Rearming for deterrence and war: First debt, then higher taxes
Current NATO rearmament plans could lead to permanently higher taxes in member states, according to a new analysis by the Kiel Institute based on a unique dataset. The dataset covers the financing of rearmament and wars over the past 150 years in 20 countries. It shows that military spending is initially financed through significantly higher public debt, while in the medium to long term the tax burden rises.
According to the study, tax rates that are increased or newly introduced during rearmament phases generally remain in place at least in part even after these phases end. Fully repealing newly introduced taxes is the exception rather than the rule.
As a result, average tax revenues more than a decade after the start of a rearmament phase were still 20 to 30 percent above their original level, while top marginal tax rates were around 15 percentage points higher.
“The current rearmament in NATO countries is among the largest in Western industrialized countries over the past 150 years, comparable to the rearmament phases prior to the World Wars or after the Korean War. A look at history suggests that this will also entail long-term financial burdens for taxpayers,” says Christoph Trebesch, Director of the Research Center International Finance at the Kiel Institute and co-author of the study “Guns and Butter: The Fiscal Consequences of Rearmament and War.”
In wartime, governments have predominantly financed sharply rising military spending through higher public debt. In addition, new taxes are introduced or existing ones increased, for example to finance rising interest payments.
A similar pattern can also be observed in rearmament phases during peacetime, such as periods of geopolitical threat without direct warfare on a country’s own territory, conditions currently faced by many NATO members. While debt issuance and tax increases are smaller in such threat scenarios than in wars, they have nevertheless often led to noticeable changes in tax systems, including higher income or consumption tax rates.
Politically neutral countries have also repeatedly felt compelled to rearm for deterrence purposes and, as a result, to place a burden on their own taxpayers, for example Switzerland and Sweden during the World Wars.
Whether for direct warfare or for deterrence in peacetime, the dataset shows that income and consumption taxes remain at a significantly higher level 15 years after a rearmament phase, even as the debt burden steadily declines.
“Overall, 150 years of fiscal history show that major geopolitical upheavals, both in wartime and in peacetime, lead to a long-term expansion of the fiscal state,” Trebesch concludes.
