Economics of the Military Draft

Author(s): W. Lee Hansen and Burton A. Weisbrod

Source: The Quarterly Journal of Economics, Vol. 81, No. 3 (Aug., 1967), pp. 395-421
Published by: Oxford University Press
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Electronic copy available at: http://ssrn.com/abstract=1856644

ECONOMICS OF THE MILITARY DRAFT *

W. LEE HANSEN AND BURTON A. WEISBROD
The model, 402.--III.
I. The conceptual framework, 396.-II.
Some extensions of the analysis,
cal application, 406.--IV.
Conclusion, 421.

Empiri411.-V.

This paper investigates two important consequences of the

present military draft system. They are distributive effects-the
impact on the distribution of real output, and allocative costs - the
impact on the size of that output. The distributive effects result
from the relatively low rate of pay to draft-affected men -what
we refer to as the implicit income tax. The allocative costs result
from the effects of the military personnel system on the efficiency
with which a given level of resources is allocated among alternative
uses.
In analyzing the consequences of the draft system, a standard
for comparison is necessary. For this standard we have selected a
free-market, voluntary system, but in so doing we do not intend to
suggest either that this is the only alternative worthy of consideration, or that, all things considered, it is preferable to the existing
draft system. Whether a voluntary system is preferable under
present or any other conditions is not the issue; rather, we wish to
point out certain consequences of existing arrangements.'
These consequences of the draft system stem directly from
several key features of that system, including:
(1) The compulsion to serve; the individual, if called, has no
choice as to whether or not he serves.
(2) The nature of the selection procedure; as long as the size
of the draft-age pool substantially exceeds military requirements,
rather arbitrary decisions must be made concerning draft eligibility,
i.e., which segments of the population will be exempted or rejected,
and which selected.
* We wish to acknowledge the comments of A. Holtmann, S. Altman, and
others, the research assistance of E. Fenlon, and the financial assistance provided by the Graduate School of The University of Wisconsin. Much of the
work on this paper was done in 1965 in connection with then-current investigations of the draft. Subsequent to the writing of this paper, several other
papers on this subject have been circulated. See for example, Walter Y. Oi,
"The Economic Cost of the Draft," and Stuart H. Altman and Alan E. Fechter,
"The Supply of Military Personnel in the Absence of a Draft," papers presented at the American Economic Association meetings, December 1966.
1. In considering these alternatives in a comparative-statics framework
we ignore any and all transition costs involved in shifting from one system to
another.

Electronic copy available at: http://ssrn.com/abstract=1856644

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QUARTERLY JOURNAL OF ECONOMICS

(3) Following from (2), the uncertainty for men of "draftable"

age as to whether, when, and for how long they might be required to
serve.
(4) The generally below-market wage paid; draft systems are
customarily (though not necessarily) characterized by rates of pay
that are below those available to comparable men in the civilian
sector.
This study has limited scope. It is limited to the analysis and,
where feasible, the estimation of the effects of the military draft
system on the size and distribution of real output, holding constant
the level of aggregate resource use. It does not consider the effects
of the draft system on such extra-economic variables as the quality
of good citizenship, or the bringing together of men from diverse
regions and backgrounds, or the ethical issues relevant to how the
risk of death in combat -which has increased with the expansion
of the Vietnam war -should be shared. Neither does it consider
the desirability of altering the size of the armed forces; that is taken
as given. Rather, we concentrate on the economic effects of the
system by which a given level and quality of military manpower is
secured.2 However, toward the close of the paper we do show how
the draft system tends to increase the number of men in uniform (at
any point in time) above that necessary to provide a given military
capability.
The plan of the paper is as follows: in Section I the incomedistributive effects and the allocative-efficiency costs of the present
draft system are examined at the conceptual level. In Section II
the model underlying the empirical analysis is presented, and in
Section III an empirical version of the model is developed and some
quantitative estimates are derived. Finally, Section IV explores
some ramifications of the analysis.
I. THE CONCEPTUAL
FRAMEWORK

A. Distributive Effects
The current draft system imposes an implicit income tax on
draftees, collected in the form of reduced rates of pay, i.e., the
difference between their civilian opportunity cost and their military
remuneration--in cash and in kind. This implicit tax currently
redounds to the advantage of taxpayers in general, who, as a con2. For an extensive bibliographicsurvey of the literatureon military

manpower policy, see Military Manpower Policy: A Bibliographic Survey,

AdjutantGeneralDepartmentof the Army,Departmentof Defense,June 1,

1965.

ECONOMICS OF THE MILITARY DRAFT

397

sequence, pay smaller explicit taxes than they would if draftees

were not thus "taxed." This implicit tax on servicemen-which
involves a redistribution of income between servicemen and civilians
- is what we mean by "distributive effects."
To observe that the choice between a draft and a voluntary
system involves a different distribution of income and output in
the economy does not imply the superiority of either system. For
taxpayers in general, the draft provides an "inexpensive" method of
maintaining a desired level of defense capability. However, during
the early 1960's society became increasingly concerned with the
growing inequity of the implicit tax on draftees, as an ever-smaller
fraction of the potential manpower pool became subject to the
"tax." This occurred as the number of men of draftable age grew,
while concurrently military manpower requirements were declining. Even with the heightened military manpower requirements
produced by the Vietnam war, it remains true that a substantial
fraction of young men are not serving and will not serve because
they are rejected or exempted, or because deferments carry them
beyond the established upper age limit. Thus, the Universal Military
Training Act is even now not "universal," and the "tax" which it
imposes remains selective and discriminatory.3
This brief discussion has recognized the effects of the draft
system on the distribution of a given level of real income. But, the
draft system, by constraining the allocation of resources, also
effects - and adversely - the size of real income. The next section
considers these allocative costs.
B. Allocative-Efficiency Costs
A draft system replaces the price mechanism of the market
place with a direct-control mechanism for allocating labor resources
between the military and civilian sectors of the economy. In the
3. There are a number of dimensions to the redistributional effects of the
draft. To the extent that military personnel, who are presently arrayed toward
the lower end of the income distribution, would receive income increases under
a voluntary system, there would tend to be greater equality in the overall
income-size distribution if a voluntary system were introduced. Distributional changes would occur not only by income size, but also by age, geographic area, and industry or occupational affiliation. For example, since the
military offers a uniform wage throughout the country, the existence of interregional wage difference in the nonmilitary sector tends to make military
service relatively more attractive in some regions than in others. Similarily,
the drawing power of the military for men in some occupations or industry
groups is stronger than in others. In addition, the attractiveness of the
military services varies with respect to one's age. The net impact of these
illustrative distributional effects of a voluntary system would be to accentuate
labor market and related pressures in some areas or sectors of the economy
and to relieve them in others.

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process, the draft system tends to produce a variety of economic

costs by:
(1) Restricting labor mobility through its compulsory aspects,
thereby leading to substitution effects within the military. These
latter tend to favor production techniques using relatively large
amounts of labor in general and skilled labor in particular, given
the "cheapness" of manpower to the services and the absence of
price differentials between manpower at various skill levels.
(2) Creating incentive effects and increased uncertainty for
employers and employees, through its eligibility criteria and its
induction scheduling arrangements.
(3) Increasing turnover rates, thereby adding to the organizational, training, and administrative costs of meeting military manpower needs.
These three types of costs are not independent of each other,
and the distinction among them is not always clear, but this division
provides a useful basis for analyzing the principal allocative costs
of a draft system. While the impact of each type of cost appears in
both the civilian and military sectors of the economy, the first of
these costs--labor mobility costs -has
its major effect on the
allocation of resources between the civilian and military sectors,
while costs of the second and third types are confined largely to
resource allocations within the civilian and the military sectors,
respectively.
1. Constraints on labor mobility. The existence of a draft
system together with its corollary - a wage level inadequate to
attract the number and quality of military personnel required inevitably determines which people are in the military service at
any point in time and which are not. If manpower requirements are
met through a voluntary enlistment system, with wage and other
incentives adequate to generate the required number of enlistments,
the specific individuals volunteering for military service would not
be the same as those called into the armed forces under a draft
system. The draft system, through its coercive power, restricts
opportunities for labor resources to move into uses where their net
productivity is greatest, given individual utility functions,4 and
thereby reduces real national product below the level which could
be attained with any given level of aggregate resource use.
This reallocation occurs in the following way. Under a draft
system of the present type, a considerable degree of randomness
4. Utility functions will, of course, reflect any preferences for or aversion
to military service, with all that these entail.

ECONOMICS OF THE MILITARY DRAFT

399

exists with respect to the civilian productivity of men drafted for

service. Optimally, from the standpoint of efficiency in the use of
manpower resources, the services should be staffed by those men
who, for the given level and quality of manpower required, have
the lowest civilian opportunity cost (productivity.) 5 The draft
system does this very imperfectly, at best, since among eligible men,
the great variations in their civilian productivity are given scant
consideration in making selections for the draft.6
The opportunity costs imposed on the civilian economy by this
largely random process of selection tend to be greater than the costs
necessary to secure the needed quantity and quality of men. To
the extent that men who are drafted have greater civilian productivity than some who are not drafted but who would be equally
acceptable to the military services, the draft system unnecessarily
depresses real output in the civilian sector of the economy. By
contrast, under a voluntary system in which military wage rates
were sufficiently high to attract the personnel required, men would
offer their labor services to the armed forces only to the extent that
their value to the armed forces exceeded their value (productivity)
outside, as conditioned by individual preferences. Thus, the
composition of military personnel with respect to their civilian
productivity would differ from that produced by a draft; the consequence would be an increase in aggregate real output in the rest
of the economy, with no decrease in the capability of the military
sector.7
2. Incentive and uncertainty effects. The draft system produces a variety of incentive and uncertainty effects for both private
5. Other goals than economic efficiency should influence military manpower policy, of course, but noneconomic considerations are beyond the scope
of this analysis.
6. One exception, of course, is the deferment of men in occupations deemed essential for national defense. Another involves deferments of graduate
and professional school students-deferments which may in effect become
exemptions as students pass the draftable age.
7. Foregone productivity in the civilian sector, occurring because of the
draft system, may also take the form of foregone future output. The latter
involves foregone, or at least postponed, training and educational services,
insofar as the availability of such services to members of the armed forces
falls short of their availability in the civilian economy. (Training and
educational activities are less likely to be foregone if similar post-service opportunities are available through, for example, a GI Bill. Of course, the provision of such opportunities amounts to a constrained increase in compensation.) If education and training of the types having nonmilitary value are
less readily available in the military sector, the draft system involves foregone current capital formation via education and training and hence foregone future productivity. The extent of such loss is mitigated insofar as the
education and training programs provided by the military services produce
skills having transferable value to the rest of the economy. However, this
aspect is not dealt with here.

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employers and potential draftees. Incentive effects are necessary

consequences of the existence of the draft. Uncertainty effects are
results of the particular eligibility and selection procedures currently employed.
The very existence of a draft gives rise to incentive effects
regardless of the degree of uncertainty that it may or may not
produce. If, for example, all men were to be drafted for, say, two
years at age eighteen, both employers and potential draftees might
be expected to behave differently than they would otherwise.
Employers might not contemplate hiring young people until after
their military service, and young people would have to defer their
post-high school education and training. Or if some men were to
be automatically exempted from the draft, their hiring and educational possibilities would be enhanced relative to draft-eligible men.
The draft also gives rise to increased uncertainty so long as
the draft-eligible population exceeds military personnel requirements. This uncertainty operates at both the group and individual
levels. Uncertainty exists at the group level insofar as the total
number of persons who will be drafted is not known, or as the future
dimensions of the draft-eligible pool are not specified (i.e., draft
exemption categories may be changed). But even if it were known
with certainty what the total number of draftees will be and what
the duration of military service for each draftee will be, there may
remain considerable uncertainty with respect to precisely which individuals will be selected for the draft.8 Thus, for the individual
worker, there is uncertainty regarding whether and when he might
be drafted, and for the individual employer, there is uncertainty
regarding the wisdom of hiring any draft-eligible man.
Even if no men are to be drafted during some period, the very
existence of a draft law automatically gives rise to these economic
costs. Even if, ex post, the number of draftees during some period
were actually zero, it may not have been at all clear in advance that
this would be the case. And since employers as well as employees
must plan for the future, their decisions will be affected by anticipations about the workings of the draft system, quite apart from what
does, in fact, happen.
As pointed out earlier, not only are employers' decisions likely
to be affected by the draft, but the same is true of decisions by
draft-eligible young men. In general, the draft system establishes
incentives for avoiding draft eligibility, and this alters individual
8. For some categories of people exempted from the draft there will
be no uncertainty regarding their draft status so long as the rules are not
changed.

ECONOMICS OF THE MILITARY DRAFT

401

decisions regarding employment, occupational choice, and investment in training. For example, young people, recognizing their
eligibility, might be encouraged to avoid the draft by placing themselves in a deferred or excluded group, either by enrolling in college 9
or by marrying and having children, which they might not otherwise have done at the time.1 Or, recognizing that induction is
imminent, they might be disposed to take temporary jobs that have
no real career future. Or, they might not bother to seek any employment at all.
The draft-created cost of increased uncertainty in the civilian
sector of the economy is the inverse of the benefits, in terms of both
flexibility and certainty, which a draft system provides for the
military sector. With a draft the military is readily able to secure
whatever men are needed, whenever they are needed. But under a
voluntary system the military services would need to possess
considerable flexibility in establishing pay schedules in order to
adjust to changing supply and demand conditions in the interrelated
military and civilian segments of the economy. In the absence of
such flexibility a voluntary system might well impose intolerable
burdens on the national defense effort, particularly in times of
crisis, when sharp increases in the number of personnel are required.
Thus, whereas a voluntary system would reduce uncertainty in the
civilian sector, this might well come at the expense of greater uncertainty and diminished flexibility in the military sector.
It could be argued, of course, that in periods of crisis a draft
system could be reinstituted. However, to the extent that the draft
were to be reinstituted frequently, uncertainty in the nonmilitary
sector would be increased. Consequently, standby authority to
reinstitute the draft would have to be used judiciously-and
only
in clear emergency cases - lest the civilian sector of the economy
be adversely effected. Vacillation between a voluntary and a draft
system might well have more serious economic effects than the consistent use of a draft system.
3. Organizational and administrative costs. The draft produces
several types of resource-allocative changes within the military sector. First, as noted above, one potentially important allocative
effect of a draft system results from the availability of military manpower at wage rates that fail to reflect opportunity costs. Among the
9. Such incentives to increase purchasesof education tend to offset
forces such as capital-marketimperfectionsand the lack of income-tax
depreciabilityof educationalexpendituresof a human-investmenttype.
1. Of course,in designatingcertaingroupsas eitherdeferredor exempted,
the Selective Service System presumablydoes not intend to stimulate the
marriagerate or encouragepoor studentsto pursuehighereducation.

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decisions which the military services must make are choices between
the degree of manpower utilization and the degree of "hardware"
(capital) utilization. Since the latter is generally bought in private,
uncontrolled markets, while the former is obtained at below market
prices through the draft, an incentive exists for the services to substitute labor for capital equipment to a superoptimal extent,2 or at
least to substitute highly skilled, highly trained labor--having
large amounts of human capital - for less skilled labor.
Second, and again in large part as a result of the low wage level
existing under the familiar type of draft arrangement, the system
tends to cause an excessive rate of manpower turnover. This results in an unnecessarily large quantity of resources devoted to
training new inductees. That is, an unnecessarily large fraction of
servicemen are not combat-ready, being involved in training activities either as trainees or as instructors or administrators. As a
consequence, to have a given number of "ready" men at any point in
time, the total number of men in uniform must be larger than if
turnover rates were not pushed up by the submarket wage level
associated with the draft.3
At the same time, even under a voluntary system some administrative costs associated with the Selective Service System
would continue, since the draft machinery would probably have to
be retained for possible emergency use. Moreover, a voluntary system would entail certain additional costs not incurred with the
draft. There might be need for intensified study of the priceelasticity of the military labor supply function, and recruiting (advertising) efforts might have to be stepped up, depending upon the
attractiveness of the financial inducements. In summary, any administrative-cost savings that resulted from the inactivation of the
Selective Service System might be more than offset by the costs of
more intensive recruiting and of additional labor market analyses.
II. THE MODEL

Our model for estimating the magnitude of the distributive

effects and allocative costs (except for the incentive and uncertainty
2. As a result, the civilian economy tends to have "too low"
capital ratio, for a given level of aggregate employment in the total
(including the military). Offsetting this tendency perhaps, is the
military officials to court public favor by holding down the size of
call.

a labor/
economy
desire of
the draft

3. A relatively high rate of turnover is not inherent in the draft system,

since, obviously, men could be drafted for any desired period. However, our
society has chosen to make the period of compulsory duty rather brief, in part,
no doubt, to offset the loss of job freedom and income imposed on draftees.

ECONOMICS OF THE MILITARY DRAFT

403

costs with which we are unable to deal) is most easily understood

by reference to Figure I. At this point the model is set forth at the
conceptual level, while in Part III its empirical counterparts are
presented.
We turn first to the use of the model for estimating the draft
system's labor mobility costs which are a major portion of total
allocative costs. As noted in Section I, the efficient allocation of
labor between the military services and the civilian sector requires
that civilian opportunity costs be minimized, given the number and
quality of men taken into the services. The cumulative distribution
of values of such civilian opportunities (marginal productivities)
for men of the specified quality, y, is given by S, in Figure I. The
number of draft-affected men required by the military services is
N 4. In Figure I the marginal opportunity cost of ON men is NB

;$/Yr

iSy

W
v ,oD
A

Numberof Men
I
FIGURE
A Model of Allocative Costs
and Distributive Effects of the Draft

and the total opportunity cost is OABN or fSydN. OABN is the

minimum total foregone civilian output consistent with acquisition
by the military services of N men of quality y, given the stock of
4. We retain the assumption, from Section I, that manpower needs are
a given - that is, they are determined exogenously.

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resources, the state of technology, and individual preferences - including preferences between civilian and military service employment. OV (= OABN - ON) is the corresponding minimum average
foregone civilian output. The distance OV may also be viewed as
an estimate of the average civilian output that would be foregone
if there were a voluntary system of military manpower procurement.
Thus, if this minimum foregone civilian output is compared with
actual foregone civilian output under the draft system, the difference represents an estimate of the cost of labor misallocation between
the military and civilian sectors of the economy--what we have
termed the labor-mobility allocative cost of the draft.5
Actual foregone civilian output may be derived from Figure I
with the aid of an additional assumption, namely, that the existing
draft system makes selections among eligible men without reference,
in general, to their civilian productivity - at least with respect to
men within each quality class.6 That is, the selection may be
thought of as essentially a random drawing from the distribution
of civilian labor productivities.7
If the N men selected are assumed to constitute a random selection from the group of T men (T > V) of quality y in the population, their average foregone civilian productivity, OM, will exceed
OV per man, as long as Ty > Ny and Sy is not infinitely elastic
throughout its range. The difference between the actual and minimum foregone productivity per man, OM - OV, is the average, the
per man "labor-mobility cost" which results from the draft system's
compulsory selection process, combined with its lack of regard for
opportunity costs. The corresponding total labor mobility cost is
OMCN-OVDN.
At this stage we turn to the model's use in estimating the income-distributive effect of the draft system, in the form of the
implicit income tax on draftees. We have already derived OMCN
as the total foregone civilian productivity of draft-affected men.
If we assume that wages in the civilian economy are equated with
the value of marginal productivity,8 then OMCN also represents
gross foregone earnings of draftees. The difference between these
gross foregone earnings and real earnings in service is the net fore5. This assumes implicitly that the value of on-the-job training provided
to servicemen is approximately the same as that which they would have received in the civilian economy.
6. Operational measures of quality are discussed in Part III.
7. This is not to argue that the selection process is actually random,
even within education classes, but only that such an assumption seems to be
a useful and reasonable approximation.
8. Because of market imperfections, the assumption is not entirely valid.

ECONOMICS OF THE MILITARY DRAFT

405

gone earnings of draftees--their implicit income tax. In Figure

income in
I the value of draftee's earnings in service-including
kind (not only food, shelter, etc., but also the civilian value of
denoted by
military training programs), as well as in cash-is
all
for
to
the
same
assumed
is
be
W
draftees, regardless of their
W;
civilian earnings opportunities. The difference, OM - OW, is the
implicit annual income tax per draftee, and, of course, OMCN OWEN is the total implicit tax on all draftees.9
Thus far we have shown how, in principle, the labor-mobility
costs and certain income-redistributive effects of the draft can be
estimated, taking military manpower "needs" as given. Now let us
modify somewhat our assumption that military manpower needs
are determined exogenously. Presumably, military manpower
requirements relate to the number of "ready" men (hereinafter
denoted as R), not merely the number in uniform (N). That is,
men involved in training - either as new recruits or as instructors
or administrators of these new recruits - are not ready, although
the instructor-administrator cadre could be withdrawn from those
activities. The importance of the distinction between ready and
nonready men is that the higher the rate of manpower turnover in
the services, the smaller will be the fraction of men in uniform (N)
who are ready, and, hence, the greater N will have to be to provide
a given R.
The presence of an implicit tax on draftees causes a higher turnover rate than would result from a voluntary system with competitive wage rates, and thus the current type of draft system causes
N to be greater than it would be under a voluntary system, for a
given R. This means that total labor-mobility costs, as well as the
total implicit income tax--both of which are functions of Nwould be lower under a voluntary system.1
The relationship between R and N can be stated as follows:
1
1
or
N = -pN +-pkN+R,
S

9. In principle,W could exceed M, in which case there would be an

implicitnegativeincometax on, or positiveincometransferto, draftees.
1. Insofar as there are political concernsabout the dangersof a permanentand completelyprofessionalmilitarysystem,it wouldnot be desirable
to reduce the turnoverrates to zero. However, the alternativesare not
simply a zero rate or the high currentrate; rather,there are many intermediate possibilities. The optimal rate would require a balancingof the
politicaland the cost considerations.It wouldbe possibleto rely entirelyupon
a voluntarysystem and still avoid the politicaldangersof a professionalsystem by simplyrequiringthe vast majorityof servicemento retire after, say,
ten years.

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N=
1--

JOURNAL

OF ECONOMICS

R
R
(1 + k)

where:
s is the average period of service of draftees, in months
(1/s is the turnover rate);
p is the training period for draftees, in months;
k is the ratio of training personnel to trainees; and
N and R are as previously defined.
The first term on the right-hand side of the first expression
above indicates the number of men in uniform who are in training
at a given point of time; the second term indicates the number of
instructors and administrators, which is assumed to be a fixed fraction of trainees; and the final term indicates the number of ready
men. It is clear from the equation that if the turnover rate (1/s)
were reduced, then N could be reduced for a given R. Or, if N were
held constant, R, k, or p could be increased -together
or indithe
of
or
vidually
thereby raising
quantity
quality
ready military
personnel. Thus, additional savings would result from a voluntary
system, if the average duration of service could be lengthened.
III.

EMPIRICALAPPLICATION

In this section we estimate the distributive effects and the

allocative costs of the draft, employing the model just described.
The estimates are based on three alternative sets of assumptions, in
order to test the sensitivity of the estimates to a wide range of possibilities. Each assumption, hereinafter referred to as a "case," involves a different interpretation of the quality of military manpower required, but in all cases a constant number of ready men is
assumed.
The three cases are described below. Throughout, the potential
manpower pool is regarded as restricted to those men aged eighteen
to twenty-four who are capable of meeting the physical and mental
standards established by the military services.2 Such men are
referred to as "eligibles" or "eligible men."
Case 1: This case assumes that the military productivity of
men differs according to their quality characteristics, quality being
2. This age range is used only to facilitate the empirical work; census
data are reported for this age bracket. During the period of the early sixties,
as well as at the time of this writing, the actual manpower pool was from
age 181/2 to 26, except for physicians, whose eligibility continued to age 35.

ECONOMICS OF THE MILITARY DRAFT

407

measured here solely by years of educational attainment. It assumes further that all men of a given educational level are equally
adequate to meet the needs of the services, provided they are eligible
men. Finally, it assumes that the current education-age distribution
of military manpower is to be maintained.
Case 2: An objection to Case 1 is that all eligible men of a
given age and educational level may not be equally productive in
service. Thus, whereas Case 1 assumed that educational attainment
alone was an adequate measure of military-manpower quality for
all men needed by the services, Case 2 assumes that it is an adequate
measure for only 75 per cent of them. For the other 25 per cent,
civilian income potential is also regarded as an indicator of quality,
i.e., those men with higher income potential are assumed to have
higher productivity in the service. And, as in Case 1, the current
education-age distribution of military manpower is held constant.
Case 3: For contrast, a much less stringent case is examined.
This case assumes that the military services find all eligibles equally
acceptable, irrespective of differences in level of education and
civilian incomes.3 We therefore relax the assumption that the current education-age distribution of servicemen is held constant,
though the number of men is still maintained.
For each of these cases - that is, for each set of assumptions
about military-manpower quality requirements-the
distributive
effects and the (labor-mobility) allocative costs are estimated. The
manner in which this is done is summarized below,4 by presenting
empirical counterparts to the concepts presented in Section II and
Figure I. The Sy curve in Figure I is now represented by the
cumulative distribution of actual civilian incomes of males aged
18-24 in 1959, as obtained from Census publications, but adjusted
to full-year bases. Actually, five such distributions, S, curves,
were utilized, one for each of five level-of-education groups: 0-8
years, 9-11 years, 12 years, 13-15 years, and 16 or more years. The
positive intercept, OA, reflects the assumption that men with incomes below that level are rejected for military service. This results
from the obviously simplifying assumption that those men unable
to meet physical and mental standards have the lowest civilian income opportunities among men in their age and educational group.5
3. While the need for some high quality personnel is recognized, it may
be assumed that such personnel are obtained through normal enlistment
channels.
4. Additional details are presented in an appendix, available on request
from the authors.
5. The education-specific rejection rates are: grade school graduates or
less-70
per cent; 1-3 years high school-32
per cent; high school gradu-

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The number of men of each quality, y, required, ON in Figure

I, is the difference between the number of draft-age men in the
services and the number who have voluntarily enlisted. Since such
volunteers are presumably better off because of their choices, we are
concerned only with the remaining group when estimating the
distributive effects and allocative costs of the draft system. This
remaining group, numbering 650,000 in fiscal year 1963, consists of
182,000 draftees, plus an estimated 468,000 "draft-affected" enlistees who would not have enlisted but for the existence of the draft.
Draft-affected enlistees have been estimated to constitute 40 per
cent of total first enlistees.6
Let us now present the empirical values for the key variables
shown in Figure I. In doing this, we shall give only the values aggregated over all education groups; thus, for purposes of the ensuing discussion, the AS, curve of Figure I should be interpreted as
a summation of the five AS, curves. It should be noted that our
empirical method abstracts from any disutility associated with
employment in the military services. This point is discussed further
in Section IV.
The distance OW, average annual compensation (including income in kind) of draft-affected men, is estimated at $2400 in 1959.7
OV, the mean annual minimum civilian income per male aged 1824, varies with educational level, but averages almost $2100. OM,
the mean annual gross foregone income per draft-affected man
currently in service, also varies with educational level, but averages
around $3900.
Given the quality assumptions of Case 1, OABN, the smallest
total foregone civilian productivity at which ON men can be obtained, is some $1.3 billion per year. Then, assuming that the draft
system takes men randomly from within each of the five distributions, ASy, the actual foregone civilian productivity, OMCN, is in
excess of $2.5 billion per year. The difference, VMCD (= AMCB),
ates- 26 per cent; 1-3 years college--18 per cent; college graduates--16
per cent; overall average-36 per cent. (Source: unpublishedDefense Departmentdata.)
6. For a full discussionof the method used to estimatethe numberof
draft-affected
enlistees,see the appendixreferredto in fn. 4, p. 407.
7. The $2,400figureappearsto have been reasonablyconstantbetween
1959and 1962,the periodto whichourvariousdata apply.
It shouldbe notedthat the $2,400figure,while quite comprehensive,
does
not include any valuationof trainingreceivedin service. However,to the
extent that draft-affectedmen are in service for only a rathershort period,
any training-of the sort that has value in the civilian economy-that
they do receivemay not be significantlygreaterthan the on-the-jobtraining
and experiencereceivedby civilian workers. It is only this differencethat
shouldbe addedto the $2,400figure.

409

ECONOMICS OF THE MILITARY DRAFT

the estimated excess allocative burden of the draft, is nearly $1.2

billion per year, as shown in Table I.
In Case 1 the distributive effect of the draft, the difference
between actual service income and foregone gross civilian income
for all education groups, is OMCN - OWEN, or roughly $2.5 billion minus $1.5 billion- slightly below $1 billion per year.
TABLE I
ANNUAL

DISTRIBUTIVE

OF MILITARY

AND ANNUAL

EFFECTS

DRAFT

ALLOCATIVE COSTS *

TOTAL AND PER

SYSTEM,

MAN,

1959

(in dollars)
Total Costs
(millions)
Illustrative

Case

Case 1
Case 2
Case 3

Distributive
Effects
(1)

960
960
990

Allocative
Costs
(2)

1,180
870
1,120

Cost Per Man

Distributive
Effects
(3)

1,480
1,480
1,520

Allocative
Costs
(4)

1,820
1,350
1,730

*Includes only labor-mobility effect.

In Case 2 the distributive effects are identical with those in Case

1, since in both cases the rate of military pay is the same, and it is
assumed that the draft system takes men at random from within
each distribution, AS,. However, the allocative costs are substantially lower. For it is assumed that with respect to 25 per cent of
the men selected, the difference between their civilian and military
productivity is zero; and the military is assumed to require this
fraction of high productivity (high income) men. In Case 1 no such
requirement is assumed - although in both cases some high income
men are obtained through the random selection process.
We turn now to Case 3. If military manpower needs were
simply for men who could meet the induction standards of 1963 the year to which our manpower data apply- then qualitative
characteristics such as education and civilian income (productivity)
opportunities could be disregarded. In this case, application of our
model would require only a single distribution of earnings for all
men eighteen to twenty-four and an aggregate rejection rate. The
procedure for estimating labor-mobility allocative costs and distributive effects is then identical with that used in Case 1.
Table I shows, somewhat surprisingly, that these costs and
effects are very nearly the same for Cases 1 and 3. Two forces
operate to produce this result for the allocative costs. First, because the educational distribution of military personnel does not

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QUARTERLY JOURNAL OF ECONOMICS

differ significantly from that for all males in the draft-age group, the
level of foregone civilian earnings in Case 3 is very close to that in
Case 1. Second, the fact that in Case 3 the minimum-earnings cutoff (NB in Figure I) is implicitly the same for all education groups,
while it varies from group to group in Case 1,8 gives rise to only a
small change in the minimum opportunity cost of the draft.9 The
net impact of these forces causes a slight reduction in total allocative cost in Case 3. The distributive effect differs slightly in Case
3 (relative to both Cases 1 and 2), because civilian incomes (opportunity costs) change as a result of dropping the assumption that
the current education mix is held constant.
In reviewing the results of Table I--the range of which is
rather modest - three points should be remembered. (1) Only those
distributive effects of the military draft system resulting from the
implicit income tax which the draft imposes, and only those allocative costs of the military draft system stemming from restrictions
on labor mobility, have been considered. (2) The distributive
effects and allocative costs shown are not additive, since the latter
are real costs, while the former are transfers. (3) All of the estimates are based on 1959 income data, even though the 1963 distribution and mix of servicemen are used.
In deriving the results presented in Table I it was pointed out
that the number of men required for the services was held constant.
However, it was also pointed out earlier in the paper that if we
assume that the number of ready men, rather than the total number
of men in service, is to be held constant, then a smaller total number of servicemen would be required if the rate of turnover could be
reduced - as it would be under a system offering more attractive
rates of compensation.
At this point we use the turnover model presented in Section
II to re-estimate the values in Table I, under several different assumptions about the relevant parameters of the model. If in this
model we hold all variables constant at their current values, and
allow only length of service, r, to increase - as it would if the turn8. The minimum average (per draftee and nonvoluntary enlistee) income
that would have to be paid, or- equivalently--the minimum civilian productivity that would have to be foregone in order to obtain the 1963 numbers of men with the 1963 educational attainments, is as follows: grade school
-$2,980; 1 to 3 years of high school-$2,100; high-school graduate$2,050; 1 to 3 years of college--$1,630; college graduate-$1,680; and a
weighted total-- $2,060. One possible implication of differential cutoffs is
discussed in Section IV.
9. The minimum income cutoff for all men is $2,010. This cutoff must
fall below the $2,060 figure referred to in the previous footnote, because a
uniform cutoff minimizes the aggregateminimum foregone income (opportunity
costs) for the given level of manpower obtained.

411

ECONOMICS OF THE MILITARY DRAFT

over rate were cut - then the number of men needed, N, is reduced
by the amounts indicated in column 1 of Table II. Columns 3 and
4 indicate how much the total labor-mobility allocative costs and
the total distributive effects shown in Table I would be reduced as
duration of service is increased. It should be borne in mind that
average duration of service could be increased in various ways,
not only by enlarging rates of compensation, but also by extending
the current two-year draft period.
TABLE II
ANNUAL ALLOCATIVEAND DISTRIBUTIVE EFFECTS OF. REDUCED
TURNOVER OF MILITARY MANPOWER
Reduction in Number of
Draft-Affected Men in
Service (compared with
the 650,000 in service
in 1963)

2
3
5
10
20

Annual Reduction * in

Total
(1)

Per cent
(2)

Allocative
Costs
(in millions
of dollars)
(3)

0
36,000
62,000
80,000
86,000

0
6
10
12
13

0
66
113
146
157

Average Years
of Service

Distributive
Effects
(in millions
of dollars)
(4)

0
53
92
118
127

* From total amounts shown in Table I for Case 1.

IV.

SOME EXTENSIONS OF THE ANALYSIS

In this section we point out several implications of the concepts and findings discussed in this paper. Our objective is to be
provocative and to suggest questions for further investigation, rather
than to offer definitive conclusions. Particular caution should be
exercised in interpreting the quantitative results in this section,
for they are crude, being based on incomplete data and assumptions that may require reconsideration. Nevertheless, some of the
results are indeed striking and may warrant further refinement.
A. The Relative Value of Educated Manpower to the Civilian and
Military Sectors
If it is assumed that the military services have the educational
mix of men that is "optimal," in the sense of equating the marginal
military productivities of men in all of the educational classes, then
the findings in Part III (including footnote 8, p. 410) concerning
differential earnings cutoffs imply that a college-educated man who

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QUARTERLY JOURNAL OF ECONOMICS

can earn as little as $1600 per year in the civilian economy is just
as valuable in the service as the elementary school educated man
who can earn as much as $3000 in the civilian economy. Thus,
formal education is being treated as relatively more valuable in the
military service than it is in the civilian economy. In a modern
military system such a conclusion is not implausible, if it is true
that the technology now employed by the military is more demanding of the skills of well-educated men than is the average technology
employed in the civilian sector.
Some notion as to whether the military services are using more
advanced technology than the civilian economy in general might
be obtained by determining whether the capital/labor ratio in the
military-service sector is higher than it is in the civilian sector of
the economy. If it is, we would seem to have found a justification for the observed differential income cutoffs according to educational attainment.
The data shown in Table III on capital/labor ratios for the
military versus the civilian sectors of the economy are consistent
with the hypothesis that the ratio of physical capital to labor is
higher in the military sector. Measured by gross capital stock
per man, in constant dollars, the military capital/labor ratio is
double that for the civilian sector. Measured by net capital stock 2
per man, in constant dollars, the military capital/labor ratio
slightly exceeds that for the civilian sector.3
Another test might involve making a comparison of the occupational distribution of servicemen (and particularly the army) with
that for the labor force as a whole. Unfortunately, the needed data
are not available, but if they were, we would expect to find a higher
proportion of military personnel concentrated in heavily capitalusing occupations.
In summary, the available data do not run counter to the
notion that military technology is more capital-using and thus,
perhaps, more demanding of the skills of at least some better
educated men. But additional work is required to give this conclusion a firmer basis.
1. Undepreciatedcapital stock; for a discussionof this concept see
RaymondW. Goldsmith,The National Wealth of the United States in the
PostwarPeriod (Princeton:PrincetonUniversityPress,1962).
2. Grosscapitalstock less capitalconsumptionallowances.
3. It is worthpointingout that from the mid-1950'suntil at least 1958,
militarycapital/laborratioswere risingmore rapidlythan were those in the
privateeconomy. For example,from 1955to 1958the militarycapital/labor
ratio rose by about 13 per cent on a net capitalstock basis (or 11 per cent on
a grossbasis),as contrastedwith a 5 per cent rise on a net basisfor the civilian
ratio. For data, see the sourcefor Table III.

413

ECONOMICS OF THE MILITARY DRAFT

TABLE III
CAPITAL/LABOR RATIOS, CIVILIAN AND

MILITARYSECTORS,1958
(in constant 1947-49 prices)
Sector

Labor Force
(in millions)

Capital Stock
(in $ billions)
Gross

(1)

Military

130

Civilian

1,715

(2)

44

1,022

Ratios
Gross (1)/(3)

Net

Net (2)/(3)

(3)

(4)

(5)

68.6

25

15

2.6

50

17

Sources: Capital Stock: Raymond

The National
Wealth of the United
W. Goldsmith
States in the Postwar Period (Princeton:
Princeton University
Press, 1962). Tables B-172
and
(sum of cols. 1-3) and B-174 (sum of cols. 1-3) for military, gross and net, respectively;
Tables A-26 (col. 1) and A-28 (col. 1), for civilian, gross and net, respectively.
Labor Force: Economic Report of the President,
Jan. 1966, Table C-20.

B. The Military Manpower Supply Curve

One of the analytical tools developed in this paper can be used
to shed light on the nature of the supply curve for military manpower and on the extent of aversion to or preference for military
service as compared with civilian employment. The key concept
is the opportunity cost curve portrayed by AS, in Figure I. This
curve can be interpreted as a special type of labor supply function
for military manpower, under the assumption that men will work
for whatever employer-military
or civilian-pays
the most
in
in
in
other
that
men
cash
or
have
neither
(either
kind) or,
words,
an aversion to nor preference for military employment. In this section we present this type of special labor supply curve based on an
aggregate of Sy curves in Figure I, and subsequently use it to develop several estimates of "actual" labor supply curves.
The first problem is to determine the shape of the opportunitycost (supply) curve for the relevant range - namely, between the
number of enlisted men of draft age currently in the services and the
number that we estimate would be in the service voluntarily (i.e.,
if there were no draft). This range, 650,000, is the number of men
for whom supply responses to wage increases are important.
In Figure II, AS*y portrays this opportunity-cost (supply)
curve. Point A indicates that if additional men of acceptable quality
are to be obtained, they will have to be obtained at a civilian opportunity cost of at least $1800.4 The remainder of the curve AS*y
4. This follows from our assumption that rejectees have the lowest
civilian income opportunities in their age-education class (see Section III).
This assumption, together with the information that 35 per cent of all men
were rejected, led to the conclusion that men acceptable to the military ser-

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QUARTERLY JOURNAL OF ECONOMICS

Number of Men in Service
I

400,000

800,000

1,600,000

1,200,000

S3
4,000-

GS3 is of unitary elasticity

/S
/

/0

3,000 -

Sl

GS2 has the same elasticity as ASy,

at each quantity
GSI has the same slope as ASy

G
2,000-

1,000-

0
I

400,000
I

800,000

Number of Additional Men Needed

FIGUREII
Alternative Military Manpower Supply Curves

represents the adjusted segment of AS, (from Figure I) over the

range 1.77 million to 2.44 million. The adjustment was made to
allow for the fact that the 650,000 draft-affected men currently in
service need to be added to the overall distribution of the type portrayed in Figure I, since AS, applied only to civilians.
Since these 650,000 men were found acceptable for military
service, we assume, as indicated earlier, that they had civilian opportunity costs of at least $1800. We assume, further, that they
would have the same distribution of civilian incomes as does the
actual civilian group. Thus, the 650,000 men were added to the
distribution in Figure I, above point A, in proportion to the number
of civilians at each level of income.5
vices would have civilian opportunity costs of at least $1,800. That is, 35 per
cent of the men aged 18-24 had incomes under $1,800.
5. The 890,000 men of the draft-age group currently in service voluntarily
were disregarded for this purpose, because we are concerned only with the
responsiveness of supply to increased incentives, and such responsiveness could
only be forthcoming from those men who are currently civilians plus those
650,000 who are currently in service as draftees or draft-induced enlistees.
Alternatively, it could be argued that the distribution of civilian income
opportunities for the 890,000 voluntary enlistees should, in principle, also be
taken into account in estimating the true civilian opportunity-cost curve for
all males of draft age. This would produce a further clockwise rotation of
AS*y on point A, if it were assumed that at least some of the 890,000 men
have civilian opportunity costs between $1,800 and $2,500 (the ordinates of

ECONOMICS OF THE MILITARY DRAFT

415

We turn now to the estimation of the actual military labor

supply curve. Figure II portrays three possible estimates of these
true curves. All of them originate at point G, which shows the
quantity of labor currently being supplied "voluntarily"6 to the
services at the existing wage (cash plus income-in-kind). The
start"existing wage" has been indicated at $2400 per year-the
be
but
the
should
of
total
remuneration
rate
$2400
interpreted
ing
as reflecting the entire wage scale. Thus, we will regard a given percentage movement up each supply curve as implying an equiproportional increase in rates of remuneration at all service ranks.
All three of the estimated supply curves imply an aversion to
military service employment over civilian employment at equal
current remuneration. The degree of this aversion may be measured
by the vertical distance between each of the curves and AS*y, where
the latter indicates the number of men who would voluntarily enlist
in (work for) the military services if military and civilian employment were equally attractive at the same current wage.
The three alternative supply curves, GS1, GS2 and GS3, differ
in their implicit assumptions about the relationship between the
attractiveness of military service employment and civilian employment as the quantity of manpower supplied to the military increases: GS2 assumes a constant relative relationship (i.e., aversion)
-that
is, GS2 is a constant percentage above AS*y throughout.
This is equivalent to saying that GS2 and AS*y exhibit equal price
elasticity at all quantities of labor. Curve GS1 assumes a constant
absolute relationship and therefore appears as a curve parallel to
AS*,. Finally, GS3 assumes an increasing relative aversion to
military employment as the level of that employment increases.7
While the curves shown here do not represent the full range of
logical possibilities, they do cover a wide range of plausible alternatives. However, it seems to us that the assumptions of either
constant absolute or constant relative aversion to military service
employment - the assumptions behind GS1 and GS2, respectively are more plausible than the assumption of increasing relative aversion, reflected in GS3. In any event, the fact that the "actual"
military manpower supply curve (such as GS1 or GS2) lies above
the civilian opportunity-cost curve, AS*,, indicates that the military
points A and S*y). We did not follow this tack; the fact that the 890,000
voluntary enlistees did volunteer indicates that they are different in some
important respects from other men in their age group, and, lacking information
about these differences, we were unable to decide what assumption to make
about the civilian income opportunities of these men.
6. That is, excluding draftees and "draft-affected"enlistees.
7. Curve GS3 was actually drawn to be of unit elasticity throughout.

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QUARTERLY JOURNAL OF ECONOMICS

services must offer remuneration of from $600 to 800 per year more,
on the average, than that offered by civilian employers to attract the
needed men, given the conditions of the early 1960's.
What are the implications of these alternative supply curves
for the increases in military pay required to attract voluntarily the
650,000 men required (1,540,000 minus 890,000)? If the supply
response to wage increases is as small as that reflected in GS3, then
an increase of about 75 per cent ($4150-$2400/$2400) in existing
military pay schedules seems needed.8 By contrast, if the supply response were that indicated by GS1 or GS2, then increases in military
pay of approximately 30 to 40 per cent would suffice. (For GS1,
($3100-$2400/$2400) = 29 per cent; for GS2, $3300-$2400/$2400
= 38 per cent). In view of what seems to us to be the greater
plausibility of GS1 and GS2 than GS3, military-compensation increases of from 30 to 40 per cent would be more reasonable.
Given the total military-compensation budget for enlisted men
of approximately $8.5 billion in 1960 9 (which includes not only cash
wages but also lodging, meals, medical and dental care, etc.), increased expenditures of from 29 to 38 per cent--roughly $2.5 to
$3.4 billion per year in 1960 -would be required. This assumes a
peacetime situation and the granting of increases to all servicemen,
including voluntary enlistees.l Even if the 75 per cent increase were
required, the expenditure increase would not exceed $6.5 billion.2
The total increase would amount to only 2.8 to 3.8 and possibly up
to 7.3 per cent of total federal revenues (on a national income accounts basis) in 1959, and could be raised by across-the-board or
any other type of tax increase. Alternatively, these amounts could
easily have been financed by foregoing a portion of one of the several
recent tax cuts. For example, they all fall easily within the total
reduction of federal personal income tax revenues resulting from
passage of the Revenue Act of 1964.
The financial implications of adopting a voluntary system of
military-manpower procurement point up the distinction between
real and pecuniary costs. A voluntary system clearly would involve
8. This increase might be distributed on an across-the-boardbasis or any
other basis that was equally attractive.
9. Based upon unpublished data.
1. The research for this paper was completed prior to the recent escalation of United States involvement in Viet Nam. The number of draftees and
nonvoluntary enlistees now in service is, of course, greater than the 650,000
to which our estimates apply--about one-third greater. In addition, the increased physical danger of military service doubtless has increased the supply
price of volunteers. Both factors clearly increase the financial cost of a
volunteer service today.
2. Put into 1967 prices, the expenditure increase would approximate
$2.8 billion, $3.8 billion, and $7.2 billion, respectively.

ECONOMICS OF THE MILITARY DRAFT

417

additional payments to servicemen -transfers from, or pecuniary

costs borne by, taxpayers. However, the real cost of switching to a
is, real
voluntary system, by contrast, would be negative--that
benefits, in the form of increased productivity and consumer satisfactions, would result.
C. Income-Tax Treatment of Draft-Affected Servicemen vs. Ordinary Taxpayers
We have already noted that draft-affected men forego substantial amounts of income, given the fact that military compensation falls short of their potential income - that is, the income they
would have received had they remained in civilian employment.
The actual military compensation received can be thought of as
after-tax income, while, as noted in Section I, foregone income reflects the implicit tax to which draft-affected men are subject. The
amount and rate of this implicit tax is computed in Table IV. It
shows that draft-affected men pay average implicit tax rates ranging from 36 to over 50 per cent, depending on their level of educational attainment and corresponding average (mean) income opportunities. The weighted average rate for all men is 38 per cent.
By contrast, the tax rate paid by ordinary taxpayers (by and large,
civilians) is only about one-fourth as high (9 to 10 per cent). In
dollar terms, Table IV shows that draft-affected men who have
estimated pretax annual income averaging $3880 pay an implicit
tax that averages nearly $1500 (38+ per cent), while ordinary taxpayers who have the same income pay an average of only $370
(9+ per cent).3
Because draft-affected men include persons with wide variations
in civilian income opportunities, the range of implicit tax rates is
correspondingly broad. For example, a draft-affected man with
civilian income opportunities of $10,000 per year would pay an
per cent-implicit income tax of $7,600 (10,000 - 2,400) -76
while a civilian with a $10,000 per year income pays an average
of $1,313 - 13 per cent.4
For draft-affected men with poor civilian income opportunities,
the implicit income-tax rate paid may be lower than that paid by
civilians. Thus, for a man with civilian income opportunities of
3. Based on source shown for column 5 in Table IV.
No attempt has been made here to standardize for any variable other
than income. If it is true, for example, that draft-affected men have fewer
dependents than do civilians at the same income level, then standardization
of the results in columns 4 and 5 of Table IV for number of dependents would
narrow the differentials.
4. Same sources as for Table IV.

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QUARTERLY JOURNAL OF ECONOMICS

only $2,400, the implicit tax rate is zero, compared with the 9 per
cent paid by ordinary taxpayers who have $2,400 incomes.5 And,
indeed, for those draft-affected men having civilian income opportunities below $2,400 per year, the military service pay schedule in
effect incorporates a negative implicit income-tax feature.
These relationships between implicit income-tax rates on drafto80

70 -

~~~60 ~~~-

yDraft-Affected

Men

450-

40 -

a:

o
I-

20-

10 -

|~\Taxpayer~~~~10
~~-

In- General

0-

-10 -

-20

12
4
8
10
2
6
Civilian Income or Potential Civilian Income (Thousands of Dollars/Year)

14

FIGUREIII

Estimated Implicit Average Income-Tax Rates on Draft-Affected Men,

and Explicit Rates on Taxpayers-In-General
5. Ibid.

ECONOMICS OF THE MILITARY DRAFT

419

affected men and on ordinary taxpayers are summarized in Figure

III. It shows clearly the "break-even" level of income, $2,650- at
which draft-affected men and their civilian counterparts are apparently treated with "horizontal equity." It also shows the level of
TABLE IV
1959
IMPLICITINCOMETAX RATEON DRAFT-AFFECTED
SERVICEMEN,

Level of
Educational
Attainment

Annual
Civilian
Income
Opportunities

Grade School
1-3 Years
High School
High-School
Graduate
1-3 Years
College
College Graduate

All

Actual
Annual
Military
Compensation

Average
Tax Rate
Paid by
All
Annual
Implicit Tax
Rate on
Net Income
Taxpayers
with
Foregone Draft-Affected
Men *
Earnings
(Implicit
as in
Income Tax)
(per cent)
Col. 1
(3) (1)
(1)-(2)
(4)

(5)

(1)

(2)

(3)

$4,199

$2,400

$1,799

42

10

3,740

2,400

1,340

36

3,811

2,400

1,411

37

4,027
5,075

2,400
2,400

1,627
2,675

40
53

10
10

$3,880

$2,400

$1,480

38

on page S-13 of appendix available from the authors.

Sources: Col. 1 -Table
Col. 2- Unpublished data.
Col. 5--Derived
from Statistics of Income, 1961; Individual Income Tax
Returns for 1961 (Washington: U.S.G.P.O., 1963), p. 74.
* Any explicit tax payments on the noncash component of military compensation (approximately one-half) are negligible and thus ignored.

potential civilian income, $2,400, below which military pay implies

a negative income-tax rate. And it shows the increasing divergence
between the tax rates on civilians and, implicitly, on draft-affected
men, as the level of actual or potential civilian income rises. Figure
III also makes clear the different income levels at which draftaffected men and civilians pay the same (explicit or implicit) average
income-tax rates. For example, draft-affected men who left civilian
jobs paying $3,000 per year were taxed implicitly at 20 per cent
($3,000-$2,400/$3,000), whereas among ordinary taxpayers, even
those with $12,000 incomes-the
highest shown in Figure III did not pay so high a rate. (Actually, as of 1961, a 20 per cent
average rate was not reached until $25,000 of adjusted gross income
was received.) 6
This analysis, while certainly incomplete, reveals great differences in the tax treatment accorded men affected by the draft as
compared with civilian taxpayers. Since the number of draft6. Ibid.

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affected men is so small - 650,000 - in contrast with the total number of income-taxpayers - around 48 million in 1961 - it would
appear that the cost per civilian taxpayer of eliminating this source
of horizontal inequity in taxation would be small. Specifically,
this "cost" (actually an income redistribution) could be less than
$1 billion (Table I) - calculated by multiplying the average net
loss of civilian income ($3,880 to $2,400; see Table IV) by the
estimated 650,000 draft-affected men.
This estimate is actually a lower limit since it assumes implicitly that it is possible to alter the military compensation system
so as to distinguish between men according to their civilian income
opportunities. It also assumes the ability to discriminate between
draft-affected men and other enlisted military personnel, increasing
compensation only for the former. If we now relax these assumptions, there is a variety of possible compensation arrangements,
each entailing a different amount of cost. One plausible arrangement would call for (1) paying all draft-affected men compensation
equal to the mean incomes of civilians of the same age (18-24)regardless of the potential civilian income of each particular man 7
- and (2) increasing the compensation of non-draft-affected men by
that same percentage. This would serve to maintain the relative
compensation structure within the service.
Under these conditions the cost of eliminating - or at least substantially reducing - the tax inequity would require an annual outlay of $4.9 billion. The first requirement entails an outlay of $1
billion, as in the earlier case, and the second requirement adds an
additional $3.9 billion.8 It is interesting to note that the $4.9 billion
increase in annual cost exceeds two of the three estimates made in
Section IV B, above, of the budgetary costs of a voluntary system.9
7. This arrangement would pay some men more, and others less, than
their foregone civilian incomes. It would thereby eliminate the implicit income tax on only the "average"draft-affected man.
8. The latter figure is calculated by finding the required percentage increase in remuneration ($3,880-$2,400/$2,400,from Table IV, for a 60 per
cent increase) and then multiplying by the military compensation budget
applicable to non-draft-affected men. (This is approximately $6.5 billion, or
almost 80 per cent of the total enlisted military compensation budget); this
produces a cost of approximately $3.9 billion per year.
9. There is no logical inconsistency in the finding that the budgetary cost
of eliminating tax inequity as between draft-affected men and other taxpayers is greater than the cost of a volunteer system. Although it is generally
necessary to pay men more than their civilian incomes to cause them to
volunteer, it may not be necessary to offer as much as the mean income for
all men in the 18-24 age class in order to obtain the appropriate quantity and
quality of volunteers. Of course, even if it is true that a draft system with
a more equitable pay structure is more "costly" than a volunteer system, the
"best" course of action remains a larger question.

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If society agreed that the implicit income-tax treatment of

draft-affected men is inequitable, changes could be brought about
in the remuneration system even within the existing draft framework. This is to note that differential tax treatment as between
civilians and servicemen is not inherent in a compulsory draft system. It is possible, after all, although it may not be an easy arrangement to administer, to draft people into military service - if that
seems desirable - but to pay them more in accordance with their
(recent?) civilian incomes than we do today. Whatever the other
advantages and disadvantages that people see to compulsory military
service, discriminatory income-tax treatment should be regarded as
avoidable.
V. CONCLUSION
This study makes no pretense of investigating all of the benefits and costs - or advantages and disadvantages - of a military
draft system. Instead, it focused specifically on the impact of the
draft on the size and distribution of real gross national product.
However, even this goal proved to be so broad and complex that it
was certainly not achieved fully. Yet, recognition of the magnitudes
of the implicit income tax that the draft imposes on servicemen, and
the loss of real output resulting from the resource-allocation distortions it produces, is important, particularly when alternatives to
the compulsory draft system and to existing pay schedules are
being considered.
UNIVERSITY OF WISCONSIN