A recent article in the Financial Times leans heavily on research from UCLA Professor Lee Ohanian.  According to the piece, “How the US actually financed the second world war,” the US raised taxes on capital from 44 to 60 percent during the second world war.  Further, labour taxes doubled, from 9 to 18 percent.  According to Ohanian, the higher taxes were used to make borrowing possible and keep interest rates down.  Ohanian said, “The US typically has done a really good job of financing wars that don’t impose a huge burden on the economy.  There’s a tension in that ideally you’d like to finance with debt as much as possible, so you can spread the distorting burden of higher taxation out over as many years as possible.  Ideally, you don’t want to have someone hit you on the head with a hammer really hard once, but if someone taps you on the head with a hammer very gently for ten years, you’re going to prefer that.”

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