NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Susan Guthrie, James R. Hines, Jr.

NBER Working Paper No. 14146
Issued in June 2008
NBER Program(s):   PE

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.

download in pdf format
   (152 K)

email paper

This paper is available as PDF (152 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14146

Published:

Users who downloaded this paper also downloaded these:
Kelley and Cook w6460 The Institutional Context and Manufacturing Performance: The Case of the U.S. Defense Industrial Network
Lichtenberg w2745 Government Subsidies to Private Military R&D Investment: DOD's IR&D Policy
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us