TIME: Almanac 1993/TIME Almanac 1993.iso/time/020491/0204200.000

Text File | 1992-08-28 | 10.0 KB | 214 lines

                3                                                              BUSINESS, Page 56

Fight Now, Pay Later


Costs in the gulf war could reach $1 billion a day, but so far
Washington is dodging the issue of where the U.S. share will
come from

By JOHN GREENWALD -- Reported by Michael Duffy and Hays Gorey/
Washington, with other bureaus


    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.


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

    Yes    54%     No     37%


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

                                               Favor   Oppose

    An increase in gasoline taxes                35%      61%

    Higher income tax rates                      27%      70%

    A tax on imported oil                        54%      39%

    A one-time income tax or surcharge           38%      56%



[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.]