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

45 Pages Posted: 30 Jun 2008 Last revised: 28 Aug 2010

See all articles by Susan Guthrie

Susan Guthrie

affiliation not provided to SSRN

James R. Hines Jr.

University of Michigan; NBER

Date Written: June 2008

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.

Suggested Citation

Guthrie, Susan and Hines, James Rodger, U.S. Defense Contracts During the Tax Expenditure Battles of the 1980s (June 2008). NBER Working Paper No. w14146. Available at SSRN: https://ssrn.com/abstract=1152687

Susan Guthrie (Contact Author)

affiliation not provided to SSRN ( email )

James Rodger Hines

University of Michigan ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
13
Abstract Views
564
PlumX Metrics