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U.S. Defense Contracts During the Tax Expenditure Battles of the 1980s

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  • Susan Guthrie
  • James R. Hines, Jr.

Abstract

This paper considers the impact of the tax treatment of U.S. military contractors. Prior to the early 1980s, taxpayers were permitted to use the completed contract method of accounting to defer taxation of profits earned on 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 the tax benefits associated with long term contracting with those that were eligible, it appears that between 1981 and 1989 the duration of U.S. Department of Defense contracts shortened by an average of between one and 3.5 months, or somewhere between 6 and 29 percent of average contract length. This pattern suggests that the tax benefits associated with long term contracts promoted artificial contract lengthening prior to passage of the 1986 Act. The evidence is consistent with a behavioral model in which the Department of Defense ignores the federal income tax consequences of its procurement actions, thereby indirectly rewarding contractors who are able to benefit from tax expenditures of various types.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14146.

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Date of creation: Jun 2008
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Publication status: published as 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 Cita.
Handle: RePEc:nbr:nberwo:14146

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  1. James R. Hines Jr., 1993. "Altered States: Taxes and the Location of Foreign Direct Investment in America," NBER Working Papers 4397, National Bureau of Economic Research, Inc.
  2. Lichtenberg, Frank R., 1989. "How elastic is the government's demand for weapons?," Journal of Public Economics, Elsevier, Elsevier, vol. 40(1), pages 57-78, October.
  3. Naegelen, Florence & Mougeot, Michel, 1998. "Discriminatory public procurement policy and cost reduction incentives," Journal of Public Economics, Elsevier, Elsevier, vol. 67(3), pages 349-367, March.
  4. 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.
  5. Hartley, Keith, 2007. "The Arms Industry, Procurement and Industrial Policies," Handbook of Defense Economics, Elsevier, Elsevier.
  6. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262121743, December.
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  1. 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.

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