ABSTRACT
This chapter analyzes the economic effects of different government policies for war financing. Perhaps the most significant difference between the fiscal policies used to finance US wars were those of World War II and the Korean War. The chapter summarizes the behavior of the US economy during these two wars, and in particular, highlights differences in monetary and fiscal policy across the two periods. Labor income tax rates, and to a lesser extent, capital tax rates, rose during World War II. Prior to World War II, the average marginal tax rate on capital was about 45 percent, and the average marginal labor tax rate was just nine percent. Taxes rose again during the Korean War, with capital tax rates rising to an average of nearly 63 percent. Prior to conducting the experiments of interest, values must be assigned to the parameters describing preferences, technology, and government policy variables.
