TY  - JOUR
AU  - Guthrie, Susan
AU  - Hines, James R, Jr.
TI  - U.S. Defense Contracts During the Tax Expenditure Battles of the 1980s
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14146
PY  - 2008
Y2  - June 2008
DO  - 10.3386/w14146
UR  - http://www.nber.org/papers/w14146
L1  - http://www.nber.org/papers/w14146.pdf
N1  - Author contact info:
Susan Guthrie
353 North Bowman Avenue
Merion, PA  19066
E-Mail: sguthrie@comcast.net

James R. Hines
Department of Economics
University of Michigan
343 Lorch Hall
611 Tappan Street
Ann Arbor, MI  48109-1220
Tel: 734/764-2320
Fax: 734/764-2769
E-Mail: jrhines@umich.edu
M1  - published as Susan J. Guthrie, James R. Hines Jr.. "U.S. Defense Contracts during the Tax Expenditure Battles of the 1980s," in James M. Poterba, organizer, "Economic Analysis of Tax Expenditures" National Tax Journal, (National Tax Association), Vol. 64, no. 2, part 2 (2011)

M3  - presented at "Economics of Tax Expenditures Conference", March 27-29, 2008
AB  - 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.
ER  -