Well, the .gov contractor is a BETTER situation in terms of generating economic VALUE (do not confuse with moral value) than the direct .gov employee at least. That is, presuming that the contractor produces some sort of durable good. Because the manufacture of raw materials into parts is still a key way that value is created to provide some GNP parity to the fiat currency.
And there's an expanding trickle-down effect of the same thing through all the sub-sub contractors and raw material providers too.
However, while it's "better" it's all still shell-game Keynesian economics in the end. The dragon still eats it's tail.
And it still does not change that a .gov contractor getting "taxed" is still just a shell game. At best, the contractor can hold the tax money out of profits paid by the .gov and make some micro-interest on it. From an accounting standpoint though, the .gov could just as easily underpay the contractor by the amount they'd be taxed later, and call it even.
It's just that the tax code, and areas of taxation, income, corporate income, FICA, payroll tax, is so complex, it's much easier to compute it after the fact, than proactively discount it going forward.
