Excess-profits tax on defense contractors during wartime is long overdue

No one can safely predict what will happen in 2013, but here are a few things I would like to see occur when it comes to national security.

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My most radical idea — and it should have been done 10 years ago — is for an excess-profits tax on defense contractors while we have troops fighting overseas. As I have often noted, Afghanistan and Iraq are the first U.S. wars in which taxes were not raised to pay for the fighting. Instead, the cost has been put on a credit card.

In World Wars I and II and the Korean War, Congress approved new taxes, including one directed at defense contractors. In introducing his request in 1940 for a “steeply graduated excess-profits tax,” President Franklin D. Roosevelt said the government should make sure that “a few do not gain from the sacrifices of many.”

Since 2002, profits of the five largest U.S.-based defense contractors have “increased by a whopping 450 percent,” said Lawrence J. Korb, senior fellow at the Center for American Progress.

Profits of the five rose from $2.4 billion in 2002, adjusted for inflation, to $13.4 billion in 2011, according to an August study co-written by Korb, a former assistant secretary of defense for manpower during 1981-85 and an expert on Pentagon spending

“This success applied both to companies with large civilian sections of their businesses and to those almost wholly dependent on defense funding,” Korb wrote. He noted that defense profits faltered at the beginning of the recession but “rapidly recovered, rising over 40 percent between 2008 and 2011 and nearly returning to their 2007 peak.”

“In short, the largest defense contractors have prospered to a degree that would have looked very unlikely just eleven or twelve years ago,” he said.

General Dynamics was one of the companies that grew during this period. Its earnings went from $5.08 a share in 2001 to $6.87 in 2011, while its stock price rose from $38 a share in September 2002 to $66 in September 2012. GD stockholders also benefitted from increased quarterly dividends, which rose from 14 cents a share in 2001 to 51 cents a share in 2012.

GD sought a monopoly on nuclear submarine building, owning for years the Electric Boat Division and trying to buy Newport News Shipbuilding in 1999. The Justice Department stopped that in 2001. It went on that year to purchase Motorola’s electronic defense business and two years later General Motors’s defense division, which made armored vehicles and fit well with GD’s division that makes M1 Abrams tanks.

The company, like many of its competitors, hired former Pentagon senior officers and officials to be top executives and board members.

Jay L. Johnson, a former company president who retired Monday as chairman of the GD board, is a retired admiral and was chief of naval operations from 1996 to 2000. After retiring, he joined the GD board in 2002 while he was an executive of a Virginia gas and power company. Six years later, he became GD’s chief executive.

Johnson’s successor as chairman, GD President Phebe N. Novakovic, worked at the CIA in the 1980s and from 1992 to 1997 at the Office of Management and Budget. Her last position there was as deputy associate director for national security, responsible for managing and submitting the president’s budget for the Defense Department and U.S. intelligence agencies.