Do defense firms tax the US government?

A good deal of the defense business in your State is conducted by conglomerates. That is another problem. Frequently a conglomerate means the pooling of inefficiencies. [Laughter.]

 

That is what it really does mean. And I have had personal experience with conglomerates. I have found out the parent company often is not responsible for anything one of its subsidiary compares does. There is a corporate veil such that the conglomerate can control the detailed activities of its companies without bearing the consequences of its actions. Conglomerates are aided by the fact that they can transfer stock without any tax. They have pretty much taken over the defense industry.

 

Take shipyards as an example. The Electric Boat Co. is a division of General Dynamics. Newport News Shipbuilding Corp. became part of Tenneco. The Ingalls Shipyard became part of Litton Industries. The Avondale Yard became part of Ogden. Lockheed acquired the Puget Sound Shipbuilding Co.

 

Now, what happens? A conglomerate acquires a company. It then levies a tax in the form of a corporate general and administrative rate on all work performed by the company that was taken over. If I remember my history, we went to war in 1776 because there was taxation without representation.

 

So now you have a situation where these conglomerates decide, on their own volition, to place a tax on the U.S. Government. And therefore the prices of ships go up.

That was Hyman Rickover in 1970 advocating for uniform cost accounting standards.

The G&A tax Rickover brings up seems to only work when the conglomerates have plenty of commercial work under one division or another. If the company were 99% government sales, then the “tax” isn’t as effective at boosting profitability or subsidizing commercial work. But it can result in administrative bloat, excessive executive salaries, and so forth.

Source: Extension of the Defense Production Act and Uniformed Cost Accounting Standards. Hearings Before the Subcommittee on Production and Stabilization of the Committee on Banking and Currency, United States Senate, Ninety-First Congress, Second Session, on S. 3302, A Bill to Amend the Defense Production Act of 1950, and for Other Purposes. March 31 and April 1 and 2, 1970.