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December 11, 2012

NATION: A Budget Lesson From 1917



More than $1 billion was to come from an excess-profits tax on corporations, individuals and partnerships whose profits "have been increased enormously by war business, or business incident to the war," Treasury said.

Rates were also raised on corporations and the wealthy, personal exemptions for married and single taxpayers were reduced slightly and excise taxes were raised on liquor and tobacco products. Everyone paid something to support the war.

With the Second Liberty Bonds Act in September 1917, Congress put limits on bonds and certificates of indebtedness (short-term interest-bearing notes such as Treasury bills) in a move meant to give Treasury a better way to manage raising funds. The limit was set above the debt so the government was free to raise funds when needed. For example, in 1919 the debt limit was set at $43 billion when the debt was $25.5 billion.

In March 1939, with World War II looming, President Franklin D. Roosevelt asked Congress to raise the debt ceiling to $45 billion. With rising costs, it grew to $300 billion by April 1945. Overall war costs were paid by raising $135 billion in seven War Bond drives and increasing taxes under the Revenue Act of 1942. The tax burden, again, was spread across the population. The income tax for the first time hit 37 million low- and moderate earners and rates rose for corporate, estate, excess-profits and gift taxes.

In 1946, the debt limit was reduced to $275 billion, where it remained through 1954. It did not rise during the Korean War since that conflict was mostly financed by increased taxes. In 1968, President Lyndon B. Johnson pushed through Congress a 10 percent surtax on individual and corporate filers to help pay for the Vietnam War. The debt limit was raised $73 billion that year.

In June 1990, President George H.W. Bush, faced with a budget deficit and the debt limit, reversed his 1988 promise — "Read my lips: no new taxes" — and negotiated revenue increases with the Democratic Congress. On Aug. 5, 1990, Iraq's Saddam Hussein invaded Kuwait, and, faced with an obvious need to intervene, Bush agreed in September to a deficit-reduction package that included spending cuts of $324 billion over five years and a 3 percent increase in the top income tax rate, to 31 percent, that raised $159 billion.

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