This confirms once again why I support Barack Obama for president: he goes after the corruption. Although there are so many ways that Halliburton and its subsidiary Kellogg Brown & Root have been engulfed in corruption and scandals, this one has to piss off even the most dedicated Iraq War boosters: using the Cayman Islands as their "office" to avoid paying taxes in America while American tax payers continue to pay for the Iraq War. Well, open anti-corruption Democrats like John Kerry and Barack Obama are not going to stand for it, and are now pushing for a Senate investigation into KBR's tax shelter abuses. More on the story below the fold.
The Boston Globe broke the story in March on how some of KBR's subsidiaries were not paying any U.S. taxes for services they were charging our government for in Iraq:
Top Iraq contractor skirts US taxes offshore
Shell companies in Cayman Islands allow KBR to avoid Medicare, Social Security deductions
March 6, 2008
CAYMAN ISLANDS - Kellogg Brown & Root, the nation's top Iraq war contractor and until last year a subsidiary of Halliburton Corp., has avoided paying hundreds of millions of dollars in federal Medicare and Social Security taxes by hiring workers through shell companies based in this tropical tax haven.
More than 21,000 people working for KBR in Iraq - including about 10,500 Americans - are listed as employees of two companies that exist in a computer file on the fourth floor of a building on a palm-studded boulevard here in the Caribbean. Neither company has an office or phone number in the Cayman Islands.
The Defense Department has known since at least 2004 that KBR was avoiding taxes by declaring its American workers as employees of Cayman Islands shell companies, and officials said the move allowed KBR to perform the work more cheaply, saving Defense dollars.
But the use of the loophole results in a significantly greater loss of revenue to the government as a whole, particularly to the Social Security and Medicare trust funds. And the creation of shell companies in places such as the Cayman Islands to avoid taxes has long been attacked by members of Congress.
This, of course, is nothing short of outrageous and downright corrupt, but apparently, KBR considered it legal. And it compounds the cost we already pay for the war:
KBR declined to release salary information. But workers interviewed by the Globe who served in a range of jobs said they earned between $48,000 and $85,000 per year. If KBR's American workers averaged even as much as $63,000 per year, they and KBR would have owed more than $100 million per year in Social Security and Medicare taxes, split evenly between them. Over the course of the five-year war, their tax bill would have been more than $500 million.
Obama and Kerry seek to remedy this situation in two ways. First, they have introduced a bill, called the Fair Share Act of 2008, which would close those tax loopholes. Secondly, they are calling for a Senate investigation into companies "that circumvent paying payroll taxes by hiring employees through offshore shell companies". Their statements:
"Abusing offshore tax loopholes is wrong and at least one greedy company has fleeced the American taxpayer to the tune of hundreds of millions since the Iraq war began," said Senator Kerry. "The American people who play by the rules and foot the bill for this war in Iraq deserve to know just how many companies are avoiding paying their fair share of taxes and how much it’s costing our economy. The Senate has a responsibility to shed some sunlight on the tax practices of these government contractors, and we will not be satisfied until these kinds of loopholes are eliminated once and for all."
"It’s the responsibility of American companies to pay their taxes and ensure that their employees’ work is counted for future Social Security and Medicare benefits," said Senator Obama. "It’s unacceptable for contractors to use foreign shell companies to avoid paying their share of payroll taxes, and that’s why Senator Kerry and I introduced legislation to close this loophole and hold these contractors accountable. I look forward to moving this legislation forward and working to crack down on tax havens and abusive tax shelters."
This of course is an excellent move by the Senators, and also frames the issue in terms of our economy as a whole being hit with a double whammy: the Iraq War cost and the way some contractors in Iraq are cheating on their taxes. It also is extremely important that their bill is passed, so that this kind of abuse of the tax system can't be done again. You can read the text of the bill here.
Finally, an investigation is in order, and I hope Senator Levin will go forward with it. I'll end with the letter sent to Levin and Coleman from Kerry and Obama:
April 23, 2008
The Honorable Carl Levin, Chairman
The Honorable Norm Coleman, Ranking Member
Permanent Subcommittee on Investigations
Committee on Homeland Security & Governmental Affairs
199 Russell Senate Office Building
Washington, D.C. 20510
Dear Senators Levin and Coleman:
Recently, we introduced S. 2775, the Fair Share Act of 2008, which ends the practice of U.S. government contractors setting up shell companies in foreign jurisdictions to avoid payroll taxes. Representatives Ellsworth and Emanuel also introduced companion legislation. This legislation amends the Internal Revenue Code and the Social Security Act to treat foreign subsidiaries of U.S. companies performing services under contract with the United States government as American employers for the purpose of Social Security and Medicare payroll taxes.
The legislation was introduced in response to a Boston Globe article in which Farah Stockman reported that Kellogg Brown & Root (KBR) has avoided payroll taxes by hiring workers through shell companies in the Cayman Islands. American companies who are benefiting from U.S. government contracts are able to set up foreign subsidiaries in tax havens and treat American workers employed in connection with the contract as employees of the subsidiary. As a result, those employers can avoid Social Security and Medicare payroll taxes and their employees are denied the contributions for Federal benefits purposes.
We bring this issue to your attention because we think it is another example of the abuse of offshore tax havens used in order to avoid the payment of U.S. taxes. We believe closing this glaring loophole is consistent with your efforts to address tax shelters and tax havens. It is unclear how pervasive the practice used by KBR is, but there are numerous federal contractors that have subsidiaries located in tax havens and, as your investigations have uncovered, an abundance of tax professionals willing to help companies shirk their tax responsibilities whenever a loophole can be found.
We are working with the Finance Committee to close this tax loophole, and the House recently included this legislation as part of the Taxpayer Assistance and Simplification Act of 2008. The Joint Committee on Taxation estimates that closing this loophole raises $846 million over ten years.
We request that the Permanent Subcommittees on Investigations investigate this and similar abuses by federal contractors to avoid payroll taxes, and we look forward to continuing to work with you on measures to ensure fairness for American taxpayers.
JOHN F. KERRY
A big kudos to the open government anti-corruption Democrats in the Senate, one of whom I hope to see in the Oval Office next year doing this kind of reform throughout the executive branch.
Update: Kerry and Obama worked on this bill together; however, Hillary Clinton has co-sponsored the bill, and should get credit for that. The others who have co-sponsored thus far are Senators Durbin, Leahy, Kent, and Harkin.