episode, spending by the federal government increased from less than 2 percent of the Gross National Product (GNP) to an average 15 percent of GNP. The Republican leadership admired how the British Liberals had used income taxes to finance the Crimean War instead of imposing higher taxes on property, and so the U.S. adopted the same device. By end of the Civil War, the wealthiest 10 percent of all Union households were paying income tax, which accounted for about 21 percent of federal tax revenues—with excise taxes comprising 50 percent and tariffs accounting for 29 percent.

The Civil War-era income tax was abolished in 1872, and the federal government returned to financing itself through its traditional antebellum means: excise taxes on particular goods and tariffs on imports (that is, two consumption taxes) and sales of public land. Yet the wartime policy had set a precedent, and after foreign trade (and thus tariff revenues) fell during the depression of the 1890s, the income tax was resurrected. Grover Cleveland, an otherwise very conservative president, accepted the income tax in exchange for lower tariff rates.

In 1895 the Supreme Court ruled that the new tax was unconstitutional because the U.S. Constitution required any direct tax to be assessed among the states according to population; taxing individuals according to their incomes did not meet that requirement. But in 1913 the constitutional problem was surmounted by the ratification of the 16th Amendment, which specifically allowed the imposition of an income tax. This time the tax had roots in the populist and progressive movements: the broad public perception was that the burden of tariffs and excise taxes, which accounted for most federal revenue, fell disproportionately on the non-wealthy.

Domestic movements may have reintroduced the income tax, but it was World War I that led to the income tax replacing tariffs and excise taxes as the federal government’s primary form of taxation. According to Brownlee: “The income tax was a highly tentative experiment until 1916, when America prepared to enter World War I and settled on it as the primary means of raising taxes for the war.” The Great War was transformational in bringing permanent “big government” to the United States, a change made possible by the war’s enhancement of the income tax’s role in taxation.

During wars, trade—and thus tariff revenue—gets disrupted, requiring governments to levy greater internal taxes to fund conflicts. The income tax showed once again during the world war that it had a great capacity for generating revenue. After the war, the ballooning of tax receipts underwrote the vast expansion of federal domestic programs during the Hoover administration, FDR’s New Deal, and beyond.

But it took another war, World War II, to turn the income tax from a burden on only the well-to-do into a tax on most earners. From 1939 to 1945, the number of people paying income tax rose from 3.9 million to 42.6 million—roughly 60 percent of the labor force—and income tax revenues soared from $2.2 billion to $35.1 billion. The federal government could now take in massive revenues from taxing middle class salaries and wages.

Franklin Delano Roosevelt and the New Dealers had believed that a mass-based income tax was the best way to guarantee a permanent stream of funds to support federal programs. They were right. In 1940, before America’s entry into World War II, the federal income tax accounted for only 16 percent of all government tax revenues. By 1950, the federal income tax had grown to 51 percent of all government tax revenues. The World War II tax regime was supposed to be temporary, but it became permanent.

From the postwar period until the late 1970s, the broad base of the mass income tax, combined with economic growth and inflation that pushed people into ever higher tax brackets, allowed the federal government to swim in swollen revenues, which were used to expand domestic and overseas programs while cutting excise and corporate levies. The augmented domestic programs made possible by the income tax included healthcare (for example, Medicare), education, welfare, urban development, and federal aid to state and local governments—most of the welfare state, except for Social Security. But that too has its origins in wartime measures.

To encourage male breadwinners to enlist in the military, ever since colonial times all levels of government, including the federal government, had paid pensions to widows and orphans who lost a provider in war. But in 1862, as early Union defeats tempered patriotic enlistment in the North, the federal government increased the level of compensation for such dependents and widened the range of family members covered by the payments to include not only widows and orphans but elderly parents and siblings of those killed in battle. After the war, this social program came to serve a significant fraction of the population.

From the American Revolution to 1861, the federal government had paid 143,644 pension claims. From 1861 to 1890, Civil War pensions amounted to more than five times that number. By 1889, U.S. pension spending alone was greater than the entire federal budget before the Civil War. By 1893, a whopping 40 percent of the federal budget was allocated for disabled troops, widows, orphans, and the elderly. The patronage-oriented politics of the Republican Party—which dominated American politics in the latter half of the 1800s and early 20th century—led to huge expansions of pension benefits to win votes.

In 1879, the Arrears Act caused many veterans, who hadn’t realized they were disabled until the government offered $1,000 or more for finding aches and injuries, to flood the Bureau of Pensions with claims. Although, according to its commissioner, the bureau was the largest executive bureau in the world, it had few means to detect fraudulent claims, which were rampant. During election years between 1878 and 1899, Republicans used the bureau to dole out pensions rapidly and heavily in key electoral states.

In 1890, a quarter century after the Civil War ended, pension eligibility expanded to include any soldier who had served 90 days or more during the war and was unable to do manual labor—whether or not he was injured during the conflict, or even whether he had seen combat. Similarly, widows of soldiers who had served in the war for 90 days or more got pensions, regardless of whether their husbands had died in the conflict.

As historian Megan J. McClintock concludes:

Civil War pensions were not simply a military benefits program … but also a social welfare system that contained assumptions about familial relationships. Only those pension claimants whose domestic arrangements met with approval received federal moneys. In the case of mothers and fathers, the ideal of filial devotion encouraged the federal government to become a provider of poor relief for the elderly in the late nineteenth century. Ideals of familial relations shaped policy directed at Civil War widows as well, but with very different results. Rather than simply benefiting from the expansion of federal assistance, widows were subjected to increasing government supervision of their private lives.

If a widow remarried, she was no longer eligible for the pension. This created a perverse incentive for women not to remarry but instead to cohabitate or become prostitutes. Having fostered this development, the government then had to investigate whether either of these forbidden alternatives was happening.

McClintock provides a summary of the Civil War mobilization’s dramatic effect on widening the federal government’s social welfare role:

Forced by large-scale warfare to broaden its social welfare role, the federal government developed a family policy. In the postbellum years, that family policy reconstructed households shattered by the Civil War.

The extensive involvement of the federal government in Union households demonstrates that the links between military recruitment and family needs have shaped the evolution of social welfare policy in the United States. Before the Civil War, the federal government had assumed only limited responsibility for military dependents and virtually none for the civilian poor and disabled. Pre-Civil War military benefits were piecemeal and limited to veterans, widows, and orphans; moreover, the federal government abstained from social welfare spending for the civilian poor, and local charity was stigmatized and parsimonious. The nation’s first “modern” war transformed the landscape of relief, forging new ties between the federal government and families, and between public and private economies, as the government sought to increase the number of men willing to leave their families in the 1860s and to prepare future citizen soldiers for patriotic sacrifice.

According to Theda Skocpol, the Civil War pension system degraded into what became America’s first massive, federally funded old-age and disability welfare system:

By the time the elected politicians—especially Republicans—had finished liberalizing eligibility for Civil War pensions, over a third of all the elderly men living in the North, along with quite a few elderly men in other parts of the country and many widows and dependents across the nation, were receiving quarterly payments from the United States Pension Bureau. In terms of the large share of the federal budget spent, the hefty proportion of citizens covered, and the relative generosity of the disability and old-age benefits offered, the United States had become a precocious social spending state. Its post-Civil War system of social provision in many respects exceeded what early programs of ‘workman’s insurance’ were giving old people or superannuated industrial wage earners in fledgling Western welfare states around the world.

Skocpol adds, however, that public revulsion against the expansion, excesses, and corruption of the Civil War pension system from the 1870s to 1910 stalled the onset of the welfare state proper—then taking hold in other Western countries—until the New Deal in the 1930s. Americans may have been repelled by Civil War pensions because—in a classic case of high taxes leading to surplus government revenues leading to excess spending—Republicans supported lavish pensions to groups in their political constituency (Union veterans) to justify continued high tariff walls to protect Northern industries, which were among the most influential supporters in their political coalition. The interests of such industrialists coincided with those of pensioner lobbies and the bureaucratic empire of the Bureau of Pensions to widen the program over time.

By 1910, 45 years after the war, about 28 percent of American men aged 65 or older were receiving federal benefits. This led to the erosion of public confidence in a system then as generous as that of nascent welfare states around the world. Nevertheless, in a pattern that has been seen before, a precedent had been set and would be available at the next crisis—in this case, the precedent that the federal government could administer what amounted to a nationwide retirement program. The groundwork for Social Security had been laid. As Skocpol summarizes, “Civil War pensions at their height were America’s first system of federal social security for the disabled and elderly”—and the embryo of other, even broader and more expensive federal programs to come.

Conservatives should not fail to recognize that war is the most prominent cause of the massive welfare state that has been erected in the United States. Both taxes and spending as we know them today—Leviathan’s head and tail—spring from the warfare state. Traditional conservatives recognized that war is the primary cause of overweening government in human history; thus, they promoted peace. Since the rise of the neoconservatives, however, the right has forgotten this important lesson, which has to be relearned.