Bush closes defense contractor tax loophole

President Bush on Tuesday shut a loophole that defense contractors had been using to avoid paying millions of dollars in payroll taxes.

Bush signed into law the Heroes Earnings Assistance and Relief Tax Act, which provides tax relief for military families. Included in the legislation is a provision that would treat foreign subsidiaries of U.S. government contractors as American employers. That means they now have to pay the taxes that finance Social Security and Medicare programs.

Defense companies such as Combat Support Associates and KBR Inc. set up shell companies in the Cayman Islands and other tax havens to avoid paying those taxes on their American …