Fight Now, Pay Later

By John Greenwald

How should the U.S. and its allies pay for Operation Desert Storm? At nearly $50 million for an F-117 Stealth fighter and $2 million for an M-1 tank, the cost of the conflict could add up more swiftly than any other war in American history. By one estimate, the price tag would be as much as $28 billion for a one-month campaign and $86 billion for a six-month siege of Saddam Hussein's forces. Experts say the high-tech combat already costs $500 million a day and may reach $1 billion if heavy fighting breaks out on the ground. At the height of the Vietnam War, which employed less sophisticated weaponry, U.S. military expenditures came to about $230 million a day in 1991 dollars.

Politicians in Washington retreated last week from any serious attempt to grapple with the issue of financing the gulf conflict. Some legislators dared to mention the idea of a special tax surcharge, but with the U.S. mired in a recession, lawmakers and the Bush Administration backed away from that idea as too dangerous politically and economically. Their fears were reinforced last week when the Commerce Department reported that the economy contracted at a sharp annual rate of 2.1% in the fourth quarter of 1990. Politicians showed almost as much reluctance to finance the war by heavy borrowing, since the U.S. already faces a federal deficit that will exceed $300 billion this year -- even without the cost of combat.

No taxing? No borrowing? That prospect raised the concern that the money may have to come from cash-starved social programs. But that path could prove ruinous at a time when 29 deficit-ridden states are unable to provide adequate financing for such vital needs as education, housing and police protection. The cost of two days of fighting surpasses the $937 million that Congress voted last year for aid to the homeless. Meanwhile, demands on the budget are swiftly growing. Treasury Secretary Nicholas Brady warned last week that the savings and loan bailout will require $77 billion more in emergency funds to remain in operation past March of this year.

Unlike their leaders, many Americans seem to consider a tax increase for the war to be inevitable. In a TIME/CNN poll taken last week by Yankelovich Clancy Shulman, 54% of the 1,000 adults surveyed said they thought it would be necessary to raise taxes to pay for the fighting. But few of the options were attractive. Only 27% favored raising income taxes, while just 35% supported an increase in gasoline taxes, and 38% approved of a one-time income tax surcharge. The preferred choice: a tax on imported oil, which 54% favored.

Politicians taking the wait-and-see position drew moral support from Federal Reserve Chairman Alan Greenspan, who argued somewhat wishfully last week that much of the estimated cost of the war may simply vanish. Greenspan told Congress that the price tag "may be a lot lower than we realize" if the conflict proves short and the U.S. decides not to replace many weapons lost in battle. He pointedly advised against raising income taxes. "I think a surcharge at this stage is very clearly premature and, hopefully, unnecessary," Greenspan said. At the same time, he indicated that the Federal Reserve would continue to lower interest rates to stimulate the economy.

With little U.S. money set aside to finance the fighting, Washington urgently passed the hat to its allies once again. While the U.S. has fielded two-thirds of the coalition's 685,000 troops, it reportedly hopes to limit its financial contribution to about 20% of the cost of the fighting and collect the balance from other key members of the 28-nation alliance. In response, Kuwait's government-in-exile last week pledged $13.5 billion to support the war effort. Saudi Arabia is providing food, water and transportation for allied soldiers on its soil, and agreed earlier to pick up as much as half the bill for all war costs.

While Washington ducked the tax issue, Japan and Germany seemed willing -- if not exactly eager -- to consider new levies to help pay for the war. In Tokyo, Prime Minister Toshiki Kaifu staked his political future on a request for Japanese lawmakers to allocate $9 billion to the allied campaign. The outlays would be in addition to $2 billion that Japan pledged before the fighting began. One plan to finance the new grant would combine borrowing with increased taxes on such items as gasoline, tobacco and alcoholic beverages.

Germany, already burdened by the cost of reconstruction in its eastern part, is likely to bow to U.S. pressure to contribute fresh funds to the war effort by providing at least $3.5 billion of additional aid. That would match the $3.5 billion that Bonn has given to show solidarity with the allied cause. In announcing German plans for a contribution "of a large dimension," Chancellor Helmut Kohl conceded that "I cannot exclude that we will have to raise revenues."

Such blunt talk is rare in the U.S., where the White House and Congress are so far ignoring the arguments for wartime sacrifice in favor of a game of high-stakes political chicken. Neither side wants to be blamed for creating more pain after Washington cut spending and added $21 billion of new taxes as part of last year's deficit-reduction agreement. Bush is still nursing wounds for breaking his "no new taxes" pledge during the heated political battle. Yet virtually no one wants to rescind the budget deal and thereby widen the menacing federal deficit. While the Senate Budget Committee debated a resolution last week to roll back the agreement and halt the burdensome tax increases in light of the recession, lawmakers voted 21-0 to reject the proposal.

Aides to George Bush stunned Democrats and some Republicans last week by indicating that the President, in his annual budget request, would renew his long-standing campaign for lower capital-gains taxes. The strategy seemed a halfhearted attempt to appease conservatives who remain furious with Bush for agreeing to tax increases last year. Scoffed a Democratic aide to a congressional committee: "Maybe they'll ask for a capital-gains cut to pay for the gulf war."

The White House considered options last week that were hardly more promising. So far, the Administration's response to the financial cost of the fighting has been to consider a muzzy combination of borrowing, cutbacks in other defense spending and more aid from the allies. The White House argued that its lack of financial focus made sense. "If we rush to go for a tax," an official said, "that takes the pressure off the rest of the world to share the burden."

Congressional efforts to face up to the war costs were, predictably, just as feeble. Leaders of both parties raced to distance themselves from talk of new taxes as if the words were poisoned. While House Speaker Thomas Foley asserted that "it would be a mistake to put this entire cost on the next generation," he saw no chance for a tax hike. "I don't think we can put it aside categorically and never, ever think about it," the Washington Democrat said. "But there are no plans. There is no discussion."

Yet a few politicians argued that new taxes were needed to finance the fighting. "We've got to live in the real world and start paying our bill," said Democratic Senator Ernest Hollings of South Carolina. Harvard economist John Kenneth Galbraith advocated a surcharge on annual incomes greater than $100,000. "Some of our poorest people are fighting the war," Galbraith said. "I would like to see our richest people pay for it. It would be a fine expression of democratic will."

In the search for new revenues, politicians gazed covetously last week at some very rich oil companies whose profits have skyrocketed following Iraq's invasion of Kuwait and the ensuing run-up of petroleum prices. The firms included Chevron, which last week reported earnings of $633 million for the fourth quarter of 1990, an eightfold increase over the final quarter of the previous year. After such reports, Democrats Howard Metzenbaum of Ohio and Joseph Lieberman of Connecticut introduced a Senate bill for a windfall- profits tax on Big Oil to help pay for the war.

For the U.S., the immediate financial cost of the war will depend on the length of the fighting and the generosity of its allies. But the expense of maintaining peace in the Persian Gulf will scarcely end once the guns fall silent. Even if Pentagon planners decide against replacing most lost equipment, the services are likely to clamor for more high-tech weapons like the Stealth fighters and Patriot antimissile systems, which have become media stars of the conflict. Moreover, the U.S. will probably need to keep a large garrison force in the region. Washington may soon have to stop dithering and decide how to meet the bills for Operation Desert Storm that are coming due today -- and tomorrow.

CHART: NOT AVAILABLE

CREDIT: From a telephone poll of 1,000 American adults taken for TIME/CNN on Jan. 24 by Yankelovich Clancy Shulman. Sampling error is plus or minus 3%. "Not sures" omitted.

CAPTION: Do you think it will be necessary to raise taxes to pay for the war?

Do you favor or oppose these taxes as a way to pay for the war?

CHART: NOT AVAILABLE

CREDIT: [TMFONT 1 d #666666 d {Source: Congressional Budget Office}]TIME Chart by Steve Hart

CAPTION: RUNNING UP THE TAB

With reporting by Michael Duffy and Hays Gorey/Washington, with other bureaus