Generally, we found, taxes and wars have followed a fairly predictable pattern: Taxes rise during wartime and then come back down in the years afterward.

We’ll start with the Civil War. Congress enacted various income and excise taxes to meet the rising cost of the war, most of which were repealed in the years after the war.

During World War I, the 1916 Revenue Act and the War Revenue Act of 1917 increased tax revenue from $761 million in 1916 to $3.6 billion in 1918. After the war, in the 1920s, Congress cut taxes five times.

The same was true during World War II. Tax increases over several years raised revenues from $8.7 billion in 1941 to $45.2 billion in 1945. Again, tax cuts followed the war.

It’s worth noting, however, that during all of those wars, the war expenses were much larger than today, relative to the size of the economy.

Congress hasn’t formally declared war since then, but we think it’s fair to consider the wars in Korea, Vietnam, the Persian Gulf and Iraq. However, we have decided not to include the armed conflicts in Grenada in 1983 and Panama in 1989 due to their much smaller cost, length and scope.

Wars are obscenely expensive, usually costing far more money than people can imagine before they start. Finding such funds usually requires a combination of hard work and brute force.

I was struck by this question because the cost of Trump’s War is usually overlooked in the strategic discussion of whether Trump can or should escalate, and whether such a decision might turn Trump’s war into a longer-term conflict. In actuality, the question of how this war can or should be financed needs to be addressed first. One of the determining facts which will determine the length of this war could be that the USA is far more under the gun financially than it was at the start of any war in its history. That alone might prevent the US from escalating or lengthening the war—even if Trump wanted to do both.

If I may, I would like to go back to one of my favorite pieces of the year so far, which struck some people as a little out of left field. It was how in geopolitical and economic terms, we may have forgotten what it was like to deal with a real financial crisis.

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The argument in the piece was that over the last 20 years we have had one way to deal with any crisis, be it the 2007-8 financial meltdown, the Covid pandemic, etc., and that was through massive deficit spending. We could, and did, throw masses of money at any problem. At the same time, the US fought its long War on Terror, which lasted through the American withdrawal from Afghanistan in 2021. All of this borrowing helped get the USA (and the rest of the world) through these crises, but of course it came with a time limit. We have been incredibly lucky (in the short term) over the last twenty years in that for much of the time interest rates were exceptionally low. At some point the borrowing has to stop, and I do not believe people understand this and are prepared for it.

The omens are already somewhat ominous. In a nutshell the US is trying to fight this war having already accrued a national debt bigger than it had at the end of World War II and with interest rates at relatively very high levels—a double whammy it has never faced before. And the US is already struggling to sell the debt, before the increased costs of this war have been figured in.

Here is a chart that I had created comparing the relative state of the US federal debt now and at the start of other recent wars (on top), and then the interest rates at which the US government could sell ten-year bonds at those times.

The reality is that National Debt of the USA (as a percentage of GDP) is more than twice as large as it was when the War on Terror started in 2001 and almost three times as large as it was when the Vietnam War started.

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Things are further complicated by the fact that already we have no idea what this war has already cost. The administration has been claiming recently (July) that the costs of the war has been $37.5 billion. However that is undermined by two facts. First, the Department of Defense is requesting a supplemental bill for an extra $67.1 billion and the DOD a year ago received a large supplemental appropriation of $150 billion which is supposedly has not spent.

Just a guess, the $37.5 billion figure used by the Pentagon just covers the cost of munitions expended in the war. The real figure would be multiples of this.

In other words, the costs of this war in six months are already steep and would explode if the war metamorphosized into a long-term war with US ground troops going into Iran.

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So add it up and what do we see? It might be that even if Trump wants to escalate the war that he simply cannot. There would be no way to fund it without leading to higher borrowing costs and even then it might never have the political funding to begin with. People should be talking about this more than they are.