Paying the Defense Bill: Financing American and Chinese Geostrategic Competition (Spring 2023)

In the face of what could be a decades-long competition, the United States and China must consider how they will finance defense spending. Leaders in both states are constrained by an intertemporal dilemma: pay the high political cost of raising taxes today, thereby establishing a sustainable revenue source, or avoid political costs and borrow, risking the economic vitality of the state. A state’s status in the international system shapes its ability to navigate this dilemma. Rising challengers can frame fiscal sacrifice today via taxes as an investment in a bright future, while dominant powers face a public that is skeptical that the future will be better than the present, causing leaders to resort to taking on debt. Early evidence suggests that the Biden administration’s framing of a return to a great-power status quo will not result in increased taxes. For China, the narrative of “national rejuvenation” has supported the country’s rise and fiscal strength and may allow for increased taxation despite slowing growth, positioning Beijing to sustain military spending over the long term.