How do governments finance military spending? Beyond taxes and deficits, central governments in multi-level fiscal systems can shift the burden to subnational governments by cutting intergovernmental transfers, a channel absent from the war finance literature. We document this novel "hidden financing" mechanism using an international panel of 91 countries from 1972–2024. A structural model of politically-constrained fiscal adjustment predicts that transfer cuts emerge at longer horizons, under fiscal constraints, and in federal systems where blame can be diffused to lower-level governments. The data strongly confirm these predictions: a one percentage point increase in military spending reduces transfers by 0.15 percentage points over five years, concentrated in high-debt and federal countries. Using U.S. state-level data and a shift-share identification strategy, we then document how states absorb transfer cuts through tax increases and spending reductions, and connect this burden shifting to its political consequences.

We provide a global analysis of how governments fund and defund military spending. We document three main fiscal adjustment patterns. First, deficit spending is the dominant financing instrument, but the composition of financing varies with the scale of armament. Second, fiscal space is a critical moderator. Low-debt countries rely predominantly on borrowing whereas high-debt countries, constrained by limited fiscal space, shift adjustment toward taxation and civilian cuts. Third, armaments and disarmaments have asymmetric fiscal effects. Disarmaments only partially reverse prior fiscal expansions, sustaining elevated civilian spending as a peace dividend. Our empirical strategy exploits year-to-year variation in military spending and the onset and termination of inter-state wars to trace fiscal adjustment in a newly constructed panel of 167 countries, offering extensive post-WWII coverage while extending the analysis back to the early 19th century. We conclude by discussing implications for the current wave of rearmament.

Introducing carbon pricing increases production costs and reduces output, at least initially. Benefits from reduced emissions damage materialize only later. This affects households' saving behavior and, thereby, the natural interest rate $r^*$. Using a dynamic, three-region environmental life-cycle model, we find that the effects on the natural interest rate and net foreign asset positions crucially depend on how governments recycle carbon revenues. If carbon revenues are paid back to all households in a lump-sum manner, saving declines, the natural rate increases permanently and the net foreign asset position of the carbon pricing increasing country falls. The opposite holds if only the working-age population benefits from carbon revenues. The impact on exchange rates and trade flows depends on which regions introduce carbon pricing (and potential border adjustment mechanisms) as this ultimately drives relative price changes across the regions. The resulting asset and trade flows between regions also affect domestic welfare.

We study a two-region overlapping-generations model with life-cycle saving and open capital markets to assess whether capital income taxation can finance social insurance more efficiently and equitably than labor taxation. Revenue-neutrally, a labor-tax cut is funded by taxing (i) households’ savings income, (ii) capital used in production, or (iii) accidental bequests. The labor-tax cut raises employment in all cases. Savings-tax financing lowers aggregate saving, triggers net capital inflows that fund domestic investment, raises consumption and output, and worsens net foreign assets. A production-capital tax increases the user cost of capital, reduces capital intensity, lowers long-run output, and improves net foreign assets as domestic saving shifts abroad. A bequest tax avoids distorting firms’ investment and delivers stronger short-run activity, but implies pronounced intergenerational redistribution; in the long run, consumption falls slightly as investment relies more on foreign financing and interest payments. Welfare gains mainly accrue to post-reform cohorts under savings taxation.