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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.

Suggested Citation

  • 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;National Tax Journal, vol. 64(2), pages 731-751, June.
    • Handle: RePEc:ntj:journl:v:64:y:2011:i:2:p:731-51
    DOI: 10.17310/ntj.2011.2S.11
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    References listed on IDEAS

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    Cited by:

    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;National Tax Journal, vol. 64(2), pages 731-751, June.
    2. Carril, Rodrigo & Duggan, Mark, 2020. "The impact of industry consolidation on government procurement: Evidence from Department of Defense contracting," Journal of Public Economics, Elsevier, vol. 184(C).

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    More about this item

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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