Arms, Revenue, and Entitlements. William Mannen

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      The U.S.’s entry into the Pacific and the Caribbean at the end of the 1800s provides greater context for understanding isolationism. As a twentieth century phenomenon, isolationism was magnified by the bloodbath in Europe starting in 1914 and then the fear of another European war by the 1930s. This isolationism towards the horrendous slaughter going on in Europe or the prospects of another such slaughter was unsurprising, but it also did not necessarily signify rejection towards the rest of the world, especially other regions outside of Europe such as Latin America. Isolationism should be mainly thought of in relation to Europe and the World Wars. The U.S. emerged as a more engaged global power by the dawn of the twentieth century, and this new role did at times carry a budgetary impact, even if not always enormous. For instance, the federal budget ran deficits in 1904 and 1905 during and shortly after an economic slowdown, but Panama Canal spending also greatly contributed to these transitory deficits.^[8] The budget then turned in a series of deficits starting in 1908 that resulted from the Panic of 1907 and its severe aftershocks. The surplus normative state survived for a while into the twentieth century, even with the beginnings of larger scale regulation over the economy and greater military power. The government in fact turned in another uninterrupted series of surpluses from 1920 through 1930 during the short-lived era of interwar prosperity at home. The Great Depression ended these surpluses in their tracks by 1931, and a surplus would not be reached again until 1947.

      For taxation, the surplus normative state in the 1800s relied in large part on the tariff as a means for raising revenue. The tariff also served protectionist purposes, especially when Republican Congresses refrained from lowering the high Civil War–era duties in the late 1860s and 1870s. The federal government otherwise imposed excise taxes, with public land sales and other miscellaneous sources bringing in small amounts of additional revenue. To take the year 1890, for instance, when support for the tariff was still widespread, customs duties brought in $229.7 million in revenue as opposed to only $142.6 million from internal sources.^[9]

      Given their stewardship over industrial interests in the Midwest and Northeast, the Republicans, like their Whig forebearers, championed the tariff, while the Democrats had all along fought for free trade. A Democratic president, Grover Cleveland, and a Democratic Congress managed to enact the Wilson-Gorman Tariff during their one interregnum of joint power in the 1893–1895 session, but they failed to reduce overall tariff levels, and Cleveland refused to affix his signature to the law. They also revived the Civil War–era income tax in 1894, but the Supreme Court struck it down as unconstitutional the next year, concluding that it served as a direct tax that had to be levied proportionately with state populations. Even partial tariff reduction, meanwhile, did not stop Republicans from raising tariffs again in the late 1890s, or yet again in the early 1920s, which undid the Underwood Tariff signed into law by Woodrow Wilson. The Fordney-McCumber Tariff of 1922 became synonymous with Republican protectionism of that era, while the more reviled Smoot-Hawley Tariff of 1930 did much to dampen international trade without necessarily worsening the Great Depression. The push for Smoot-Hawley started as politics as usual for the Republicans after they again won the presidency and a huge majority in Congress in 1928. But by the time President Hoover signed the legislation the economy was entering a deep contraction, and the bill had already encountered stiff opposition from the academic and business communities.^[10]

      The Sixteenth Amendment to the Constitution authorizing an income tax, ratified in 1913, allowed the federal government to shift the tax burden onto personal and corporate incomes. But the personal exemption, written into the code at $3,000, or $78,000 in 2019 dollars, shut off the majority of taxpayers from liability. Taxes instead disproportionately hit the wealthy, and even under Republican administrations in the 1920s they brought in between 40% to 60% of revenue, with customs duties well under 20%.^[11] The Revenue Acts of 1924 and 1926 reduced liability by expanding the personal exemption and cutting the normal and surtax rates. Treasury Secretary Andrew Mellon provided singular views on tax cutting, pointing to the need for lower rates and base broadening and even penning the famous tract Taxation: The People’s Business. In his annual report for 1924 he assessed the Revenue Act of that year, along with President Coolidge deeming it inadequate and further opining that “if we attempt to levy taxes inherently too high, those whom we seek to tax will find some of the many ways of avoiding the realization of an income which can be reached by taxation, and the source of the revenue will decline.”^[12] Mellon wrote of tax cuts and base broadening in anticipation of the supply side movement some fifty years in the future. But in the next few decades economic depression and total war took tax rates in the opposite direction. Herbert Hoover by 1932 prioritized a balanced budget over lower taxes, and New Deal tax legislation led to even higher rates on the wealthy. World War II helped turn the tax code for the first time into a truly national system. In addition to hiking the top marginal rate to over 90%, Congress reduced the personal exemption, which had previously protected most middle income taxpayers from liability. Now they were brought into the system, causing income tax filings to rise by nearly 40 million during the war years.^[13]

      Meanwhile, multilateral trade agreements ratified after World War II only further detached the tariff from any lingering revenue raising purposes. Barriers were dramatically lowered again as a result of trade rounds in the 1960s and 1970s. By that point trade liberalization had gained greater support among both parties, especially the Republicans, though as domestic industries faced new competition overseas, resistance to more trade rounds grew. But this populist resistance, which found its home in certain quarters of the Democratic Party in a reversal of its historical role, did not stop the long-term trend already underway, which was that the multilateral trade rounds helped unify the free world in an epic new struggle against communism, a struggle that was geopolitical, economic, military, and ideological. With tariff rates declining, the government relied ever more for its revenue on income taxes, mostly personal and to a lesser extent corporate. Perhaps unsurprisingly, the deficit normative state took hold once income taxes generated the overwhelming share of revenue. By 1970, personal income taxes brought in $90.4 billion in revenue, along with $32.8 billion from corporate income taxes, compared to $15.7 billion from excise taxes and only $2.4 billion from customs duties.^[14]

      The surplus normative state could not survive the duration of the Great Depression and World War II, but not until the period from 1945 to 1991, coinciding with the Cold War and momentous political changes at home, did the budget decisively turn deficit normative. This transition was not at first obvious, especially because the first two presidents during this period, Harry Truman and Dwight Eisenhower, both adamantly insisted upon balanced budgets. Their fiscal legacies improbably aligned because they both succeeded in balancing the budget part of the time in office, attributable to a shared commitment even though they belonged to opposing political parties and had become personally antagonistic to one another by 1952. Yet they only partly succeeded in balancing the budget, and their successors were even less successful. Truman secured surpluses in 1947, 1948, 1949, and 1951, while Eisenhower did so in 1956, 1957, and 1960. Post-Truman and Eisenhower, the budget turned in a surplus only once more during the Cold War, in FY 1969, remaining otherwise in deficit until the late 1990s when international tensions had considerably subsided.

      No single factor caused the transition to deficit normality. The emergence of the entitlement state out of the economic wreckage of the 1930s did not single-handedly produce deficits, particularly since the most significant program enacted during the New Deal, Social Security, was funded through dedicated revenue sources. Postwar military commitments in Europe in the late 1940s, a dramatic break from interwar isolationism, offered the first potential challenge to surplus normality, even as the Truman Administration initially kept defense spending in check. This was the state of affairs until the shocking outbreak of war in Korea, which utterly overturned the Administration’s fiscal and national security posture. The U.S. military emerged from the Korean War larger and more powerful, so much so that Eisenhower strived to use all his influence and credibility in these matters to keeping a lid on defense spending for the rest of the 1950s and preventing the country from descending into a militarized “garrison state.”

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