Should We Have a Special Tax to Combat Terrorism?

Recently I came across a column by James Pethokoukis in US News and World Report that asked the question: Do We Need a Special Tax for the War on Terrorism?

The notion that deficit spending somehow is paid for by future generations is actually nonsensical. We pay for the deficit in the current period by a reduction in goods and services that we consume whether it is because we raise taxes or because we raise money through bond issuance that would otherwise have been used for other purposes. The fact is that deficit spending does not matter so long as the deficit is financed internally. In that case, Americans may have to pay higher taxes but Americans also are the beneficiaries of the bond revenues. What really happens is that bond financing ends up transferring wealth to richer Americans who purchase bonds at the expense of the taxpaying public at large. However, since most of the taxes are paid by the upper half of income earners (just as most of the bond income is paid to the upper half of income earners), deficit financing tends to be a redistribution amongst the relatively well-to-do. Thus bond holders will be made better off while similarly situated non-bond holders will be made worse off through higher taxes.

Another way of thinking of this is to think that the bondholders are agreeing to be taxed (by buying the bonds) and then we agree to pay them a subsidy in the future for that voluntary tax arrangement. In fact, if we wanted to we never have to tax anyone at all, so long as there are always willing bondholders since we can always recycle the debt into a new bond offering. Of course, if there are no willing bondholders at an interest rate that we find acceptable, there is only one option and that is to tax people.

Of course, if we finance our deficits abroad (as we currently do), we could be said to tax Americans to benefit future Chinese (or Russians or Iranians or any other country's citizens who end up purchasing our bonds). Still, the fact remains: our GDP will not be lessened based on how we finance the deficit (whether it be through taxes or bonds). Therefore, it is unclear how we can say that future generation will be paying for it. On the other hand, if we end up LOSING the war on terrorism, our GDP will definitely be lower because of the destruction of productive capacity that the terrorists will inflict upon us and the extra security measures that we will have to endure in the future. Thus the question is not whether we want future generations to pay for the war on terrorism but rather do we want future generation to pay for the fact that we LOST the war on terrorism.