The editorial ". . . and Miniwhoppers" {Dec. 7} contained some serious errors with respect to the taxation of long-term defense contracts and continues to feed the misconception that defense contractors are not paying taxes because of special treatment. Every reference to a "tax break," a "deferral" or a "benefit" implies that defense contractors are escaping or postponing a tax liability on earned income. The Post's statement that they "get paid as a contract goes along, but can defer some taxes until it is over" implies that profit is being paid as the contract is being performed. This is not true.

Contractors do receive payments during performance of a contract, but only for a portion of their costs. Progress payments are limited to 75 percent of allowable costs incurred and do not include any profit. Contractors do not recover all their costs, let alone realize any profit, until deliveries are made.

The focus on payments received by contractors is a red herring. These payments are made as a form of contract financing simply because the government can borrow at a lower cost than can contractors. This financing mechanism is used instead of allowing interest as a contract cost and keeps the price of the contract down. The completed-contract method of accounting recognizes that income is earned when the contract is completed and permits contractors who are performing long-term contracts to wait until profit is realized before calculating their tax liability. Not reporting income before it is earned is not a deferral or a tax break, but only common-sense tax accounting.

The alternative proposed by the House Ways and Means Committee would require contractors to estimate future income and report a portion of this estimate each year, based on the costs incurred on a contract during the year. This system would tax contractors as they incur costs, not as they earn income, and would be a significant departure from the normal manner in which income is reported by taxpayers generally. What other group of taxpayers is called upon to pay taxes as it produces goods? Should a farmer pay tax as his crops grow, an automobile manufacturer pay taxes as automobiles are produced or an author pay taxes as he writes his book? The answer is no, because incurring costs and producing goods is different from fulfilling the orders of customers and earning the profit.

The Post also contradicted itself on what constitutes a real tax. The editorial stated that moving up collection dates is not a "real" tax increase but supported moving up the "collection date" for defense contractors. Either of these proposals is a real increase and would be considered as such by the professional revenue estimates of the Treasury or the Joint Committee on Taxation.

We believe that it is time to stop making the defense contractor the whipping boy. The public has a right to be fully informed, but it is a disservice to misinform them by distorting the facts.

DON FUQUA President, Aerospace Industries Association of America Washington