The long-run fiscal legacy of military spending booms
In this paper Johannes Marzian and Christoph Trebesch analyze the fiscal consequences of large military buildups. They identify 114 military spending booms, 26 in major wars, 88 in peacetime or smaller conflicts and construct the Global Budget Database a new dataset of disaggregated central government finances for 20 countries from 1870 to 2022, comprising over 112,000 expenditure items and 30,000 revenue items drawn primarily from original budget accounts.
Findings
- Guns and butter, not guns versus butter: Military buildups are rarely financed by cutting social spending. Instead, governments expand both military and civilian expenditures simultaneously.
- War vs. peace financing differs: Wartime booms are financed primarily through debt (debt-to-GDP rises 40% on average), while peacetime buildups rely on a more balanced mix of debt and taxes.
- Taxes are persistent: Real tax revenues remain 20–30% higher and come mainly through income and consumption taxes. Top marginal income tax rates stay 10–20% elevated for 15+ years after boom onset. Tax narrative analysis across all 114 episodes confirms that full rollbacks of war/rearmament taxes are the rare exception.
The paper’s headline implication for today is that as NATO members scale toward the new 3.5% of GDP defense spending target, the historical record suggests this will produce a lasting expansion of government size and taxation, not a reallocation away from social programs.
Guns and Butter: The Fiscal Consequences of Rearmament and War
Authors: Johannes Marzian, Christoph Trebesch
From: Kiel Institute
Wars and inequality
In this paper, Ralph Luetticke, Timothy Meyer, Gernot J. Muller, and Moritz Schularick combine new empirical evidence with a structural macroeconomic model to assess how wars reduce inequality and through which channels.
- Empirical approach: The authors assemble a long-run panel dataset of top-1% income and wealth shares across war-site countries (those experiencing fighting on their own soil), drawing primarily from the World Inequality Database. They estimate panel local projections over 15-year horizons following war onset, controlling for country fixed effects and pre-war trends. They also collect data on capital destruction, capital shares, top marginal tax rates, and inflation to trace the transmission channels.
- Structural model: The authors build a Heterogeneous Agent New Keynesian (HANK) model in the tradition of Bayer et al. (2024), where households differ in both income and wealth, firms earn monopolistic profits, and prices adjust infrequently. Three war-related shocks are fed through the model: capital destruction, increased taxation, and inflation.
Findings
- Income inequality falls far more than wealth inequality: The top 1% income share drops by over 20%, while the top 1% wealth share falls by only 10%. This asymmetry is a central finding.
- Capital destruction is the primary driver of income leveling: War destroys capital and raises firms’ marginal costs, but wartime price rigidities (including price controls) prevent full pass-through, causing a profit squeeze. Since profits disproportionately accrue to top earners, this compresses the income distribution sharply.
- Taxation matters most for wealth inequality: Rising top marginal tax rates (which increase 50% during wars) reduce the post-tax disposable income from which the wealthy accumulate assets, gradually eroding wealth concentration.
- Inflation helps at the bottom, not the top: Wartime inflation (price levels rise 70% over 10 years) primarily benefits indebted households at the lower end of the wealth distribution by eroding real debt burdens, but has little effect on top-1% shares because wealthy households hold similarly inflation-exposed portfolios.
- War on foreign soil has weaker effects: Countries that fight abroad but are spared domestic destruction see weaker and less persistent declines in income inequality.
The Great Leveler According to HANK
Authors: Ralph Luetticke, Timothy Meyer, Gernot J. Muller, Moritz Schularick
From: University of Tubingen, University of Bonn, Kiel Institute
