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December 11, 2012

NATION: A Budget Lesson From 1917

WASHINGTON — 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' 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."

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