Social Security Reform, KBR-Style

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Yesterday's Boston Globe breaks the story of how Kellogg Brown & Root (KBR), until last year a subsidiary of Halliburton, is avoiding hundreds of millions of dollars in federal Social Security and Medicare taxes by pretending its Iraq-based employees are working for a Cayman-Islands based "shell company."

According to the Globe, KBR has made a special arrangement to avoid paying taxes on about 10,500 of its American employees who are working in Iraq on various reconstruction programs. The way it works: KBR recruits people to work on reconstruction-related projects. But when the workers get their first paycheck, they see that it's not coming from KBR, but from a KBR subsidiary, Service Employers International Inc, (SEI).

Why such deception? Because unlike KBR, SEI is not based in the United States. SEI's corporate home is the Grand Cayman Islands. (Legally, anyway -- SEI has no actual offices in the Caymans, just a mailing address.) And while KBR employees working in Iraq would be subject to the 15.3 percent payroll tax for Social Security and Medicare (half of which is paid by the employer, the other half of which is paid by employees), SEI employees don't incur federal payroll tax liability because they're not working for a US-based company.

The Globe estimates that SEI is avoiding about $101 million in payroll taxes every year using this scam. If this has been going on throughout SEI's 5-year stint in Iraq, that's more than $500 million in revenue that won't be shoring up the Social Security system.

KBR representatives breezily dismiss this by pointing out that "the loss to Social Security could eventually be offset by the fact that the workers will receive less money when they retire, since benefits are generally based on how much workers and their companies have paid into the system."

So, for those looking for a more creative way of subverting Social Security than John McCain's privatization plans, here it is: reduce future Social Security benefits by pretending your employees aren't entitled to them!

One glitch in this clever plan, as the Globe alertly points out, is that Medicare benefits are not reduced for those who don't contribute. So the Medicare portion of the foregone 15.3 percent tax is money that is going to have to be raised through taxes on the rest of us. And Texas-based KBR is also avoiding state unemployment taxes on these workers, when means that they'll be ineligible for unemployment benefits later on.

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