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U.S. DEFENSE CONTRACTS DURING THE TAX EXPENDITURE BATTLES OF THE 1980s

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  • Susan J. Guthrie
  • Hines, James R. Jr.

Abstract

This paper considers the impact of the tax treatment of military contractors on the cost and timing of U.S. military procurement. Prior to the early 1980s, taxpayers were permitted to defer tax obligations on profits earned from long-term contracts. Legislation passed in 1982, 1986, and 1987 required that at least 70 percent of the profits earned on long-term contracts be taxed as accrued, thereby significantly reducing the tax benefits associated with long term contracting. Comparing contracts that were ineligible for these tax benefits with those that were eligible, it appears that between 1981–1989 the duration of U.S. Department of Defense contracts shortened by an average of between one and two months, or somewhere between 10 and 23 percent of average contract length. This pattern implies that the tax benefits associated with long term contracts promoted artificial contract lengthening in the 1980s, and suggests that the Department of Defense ignores the federal income tax consequences of its procurement actions, thereby indirectly rewarding contractors who benefit from tax expenditures.

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Bibliographic Info

Article provided by National Tax Association in its journal National Tax Journal.

Volume (Year): 64 (2011)
Issue (Month): 2 (June)
Pages: 731-51

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Handle: RePEc:ntj:journl:v:64:y:2011:i:2:p:731-51

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  1. Hines, James R, Jr, 1996. "Altered States: Taxes and the Location of Foreign Direct Investment in America," American Economic Review, American Economic Association, vol. 86(5), pages 1076-94, December.
  2. Susan J. Guthrie & Hines, James R. Jr., 2011. "U.S. DEFENSE CONTRACTS DURING THE TAX EXPENDITURE BATTLES OF THE 1980s," National Tax Journal, National Tax Association, vol. 64(2), pages 731-51, June.
  3. Hartley, Keith, 2007. "The Arms Industry, Procurement and Industrial Policies," Handbook of Defense Economics, Elsevier.
  4. Naegelen, Florence & Mougeot, Michel, 1998. "Discriminatory public procurement policy and cost reduction incentives," Journal of Public Economics, Elsevier, vol. 67(3), pages 349-367, March.
  5. Lichtenberg, Frank R., 1989. "How elastic is the government's demand for weapons?," Journal of Public Economics, Elsevier, vol. 40(1), pages 57-78, October.
  6. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, December.
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Cited by:
  1. Susan Guthrie & James R. Hines, Jr., 2008. "U.S. Defense Contracts During the Tax Expenditure Battles of the 1980s," NBER Working Papers 14146, National Bureau of Economic Research, Inc.

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