STOCKHOLM - SIPRI has released a paper today that explores the link between taxation and military spending.
World military expenditure is on the rise. To fund their increases in military spending, options available to governments include tax, debt or revenue from natural resources. Each form of financing has its consequences, economic, political or social.
Tax is the prevalent source of finance for governments. The use of tax, and the choice among different types of tax, can have an impact on income inequality and economic growth, among other things. However, no scholarly attention has yet been paid to the use of taxation to fund military spending. Using statistical analysis combined with in-depth case studies sheds light on this use of taxation.
The findings—based on data for 100 countries between 1990 and 2020 and reinforced by detailed case studies on Burundi and Ukraine—show that countries in conflict tend to resort to indirect taxation to fund military expenditure. This is particularly true for low-income countries and for countries with an autocratic regime. This association can be consequential, considering the accumulated evidence on the impacts of indirect taxation on income inequality.
Introduction
As a reflection of the recent structural deterioration in the global security environment, many countries are increasing their military expenditure to upgrade and modernize their military capabilities. For example, Japan plans to almost double its military expenditure by 2027 in response to its growing threat perception of China, while Sweden’s military spending is expected to surge by 45 per cent between 2020 and 2025 amid growing tensions with Russia.
While the intent to boost military spending is clear, for many countries the choice of where to source the funds required to pay for the increases—and the impact of that choice—is often less clear. The money could be raised through government borrowing, through revenue from the sale of natural resources or through increases in rates of taxation. Each financing option has consequences. The main source of state revenue is taxation.
In the above examples, both Japan and Sweden have chosen to finance their increases in military expenditure by increasing taxation.2 Such a choice could have substantial impacts on economic growth or redistributive effects on income equality.
Despite these potentially far-reaching consequences, most studies that look at how governments pay for increases in military expenditure focus on the use of debt or revenue from natural resources—no scholarly attention has yet been paid to the issue of using taxation to fund military spending.
This paper addresses this gap by exploring the links between taxation and military spending. Drawing on the period 1990–2020 and covering the 100 countries for which tax and military spending data is available, it offers relevant evidence not only to understand how the announced increases in military spending may affect tax structures, but also how low-income, autocratic and conflict-affected countries in particular fund military spending.
The study combines statistical analysis with in-depth case studies to shed light on how military spending and taxation can interact. If a government decides to fund military spending through taxation, two types of tax are at its disposal: direct and indirect. A choice of indirect taxes (e.g. tax on sales of goods) can be consequential since it can disproportionately burden the poor and can have a regressive effect on income inequality. In contrast, choosing direct taxes (e.g. income tax) means adopting a progressive structure where the amount of tax collected is based on income levels. Direct taxes can thus reduce income inequality.
In outlining the potential redistributive effects of military spending choices, the study offers food for thought to policymakers on the economic and social consequences of military spending. The paper continues in section II with a further explanation of the main ways in which governments can fund military spending, with a focus on taxation. It also outlines the study’s contribution at a policy and research level.
Section III uses statistical methods to investigate the relationship between military spending and taxation. Section IV analyses in detail the cases of Burundi and Ukraine to supplement the quantitative results. Section V concludes with a discussion of the implications of the findings and by offering some policy recommendations and considering avenues for future research. Appendix A gives details of the definitions of terms and sources of data used in this study.
About the authors
Dr Nan Tian (South Africa) is a Senior Researcher with the SIPRI Military Expenditure and Arms Production Programme.
Dr Diego Lopes da Silva (Brazil) is a Senior Researcher with the SIPRI Military Expenditure and Arms Production Programme.
Xiao Liang (China) is a Research Assistant with the SIPRI Military Expenditure and Arms Production Programme.
To Download the paper, visit: https://www.sipri.org/sites/default/files/2023-01/2023_01_using_taxation_to_fund_military_spending_0.pdf
