Walter Pincus
Walter Pincus
Fine Print

Correction:

An earlier version of this article incorrectly stated that General Dynamics bought Newport News Shipbuilding in 1999. This article has been updated.

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.

The GD board includes Paul G Kaminski, who joined in 1997, shortly after he left the Pentagon following three years as undersecretary of defense for acquisition and technology; retired Gen. Lester L. Lyles, who was Air Force vice chief of staff and commander of Air Force Materiel Command until he left that service in 2000, three years before joining the GD board; retired Gen. John M. Keane, who served as Army vice chief of staff until 2003 and joined the board a year later; and most recently, in 2011, retired Gen. James L. Jones, former commandant of the Marines, Supreme Allied commander and national security adviser to President Obama from January 2009 to November 2010.

The Defense Department revolving door has been spinning at an unusual rate the past 10 years, mainly because the Pentagon has contracted out activities that in the past were normally carried out by service members. Difficult to track but in need of reform are consultant firms created by former service personnel that helped get companies the inside track on Pentagon contracts.

Inevitably, as fighting in Afghanistan winds down, there are going to be calls for more defense spending reductions. Contracting out services should go down. A military compensation and retirement modernization commission has to be established, a new effort to raise Tricare fees needs to be made, the $200 million-plus earmark for congressionally mandated research on cancer and other non-military generated illnesses should be ended, and, I hope, some reductions in the $388 million spent on military bands.

Larger amounts could be saved by buying fewer than the now-planned 2,440 F-35 Lightning II Joint Strike Fighters and reducing the future strategic nuclear force by cutting the number of new $4.9 billion strategic submarines, new heavy bombers and land-based intercontinental ballistic missiles.

No one is more qualified than Defense Secretary Leon E. Panetta to shepherd the fiscal 2014 defense budget through its introduction to the new Congress. Therefore, I hope Panetta stays on through at least April to handle what is bound to be a difficult transition for his successor.

Former senator Chuck Hagel (R-Neb.), who became co-chairman of the President’s Intelligence Advisory Board after being considered for top positions in the first Obama administration, met with the president to discuss him replacing Panetta in the second. No rush needed, but if Hagel is Obama’s choice, the president should get on with it and not be deterred by a handful of objectors.

Another nomination that should not be delayed is for CIA director. In this case, Acting Director Michael J. Morell, a veteran agency intelligence officer, should be named. After going through four non-agency directors in the eight years since 2004 when George Tenet resigned, the agency needs one of its own to provide some leadership stability.

Looking at today’s world, it’s difficult to welcome 2013 with a “happy new year.” How about toasting “a better new year” as we look to the future?

For previous Fine Print columns, go to washingtonpost.com/fedpage.

 
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