The White House and Congress Are Playing Games When It Comes to Financing the War in Iraq

Author: Allan Sloan

Published: October 28, 2003

Washington has a knack for fiscal folly. It's the place that created the Social Security trust fund, which has no funds and can't be trusted. It let George W. Bush reduce the stated cost of his tax cuts by pretending they will expire rather than become permanent. And now, in yet another example of financial fantasy, Washington is trying to pretend that we can get something for nothing when it comes to paying for the Iraq war.

Let's start with Bush's plan to get foreigners to lend us money for the war, rather than our paying cash for it. Bush doesn't say this, of course, but it's what his policy amounts to. We've just run the biggest federal budget deficit ever: $530 billion, if you include the money the rest of the government borrowed from Social Security's alleged trust fund. And you should count it, unless you're ready to say flat-out that the Treasury confiscated that money from the trust fund with no intention of ever making good on the borrowing. Now, Bush wants an extra $87 billion for the war at the same time that he's cutting taxes and hitting up foreigners for Iraq contributions.

It was one thing for the United States to borrow for the Revolutionary War, when the federal government, such as it was, didn't have any money. Or to go into hock, big-time, to fight World Wars I and II, which were expensive beyond belief. But the country is incredibly rich now, and Iraq is barely pocket change relative to the national economy, or even to the tax cuts Bush has pushed through the past three years.

Besides, we're supposed to have shared sacrifice between civilians and military when we're at war. Our troops are sacrificing in Iraq and Afghanistan -- but aside from reservists' families, civilians aren't sacrificing on the home front. Bush argues that lower taxes mean a stronger economy for returning soldiers. But outsized government borrowings undermine the economy long term.

Because foreigners finance a growing part of our budget deficit, we're in effect asking them to lend us money for the war. Which way do you think our country is more secure in the long term? Having our kids in hock to the eyeballs to foreigners who financed our war? Or paying cash now? Looks like an easy call to me.

Sure, $87 billion is a lot of money. But it's not a lot compared with the three rounds of Bush tax cuts, which total around $3 trillion. According to a study by Leonard Burman and Jeffrey Rohaly of the Tax Policy Center, a liberal think tank whose numbers are universally respected among budget techies, we could raise close to $87 billion a year with a 5.25 percent surcharge on income tax bills. For every $1,000 of income tax you pay, you'd fork over an extra $52.50.

Tax rates would still be well below their 2002 levels. We could leave the war tax in place until our major Iraq expenses are over. Or mix and match by partly rolling back some other cuts. The $87 billion in extra taxes isn't enough to even begin to derail the economy.

Various Democrats have proposed variations on the theme of scaling back tax cuts to pay for the war. I'm not trying to carry water for them, just proposing what seems to be common sense. Just as I happen to agree with Bush when it comes to opposing the appealing-looking idea of turning part of our Iraq expense into a loan. He thinks it's futile and counterproductive. And he happens to be right.

The Senate has adopted the loan idea, and the House has more or less approved it. The word "loan" makes for good sound bites -- but it's nuts. First, it damages us in the eyes of the world because it's greedy and unseemly: How can you invade another country, hire your own people to fix it and stick the invadees with the tab? Second, who's going to sign the IOU on behalf of the Iraqi people?

Finally, "lending" $10 billion to Iraq rather than just forking over the cash won't save us any real money. Debt-ridden Iraq is almost certain to default. The Congressional Budget Office would doubtless count all or almost all of the $10 billion as a budget expense because of the small likelihood of the loan being repaid. Under budget rules, the CBO has to rate the subsidy component of any loan the federal government makes, and include the subsidy as a budget expense. Here, the subsidy would be pushing 100 percent. (The CBO says it hasn't been asked to rule on an Iraq loan question, and a spokesman declined to be drawn into a discussion of what the ruling might be.)

So let's accept the fact that there is no free lunch when it comes to Iraq, and just suck up our gut and pay cash for the war instead of borrowing. Please note that this argument has nothing to do with whether we should have invaded Iraq or what we should do now that we're there. It's about money, not politics.