Offshore News Digest for Week of March 28, 2005

GLOBAL BUSINESS

SWISS TO VOTE ON EU ACCORDS

Voters will decide on June 5 whether Switzerland signs up to the EU Schengen/Dublin accords on closer security and asylum cooperation. Opponents of the accords – led by the [so-called] rightwing People’s Party – have presented the government with a petition bearing 86,000 signatures, well over the 50,000 needed to force a referendum. The accords form part of a package of nine bilateral agreements between Switzerland and the EU, approved by parliament in December. The accord on the free movement of labor is already in force for the “old” 15 EU-member states, after being approved in 2002. It was widely expected that opponents would force referendums on both issues and the government had already set aside dates in June and September for nationwide votes.

Swiss non-banking sector money-laundering investigations rose sharply in 2004.

The Swiss authorities say that the number of money-laundering investigations in the non-banking sector rose by 74% last year, to 452 financial institutions from 259 in 2003. They claim that one of the reasons for the increase is that financial intermediaries are becoming more willing to submit to inspection. The authority said that it had been able to step up its work because the new Money Laundering Act, which came into force in 1998, was now fully operational. This law requires all financial institutions – and not just banks – to report suspicious transactions.

However, far less action was taken against companies or individuals than in 2003. Two years ago seven institutions were told to cease trading, but none was ordered to close down in 2004. In almost half the cases last year no legal action was taken at all, even though 10% of them involved illegal operations.

A.I.G. PROBE PUTS BARBADOS OFFSHORE SECTOR UNDER WATCH

A U.S. probe into the dealings of one of the world’s largest insurance firms is placing Barbados’s offshore financial services sector under intensive scrutiny. U.S. investigators may soon ask Barbados what it knows about American International Group Inc. (AIG) and three other offshore firms in Barbados. What started out as an examination into the accounting practices of AIG, and two re-insurance companies, Richmond and Union Excess in Barbados, has mushroomed into a full-fledged enquiry extending to a third company, Pillar, also in Barbados. Subpoenas have been issued to AIG and the resulting media glare has thrust Barbados, Bermuda and their offshore sectors, especially the reinsurance business into the limelight and onto the pages of some major U.S. newspapers. So far it is not clear what laws were broken in Barbados, or the U.S. by AIG or the Barbados firms.

The deal that toppled A.I.G.’s boss.

Maurice R. Greenberg is a famously irascible executive. When he got a call on March 13 from Frank G. Zarb, American International Group’s lead director, telling him that his 38 years as the company’s chief executive were over, he was, well, enraged. You can only imagine what he was thinking. Who were these directors to jettison the head of a AAA-rated insurance company, one that had just reported $100 billion in revenues? Who were they to dump an executive who met regularly on equal footing with world leaders, who was revered not only on Wall Street but around the world for producing predictable, steady earnings growth through years of insurance industry ups and downs?

Mr. Greenberg’s fall from grace may seem to have been dizzyingly swift, but according to people who have worked for him, analyzed his business and dealt with him as either customer or competitor, the seeds of his ouster were probably sown earlier in his long tenure. Paradoxically, these people say, Mr. Greenberg’s ability to produce smooth and steady results in a hugely volatile and complex business was also responsible for his downfall. Remarkably, it was a lone transaction, involving just $500 million – a blip on A.I.G.’s screen – that took Mr. Greenberg down. According to regulators who have reviewed the deal, it enabled A.I.G. to bolster its loss reserves substantially, but in a way that was improper because no risk was transferred. The favorable accounting treatment assigned to insurance transactions is lost when risk is not transferred; then, the money that changes hands looks more like a loan and must be accounted for as such.

INDEPENDENCE WILL NOT SOLVE BERMUDA RACE DIVIDE, SAYS COMMISSION

Independence will not solve the social ills facing the Bermudian community – including racism, the Bermuda Independence Commission declared. Bermudians must find the solutions to these problems whether or not the Island goes Independent, Commissioners added. “Even if Bermuda does not change its Constitution, we need to do something about our social conditions in this country,” BIC chairman Bishop Vernon Lambe said at the BIC’s first public meeting. Solving the social problems “may better fit us for that great step of constitutional change,” he added.

GUERNSEY ECONOMY HAS CHANGED GREATLY OVER 30 YEARS

It is sometimes said that fears about the financial services industry’s future are misplaced because its very diversity will ensure that it will survive. To an extent, this is true. The market for captive insurance is different from the market for trust and funds services and the market for private equity is again particular. In addition, the industry is continually evolving. Some parts are new and growing rapidly, others are strong and in their prime, yet others are mature and some of these will decline. A brief review of the fortunes of the industries that have most recently flourished and declined in Guernsey provides an interesting context.

In 1973, horticulture comprised 36% of the export-sector contribution to the economy of Guernsey. By 1983 that figure had fallen to 11% because of the sudden shock of competition from other countries where the costs of growing the same produce had fallen significantly. By 1988 the figure had fallen further to 7% and since 1993 it has remained at around 4%. In 1973, tourism was also a mainstay of the export economy, contributing 30%. The decline in this figure has been slow but continuous. By 1993 it was down to 16% and in 2001 it was 11%. The main reasons for this decline are well known, being related to the changing tastes of holidaymakers, the emergence of other competing holiday destinations and the fall in the costs of longer-distance travel. There was no single body blow, but an inability to adapt sufficiently to meet the changing demands of the market has resulted in a slow but substantial decline.

The growing importance of the financial services sector is evidenced by the fact that in 1973, this comprised only 11% of the export economy but by 1983 the figure had risen to 29%, by 1988 to 44% and by 2001 to 66%. The GDP statistics reveal a steady growth in the wealth per head of population, with the exception of a short period in the late 1980s and early 1990’s. A substantial deterioration in the acceptability of Guernsey-based products could well lead to a diversion of business elsewhere. Over-regulation is also a danger to be borne in mind. Competition in all areas of the finance industry is fierce and the major international firms – so essential to Guernsey as bringers of business – would have no hesitation in moving their clients elsewhere if it suited them to do so.

SON TAKES OVER AS REGENT FROM MONACO’S DYING PRINCE RAINIER

Prince Albert took over the regency of Monaco from Prince Rainier, 81, who is in intensive care with breathing, kidney and heart problems. A crown commission decided that the monarch was unable to exercise his royal functions and Prince Albert, 47, was asked to become temporary ruler of the province. He is the only son of Prince Rainier and Grace Kelly, the actress who died in a car crash in 1982. He will become head of state when his father dies. Prince Albert is set to accede to the throne without fulfilling his father’s public request that he should provide an heir before doing so: he is childless and unmarried.

It marks what many of Monaco’s 32,000 residents believe will be a historic date for a country that has been ruled by the Grimaldi dynasty since 1297. Although a palace spokesman said that Prince Rainier could take back his royal functions if his health improved, most people believe that his son will keep the powers he assumed yesterday, signaling the start of a new reign.

Prince Rainier, who has been on the throne since 1949 and is the longest-serving monarch in Europe, has suffered health problems in recent years. He has transformed the principality from a tiny backwater into a global center for high finance and jet-setting celebrities, and is very popular among his subjects. Their main concern is to ensure a continuation of the policies that he implemented – notably the absence of income tax, tight security and a red-carpet welcome for the rich and famous. However, few observers can predict what sort of monarch Prince Albert will be. A shy, softly-spoken man, he is best known for his sporting achievements.

REAL ESTATE OPPORTUNITIES ABROAD

Romania – Investing in a Land of Unexpected Opportunity

Romania presents the investor with an exceptional opportunity to benefit from the ascension of an eastern block country to the European Community. The timetime line this opportunity, however, is limited. Romania is one of the last European countries in ascension talks with the EU and it is projected to enter in either 2007 or 2008. The expectation around this hallmark event has resulted in much needed economic and government reform, making conditions more suitable for foreign investment.

The pre-ascension excitement has also given way to a dramatic increase in real estate prices in recent years, especially in major cities and tourist areas. For example, a friend of ours bought a 2-bedroom apartment in central Bucharest in early 2002 for $25,000. Today his apartment is valued at €75,000 ($100,000) and the amount of interested buyers is more then sufficient. So much so, that potential buyers have actually posted advertisements on the entry door to his apartment building stating that they are eagerly looking to buy an apartment in the building or a nearby one. Until he sells, he could continue to rent out the apartment at €700 ($890) a month or get in on the burgeoning short-term rental market which offers an alternative to the over-priced hotel room rates in the city, and with a pretty good occupancy rate, rent the apartment on a daily or weekly basis at €50 per night.

Montenegro – the Jewel of the Adriatic

Montenegro is just beginning to blossom as far as real estate is concerned. After 50 years of communism, the sleeping tiger is beginning to emerge. I have traveled to Montenegro at least 6 times, and each time I am surprised at how quickly things are changing, and then again how things are not changing. Many people in Montenegro have an exaggerated idea of what the value of their property is. For instance, I asked a farmer in a small village not far from Podgorica, what he was selling his small farm for. “$200,000!” They just grab a number out of the air, and throw it at you. They are not able to travel freely in the rest of Europe, and so they are very isolated from reality and capitalism.

You should not be afraid to invest here, however. There are many opportunities. You need to be a smart investor and find someone you can trust to get you through the mine fields of investing in this country. One of the biggest problems is title to the land. Tito took a lot of land from families during his reign. Now the families can sue and get the land returned to them. The problem is that sometimes the land has a huge hotel on it, or someone else might be living on it. This can be a hassle. Montenegro has not heard of title insurance, and so a good attorney is needed to research the land and make sure the individual who is selling the land is indeed the owner.

Currently there is no good financing available. Either you bring cash, or you arrange for the seller to carry your loan. The Banko Komercial in Budva is offering some loans of 30% loan to value. Other than that, good lending is non-existent. Now for the opportunities. There is waterfront land available, there is new construction of condominiums, and Montenegro is divesting itself of all of the property it owns. There is a huge amount of property in their inventory!

Comments on the South African property market.

With the South African property market enjoying burgeoning growth, there is no better time to consider how other key property markets are performing. Over the past decade, hundreds of thousands of South Africans have emigrated in the hopes of starting a new life for themselves and their families. Some have opted for the relatively familiar lifestyle and climate of Australia, while others have braved the high costs of the UK and the freezing winters of Canada.

If purchasing property is a weighty, life-altering decision to make, purchasing property in a foreign country can only be more daunting. Making the right decision requires an understanding of all the elements, including the standard and cost of living, job market, economy, housing market and buying conditions, among other factors. MortgageSA provides a snapshot of what emigrants to these three countries can expect in terms of purchasing a house.

Offshore Real Estate & Investment Quarterly, Q1 2005 Table of Contents here.

GRAND CAYMAN DISPLAYS MULITIPLE VIRTUES

Grand Cayman has been a favorite port of call for every cruise line that plies the Caribbean. It has no dockage accommodations for cruise ships so on some days one can see 10 to 20 cruise ships anchored off-shore sending their passengers into town aboard the vessel’s tenders. Tenders are really lifeboats doubling as shuttles by carrying passengers to and from shore when no pier to tie up to is available. George Town has made itself into a viable port of call with its duty-free shops selling everything from T-shirts to jewelry and fine clothing. There really is not too much to see, but the water is considered to be the clearest and cleanest in the Caribbean, and water sports and the magnificent beaches offer day visitors excellent reasons to go ashore.

Today, Grand Cayman is one of the most prosperous islands in the Caribbean. Offshore banking is big and there are more than 500 such installations as well as many international companies that are making their home and headquarters there. But one of the most important things about the Caymans is that they demand no taxes. And thereby hangs an interesting tale.

BEAUTY AND TAX BREAKS LURE BUYERS TO PANAMA

When Larry and Honey Dodge of Jackson, Wyoming, first visited Panama two years ago, they were thinking about retiring abroad and decided to take a vacation here to check it out. They had read about Panama’s diverse climate of tropical beaches and mountain cloud forests, as well as its recent efforts to lure foreigners with residential visas for anyone with just $500 a month in personal income and generous breaks on property and income taxes. Committed libertarians, Mrs. Dodge, 58, and Mr. Dodge, 63, both retired, also liked the country’s laissez-faire stance on private property rights and entrepreneurship. Best of all, land prices as low as a few thousand dollars an acre and building costs starting around $40 a square foot meant the two could afford to sell their house, build a new one in Panama and still have plenty of money left over to cover their living expenses.

Their trip was a success. Before they returned home, they put down $27,000 for a small plot of land in Altos Del Maria, a mountainside real estate development an hour and a half drive from Panama City. “Almost from the minute we got there, we were, like, ‘This is the place,’” Mrs. Dodge said of the creek-side building site with a view of the surrounding mountains. “It was perfect.” Little wonder that Panama is increasingly lighting up the radar screens of those searching for an affordable alternative to more traditional south-of-the-border retreats in Mexico, Costa Rica and the Caribbean, where escalating prices increasingly rival those along Americ’qs own beachfronts. Touted as the “next Costa Rica” by travel magazines and newsletters like International Living, Panama is undergoing a land rush as its Tocumen Airport fills with planeloads of eager foreigners with cash in hand.

Since 2001, once sleepy rural towns like Boquete, which AARP’s Modern Maturity magazine named one of the world’s best places to retire, have seen real estate prices rise as much as fivefold as developers transform farmland into high-end developments like Valle Escondido, a gated golf-course community where half-acre lots now sell for $100,000 and more. Prices in coastal areas like Bocas Del Toro, on the Caribbean Sea, have also skyrocketed, and a restoration under way in Panama City’s historic Casco Viejo neighborhood has drawn foreigners eager to get a piece of its 330-year-old history.

Yet despite the price increases, property there remains a fraction of what one would pay for similar real estate in the U.S. And with enticements like a 20-year suspension of property taxes to those who build houses or renovate in a historic district, and an income tax hiatus for those starting some small businesses, the opportunities are appealing not only for those seeking a place to retire but also for entrepreneurs.

Analysis: Expanding the Panama Canal

The expansion of the Panama Canal with the construction of a new set of locks is generating uncertainty among Panamanians. How much will it cost? Who will pay for it? The idea is to build a new set of locks parallel to the three existing ones to permit the passage of post-Panamax ships, which are too large for the existing locks.

Any decision of the Panamanian government to expand the canal will have to be ratified by the people through a popular referendum, as established by the Constitution. Before that the electorate will vote on social security system reforms, which could cause the referendum on the expansion of the canal to become an assessment of President Martin Torrijos’s government.

Although the expansion work’s cost has been calculated at $7 billion to $12 billion, former Vice President Ricardo Arias Calderon has noted that the Panamanian government could not count on securing investment of more than $5 billion. As the number of Panamax ships increase – the “Panamax” being the largest size that can go through the canal – there seems to be a decrease in the cargo tonnage since fewer crossings are required to take the same amount of merchandise. While funding remains an important issue, one thing is clear: The 91-year-old canal in an era of increasing globalization is becoming more important for international trade, not less.

TAXES

LEAKY SHELTERS

Gary M. Kornman, A Dallas Lawyer, Insurance agent, estate planner and self-styled tax “educator”, called two top sidekicks on a Sunday afternoon in October 2000. He asked them to fly with him that night on his private JetStar II to a meeting in the Hamptons with a Connecticut prospect with perhaps a billion in capital gains to shelter. It was a long-shot sales call, but it paid off. By mid-2001 the Connecticut client had paid Kornman’s company, Heritage Organization LLC, $29 million for what could be the largest individual tax shelter ever sold. He had also agreed to fork over another $15 million if the three-year period during which the IRS could challenge the shelter passed without trouble. It is unlikely he paid that $15 million – the IRS considers the “Heritage Strategy” a variant of the banned “Son of Boss” shelter and is demanding back taxes and penalties from users. The client is in good company on the creditors list, which includes billionaires and centimillionaires from Hawaii to Rhode Island.

Sheltering is a big business in this tax-obsessed country. Shelter vendors span a huge range, from white-shoe law and accounting firms selling very complex investments that might hold up in court, all the way down to seedy one-man outfits promoting secret offshore bank accounts that are clearly illegal. The IRS is currently investigating in the neighborhood of 1,000 shelter promoters. Son of Boss was used by thousands of taxpayers to escape $6 billion plus in tax, the IRS says.

Senate hearings, IRS enforcement actions and client lawsuits have exposed the role prominent accounting and law firms played in promoting borderline tax shelters. But the secretive 61- year-old Kornman has remained in the shadows. His contracts – crafted to head off all suits – stated Heritage was not offering legal or accounting services or even advice clients could rely on. Promoters like Kornman thrived before the large firms got involved and are likely, as a group, to outlast them, feeding off tax code complexity and clients’ willingness to suspend skepticism to save tax. Without well-known law and accounting firm names to protect, they can shut down one tarnished business and move on to the next. Often more is questionable about their operations than just their tax advice. In August Kornman’s home was raided by the FBI, suggesting a criminal investigation is under way.

Indeed, Kornman might even be considered typical of the smaller operators were it not for the size of his fees and the wealth of his clientele. What is extraordinary is how Kornman, the son of a Florence, Alabama jewelry store owner, got through so many gilded doors. Say this for Kornman: He chugged his own tax Kool-Aid – by the gallon. For 1999 Kornman family entities reported $103 million of losses generated, the IRS alleges, by the same Son of Boss method he promoted.

What works?

You do not want to go to jail or pay penalties, but you also do not want to pay more tax than you have to – it’s not the American way. And your sister-in-law, your golf buddy or your business partner is touting a “your CPA probably does not know this, but” way to pay less. How can you tell a legal tax dodge from an iffy or bad one? The pat answer – if it sounds too good to be true, it probably is – is not bad advice, but is not always enough. Some things that sound too good to be true are allowed because Congress uses the tax code as an ersatz spending program; for example, if you invest in certain rental housing for low income folks, you can claim a special credit that is not subject to the limitations imposed on losses from other passive activities. Other improbable-sounding ploys work because the courts have blessed some taxpayer- friendly interpretation of a complicated code. Provided you do it right, you can chop your family’s gift and estate taxes using family limited partnerships and grantor-retained annuity trusts.

For most taxpayers the best shelters are still the mundane ones: homes, retirement accounts and stocks. Interest on up to $1 million in mortgage debt is deductible, and the first $500,000 in capital gains per couple from the sale of a primary home is tax free. For 2005 a worker can divert up to $14,000 ($18,000 for those 50 or older) into a tax-deferred 401(k). The gift-tax exclusion – $11,000 a year to each of as many different relatives and friends as you want – still works. Want to get fancier? Here are some pointers to keep you safe.

The richest tax cheats.

The rich normally favor the sort of technical tax shelters – like Son of Boss – that might incur monetary penalties but will not bring time in the pen. There are exceptions, however. Here are some not-so-little people charged with criminal tax evasion.

U.K. TAX SECTOR ANGERED BY BUDGET BLOWS

According to a report from the Legal Week news service, the UK’s tax sector is reeling following blows delivered by Chancellor Gordon Brown in his recent budget. In particular, the crackdown on tax “loopholes” used by major companies to minimize their tax liability was cited as a concern by tax advisers. In the section of the Budget concerned with “Building A Fairer Society”, the budget stated, “Building on the action taken in the 2004 Pre-Budget Report, the Government is introducing two new anti-avoidance rules which will allow the Inland Revenue to issue a notice to counter a tax advantage in specific circumstances where a UK tax avoidance motive is present. These new measures will tackle arbitrage, where companies seek to gain a tax advantage by exploiting differences within and between tax codes and excessive claims for double taxation relief.”

Speaking to Legal Week with regard to the stance assumed by the UK authorities on arbitrage, Slaughter and May tax chief, Tony Beare observed that “This is a major change and one that could make the UK far less attractive to business if it is stringently applied.” Meanwhile, global head of tax at Linklaters, Guy Brannan commented, “I am sceptical that they will raise any more money as people will stop doing deals. In the short-term we will see lots of PLCs unwound and restructured, but in the long term there will be a slowing down in derivatives and structured finance-type deals.”

Britain’s Chancellor of the Exchequer Gordon Brown tries to find another third way.

Now that the Soviet Union is no more, there are two economic models on offer in the world – three, if you count Cuba and North Korea, which there is no reason to do since imitators are hardly lining up for that short-cut to impoverishment. The American model can broadly be described as one that emphasizes individual initiative, flexible labor markets, low taxes, and minimal regulation. The European model, which explicitly sees itself as an alternative to the red-in-tooth-and-claw capitalism of the U.S., emphasizes collective responsibility, regulated labor and product markets, and high taxes to fund a generous safety net. Then we have Great Britain, in which Tony Blair’s Labour party is attempting to find a “third way” between the U.S. and European models. When it comes to economic policy, it is Labour chancellor of the Exchequer Gordon Brown who has taken on the task of finding that third way.

Brown – a genuine intellectual who rates Gertrude Himmelfarb’s The Road To Modernity: The British, French and American Enlightenments the most important book in many years, and can recite large passages of Adam Smith’s Theory of Moral Sentiments from memory – is much taken with the energy and innovative drive resulting from the U.S. economic system, and appalled by the stagnation that is the consequence of the unworkable fiscal and regulatory policies of the European alternative. He would like to have the advantages of American dynamism and the safety of Europe’s welfare state. But – as the budget he submitted to parliament last week shows – there just is no middle ground, and forced to choose, he has decided to head Britain in the direction of sclerotic Old Europe.

Blair’s party prefers to call itself “New Labour”, to distinguish it from the bad old socialist party of yore. But Brown has not shaken Old Labour’s taste for income redistribution. This redistribution, I assume, is an attempt to relieve the unhappiness that Richard Layard, an economist and long-time Labour guru, describes in his new book, Happiness. Layard attributes human unhappiness to inequality of income – and proposes to transform unease into contentment by redistributing income. His is a tax system that takes so much from the rich to give to the poor that envy is no longer a scourge on the human psyche.

It did not take Layard’s book to persuade Brown to take from comfortable Peter to give to poor Paul by expanding the welfare state and financing that expansion with higher taxes on the middle class. He admires the American work ethic, social mobility, relative lack of class antagonisms, and the optimism that allows Americans to see as opportunities what Europeans see as problems. But he cannot grasp the relation of those virtues to the incentives provided by low taxes. And he feels the American safety net is too porous, and the government too reluctant to intervene in labor markets to improve the quality of life of groups he thinks should not have their fates determined by employer-employee bargaining. It is a game Brown likes to play – comparing the U.K. with the U.S. to show the superiority of what we might call his “third way”. But it is a game he cannot win.

Flat tax would benefit all U.K. taxpayers, Adam Smith Institute argues.

A switch to a flat tax in the U.K. would benefit taxpayers both rich and poor while dramatically improving the international competitiveness of the British economy by sweeping away increasingly complex tax law and regulation, according to the ASI. In a new report by Richard Teather, Associate Senior Lecturer in Tax Law at Bournemouth University, it is argued that a new flat rate of income tax levied at 22%, in tandem with a personal tax-free allowance of £12,000, would take most low income earners out of the tax system altogether while boosting the after-tax earnings of those on below-average incomes by 12% and top earners by 0.5%.

What is more, the study concludes that the change can be achieved without major long-term disruption to the government’s revenue flows through improved compliance, reduced incentives to shelter income from tax and higher rates of economic growth. “The flat tax is therefore no longer a theoretical concept or one confined to specific ‘tax havens,’” Teather observed in his report. “It is on the UK’s doorstep, and our competitors are enjoying a more benign tax climate than we are.”

Small English shops braced for tax rate rises.

More than 1.5 million companies are set to receive their business rate bills in the next few days. But the Federation of Small Businesses (FSB) is warning that all companies will face sharp rises this year, with an average increase of 15.7%. It says shop owners in southeast England will be hardest hit. Business rates are the second or third highest item of expenditure for most small firms. Rateable valuations take place every five or six years. Currently rates are five times more expensive as a proportion of turnover than they are for large companies, according to the FSB. “The odds are already stacking up against small shops and we are concerned that some independent retailers will find it impossible to absorb these additional costs,” said FSB business rates chairman Roger Culcheth.

The recent revaluation of business premises by local authorities has led to a huge increase in the rateable value of shops, particularly in wealthy areas. The rateable value is based on the going rate for a particular area, irrespective of whether the business is doing well or making a profit. Calculated by the Valuation Office Agency (VOA), part of the Inland Revenue, the rateable value broadly represents the yearly rent the property could have been let for on the open market on a particular date.

OVERHAUL OF ANTIQUATED CANADIAN TAX SYSTEM NEEDED TO LURE CAPITAL INVESTMENT

A new report that $88 billion has flowed out of Canada into tax havens has, predictably, renewed demands that Ottawa shut them down and force companies to pay their “fair” share of taxes. But that misses the point. There is nothing “fair” about the Candian tax system. Corporate Canada pours investment into offshore financial centers, some of which are tax havens, mainly because Canadian taxes are too high. The federal budget tabled in February failed to come to grips with this crucial issue.

To clear up a misconception, Canada has not been deprived of $88 billion in investment. What has happened is that Canadian assets in offshore financial centers have grown from $11 billion in 1990 to $88 billion in 2003. That represents about one-fifth of all Canadian investment abroad. These assets are equity and debt held abroad by Canadian enterprises and their value fluctuates not just with investment flows but with exchange rates, corporate reorganizations, changes in ownership and shifts to other forms of investment. The IMF identifies 42 jurisdictions as offshore financial centers. Canadian companies hold assets in 25 of them. They share these characteristics: They have a large number of financial institutions, most transactions are initiated abroad, most institutions are controlled by non-residents, and assets and liabilities are out of proportion to their domestic economies.

The majority of offshore financial centers are working with the OECD to battle money laundering, improve transparency and eliminate harmful taxation policies. Canada has tax treaties with more than 80 countries. Canadian enterprises do not have investments in tax havens the OECD labels “uncooperative”, including Andorra, Liechtenstein, Monaco and the Marshall Islands. Among offshore financial centers, the largest growth in Canadian investment was in Barbados, Bermuda, the Cayman Islands, the Bahamas and – here is the surprise – Ireland. How did Ireland end up on the list of top recipients for Canadian investment? Simple. It introduced tax policies that acted as a magnet for foreign investment.

Unlike Caribbean countries that rely on financial services to support their economies, Ireland is a goods-and-services economy just like Canada. Ireland has revitalized itself with a competitive tax regime. There is no reason Canada cannot do the same. Canada has one of the highest corporate income tax rates in the industrialized world. The February budget promised to cut the rate from 21% to 19% by 2010, starting with a half-point drop in 2008. That is too little, too late. A more accurate measure of the tax load on Canadian business is the marginal effective tax rate, which is the amount of income and other capital-related taxes as a percentage of pre-tax profit. By this account, Canada ranks third highest, at 31.3%, of 20 countries studied by the C.D. Howe Institute. Ireland is among the lowest at 11.5%.

IRS GUESSES 2001 UNPAID TAX COULD BE AS HIGH AS $353 BILLION

Individual taxpayers failed to pay up to $353 billion in taxes in 2001, according to a study released yesterday by the I.R.S. The study examined the so-called tax gap, the difference between the amount of taxes owed by individual taxpayers and the amount collected. It was the agency’s first large study on the issue since 1988. The I.R.S. said the new study indicated that the tax gap was $312 billion to $353 billion. It did not explain the range of figures, which represent an increase from an earlier estimate of $312 billion owed.

The agency was able to track down some of the money it was owed. Through enforcement and other measures, it has collected $55 billion of unpaid 2001 taxes. That means that the net gap for that year was a lower $257 billion to $298 billion. That is still more than the $216 billion the federal government spent on Medicare in 2001, but far less than the $430 billion spent on Social Security that year, according to government figures.

The I.R.S. said that 80% of taxes owed but not paid by individuals were a result of underreporting of income, often by people working in the service sector. The remaining 20% is attributed to people who simply do not file income tax returns or who file returns but fail to pay taxes owed.

A TAXING EXERCISE

As people work on their tax returns, they would do well to spend a couple of minutes before calculating their final tax rates. This important information may surprise many and affect routine decisions about investments and lifestyles. The first calculation is simply the mean or average tax rate. This is the tax you owe on line 62 of the 1040 form divided by the income figure on line 22. (To be more accurate, you should also add income for tax-exempt bonds on line 8b.) This is important because many people delude themselves into thinking they are not actually paying any taxes if they end up with a refund.

A more important tax number takes a little effort to calculate. It is called the marginal tax rate, which is the tax you paid on the last taxable dollar earned. This will probably be much higher than your average tax rate. To find the marginal rate, take your taxable income from line 42 and see where you fall in Table 1, showing marginal tax rates for married couples filing jointly. The marginal tax rate is critical for knowing the after-tax rate of return on different types of investments. According to the Tax Policy Center, the vast bulk of taxpayers either pay no federal income taxes or are in the 10% or 15% marginal tax brackets.

But taxpayers increasingly find the Alternative Minimum Tax raises their marginal rate. The AMT is a completely separate tax system with two brackets, 26% and 28%, which apply to a broader definition of taxable income than calculated on the regular tax form. In particular, taxpayers lose several deductions, such as that for state and local taxes. This tends to force people in high-tax states, like New York and California, to pay higher taxes under the AMT. Taxpayers must pay the AMT if it is higher than their regular income tax.

Various types of business investments are also taxed differently because of provisions in the tax code. Those that are debt-financed bear a lower tax burden than those that are equity-financed due to the deductibility of interest, even with the current lower tax rates on dividends and capital gains. For this same reason, when taxpayers invest in housing the return is taxed much more lightly than if they invested in stocks or a business. According to new calculations by the Treasury Department, the marginal effective tax rate on equity-financed investments is close to 40%, but there is actually a negative tax rate on debt-financed investment. Tax rates also vary considerably depending on whether an investment is in land, buildings, inventories or equipment, and on whether the business is a “C” corporation, “S” corporation, partnership or sole proprietorship.

The Treasury Department has also calculated the 2001-2003 tax cuts sharply lowered the effective marginal tax rate on all new investments. Overall, the tax rate on new investment has fallen from 17.2% to 14.2%. In time, this will raise investment in the economy, which will increase productivity, economic growth and, ultimately, wages and living standards. We may not like thinking about the taxes we pay or our tax rates. But they are important economically. And at least once a year we should take the time to become aware of them. It is important information that can help us make both financial and political decisions.

AS EASTERN EUROPE LURES BUSINESS WITH LOWER LEVIES, THE PRESSURE IS ON TO CUT RATES

Corporate taxes are not a big issue for Daniel Bain, CEO of Galvex, a maker of galvanized steel with a plant in Tallinn, Estonia. The country’s tax rate on profits reinvested domestically is zero. And even though Galvex, based in New York, does not pay taxes in Western Europe, Bain would be happy to see those countries cut, too – because it would be good for his customers. “That would help industry all over Europe,” he said.

Chances for just such economy-boosting tax cuts are looking better. German Chancellor Gerhard Schröder, desperate to get companies to invest and create jobs, has proposed slashing six percentage points from the country’s nominal corporate income tax. That would take the effective rate down to around 32% when local levies are figured in. If, as expected, opposition leaders agree, Germany will boast a corporate tax rate lower than that of France or Italy and close to Britain’s – sharpening the race to attract foreign investment and putting the onus on other countries to respond. “In Italy, there is a lot of attention on the German move,” says Maria Cecilia Guerra, a professor of finance at the University of Modena.

Hard to believe that only last year, Germany was among the ringleaders of an effort to force low-tax countries like Estonia to raise their rates. Now, Germany, whose current rate of about 38% is the highest in Europe, is facing reality. “The eastern countries are advertising lower tax rates and that has definitely created pressure,” says Jörg Otto Spiller, a member of Parliament who is tax policy spokesman for Schröder’s Social Democrats. For businesses, this is one of the welcome effects of the EU’s expansion last year. Corporate tax rates in the core of Europe had already been falling, from an average of 38% in 1997 to about 31% last year, according to KPMG International. But the entry of 10 new members in May, 2004, has sparked a race to the bottom.

What is really needed in core Europe is a dose of the optimism that prevails in countries like Estonia. “It’s a very positive place to do business – young, entrepreneurial, and dynamic,” says Bain, a California native. Still, there is nothing like a tax cut to brighten a CEO’s day.

ASSET PROTECTION

IT TAKES MORE THAN A LIVING WILL

A theme running through coverage of the tragic case of Terri Schiavo is that if she had only had a living will, the long-running controversy over whether to preserve her life in what court-appointed doctors have called a “persistent vegetative state” could have been avoided. But living wills, while desirable, are only part of the package of documents that Americans today should have in order to resolve not only end-of-life issues but also broader questions that arise from serious medical conditions. Experts recommend that the medical and end-of-life documents be part of a broad estate plan, one that includes a regular will and perhaps trusts and other legal instructions that will result in an orderly disposition of a person’s property and affairs in ways that minimize family strife, taxes and other costs.

The key items to have for medical issues are: 1.) A paper that appoints someone as your agent and authorizes him to make medical decisions for you if and when you cannot. Terminology differs, but this paper is typically referred to as a medical power of attorney, power of attorney for health care, health care proxy or something similar. 2.) A paper that provides a set of instructions, governing what treatment you do and/or do not want in the case of apparently terminal illness. This document is generally called a living will. Taken together, these two documents constitute an “advance medical directive”, and this is the package that everyone should have. Indeed, many states now offer forms combining them. Other items can be added.

SUPER-RICH HIDING TRILLIONS OFFSHORE, ACCORDING TO “TAX JUSTICE NETWORK”

The world’s richest individuals have placed $11.5 trillion of assets in offshore havens, mainly as a tax avoidance measure. The figure is contained in the most authoritative study of the wealth held in offshore accounts ever conducted. The study, by Tax Justice Network, a group of accountants and economists concerned at the escalating wealth held in offshore locations, shows that the world’s high-net-worth individuals earn $860 billion each year from their assets. There is growing alarm among regulators and campaigners because exchequers worldwide are missing out on at least $255 billion of tax each year. Governments appear unable, or unwilling, to prevent the rich employing aggressive strategies to minimize their tax liabilities. The OECD confirmed that international tax avoidance is a growing problem that troubles governments not just of rich countries, but middle-income ones as well.

Individuals such as Rupert Murdoch and others among the world’s richest men all make extensive use of tax havens. There is nothing illegal about placing assets and cash offshore, but campaigners are promising to attack tax avoidance by the world’s richest people in much the same way that they currently target environment and trade issues. The $11.5 trillion does not include the vast amount of money stashed in tax havens by multinational corporations, which are using increasingly sophisticated techniques to run rings round the authorities.

More on Tax Justice Network study.

Tax Justice Network says that data on the value of wealth held offshore is hard to come by since neither governments nor the international financial institutions seems either able or willing to research the global picture. The Bank for International Settlements (BIS), an institution controlled by banks, records bank deposits by country. According to their estimates, in June 2004 offshore bank deposits totaled $2.7 trillion offshore out of $14.4 trillion total bank deposits.

However, this figure relates solely to cash. It excludes all other financial assets such as stocks, shares and bonds, and the value of tangible assets such as real estate, gold and even yachts held offshore as well as shares in private companies. These assets are typically controlled through offshore companies, foundations and trusts, the latter not even being registered let alone required to furnish annual statements of account. The value of these assets is therefore unknown and harder to determine. Tax Justice estimates that the value of total assets held offshore lies in the range of $11-12 trillion, and considers this to be a conservative estimate.

US$11.5 trillion invested at 7.5% yields a return of about $860 billion a year. This is a reasonable measure of the offshore investment income each year. The tax loss arising from $860 billion being held offshore is estimated to be 30% of that number, or approximately $255 billion. This estimate does not include tax losses arising from tax competition and corporate profit-laundering [Ed: sic! We could not have made this up].

Who is the “Tax Justice Network”?

“The network promotes research to draw attention to aggressive tax avoidance/evasions schemes operated by corporations and a wealthy elite, both Onshore and Offshore. These schemes enable companies and the rich to avoid paying their fair share of taxes by shifting burdens to the less well off. They cause poverty, degradation and economic under development everywhere. They facilitate wealth transfers from the poor to the rich and present a challenge to any notion of democracy.”

PRIVACY

NICKING IDENTITIES IS EASY, SAYS RESEARCHER

Snoops in the employ of Infosecurity Europe, an exhibition company, wandered around London streets with clipboards and managed to extract enough information out of gullible shoppers to enable them to perpetrate identity theft on over 90% of those they questioned. The company said the intention of the stunt was to “raise awareness of the need to be very careful about the information people give to complete strangers.”

The researchers admitted to a certain amount of subterfuge in extracting information such mothers’ maiden names, or first schools attended from the 200 folk interviewed. Pretending to be looking into Londoners’ theater-going habits, the researchers told pedestrians that if they took part in the survey they would be entered into a draw for theater ticket vouchers worth £20. Using this tactic they managed to get the names and address of all those questioned. 99% coughed up their address and postcode and 92% their home phone number.

Interviewees were told actors often combined their pets name and mother’s maiden name to come up with their stage name and were asked what they thought their stage name would be. 94% of respondents were thus duped into giving up their mother’s maiden name and their pet’s name. Infosecurity said the 3-minute questionnaire gave researchers sufficient information to open bank accounts, credit cards, or even to start stealing their victim’s identity. The researchers did not offer any verification of their identity, their only tool was a clipboard and the offer of the chance to win the vouchers.

ID theft is inescapable.

March 2005 might make history as the apex of identity theft disclosures. Privacy invasion outfit ChoicePoint, payroll handler PayMaxx, Bank of America, Lexis Nexis, several universities, and a large shoe retailer called DSW all lost control of sensitive data concerning millions of people. Credit card and other banking details, names, addresses, phone numbers, Social Security numbers, and dates of birth have fallen into the hands of potential identity thieves. The news could not be worse.

While this is nothing new, there is an important observation here that is worth emphasizing: none of these cases involved online transactions. Many people innocently believe that they are safe from credit card fraud and identity theft in the brick and mortar world. Nothing could be farther from the truth. The vast majority of incidents can be traced to skimming, dumpster diving, and just plain stupidity among those who “own” our personal data. Only a small fraction of such incidents result from online transactions. Every time you pay by check, use a debit or credit card, or fill out an application for insurance, housing, credit, employment, or education, you lose control of sensitive data.

In the U.S., a merchant is at liberty to do anything he pleases with the information, and this includes selling it to a third party without your knowledge or permission, or entering it into a computerized database, possibly with lax access controls, and possibly connected to the Internet. Incredibly, the only person with absolutely no control over the collection, storage, security, and use of such sensitive information is its actual owner. For this reason, it is literally impossible for an individual to prevent identity theft and credit card fraud, and it will remain impossible until Congress sees fit to regulate the privacy invasion industry.

IS YOUR NAME ON THE “MASTER TERRORIST LIST”?

If you happened to take the US Airways shuttle from Boston to New York’s LaGuardia airport on March 23rd 2002, you might have been stuck for a good while behind Johnnie Thomas, a 70-year-old African-American woman at the head of the check-in line. The ticket agent disappeared with Thomas’s passport, and did not return for half an hour. When she returned, the agent told Thomas she was cleared to fly, but that, from now on, each time she checked in US Airways would be required to call the state police, who would call the FBI, who would run a check on the date and place of her birth. “It’s not your fault,” she told Thomas. “It’s just that your name is on the master terrorist list.”

Eight days earlier, at LaGuardia, the same thing had happened, and Thomas had laughed it off. The second time, though, Thomas was not amused. March 23rd was a Saturday. On Monday morning, at home in New Jersey, Thomas got busy on the telephone, making notes on each call. She called the FBI office in Paterson. “If you want your name off the list, hire a lawyer,” said the man who returned her call. He refused to give his name. She called the Washington offices of the United States senators from New Jersey and Montana (she spends time each year in Miles City, Montana) but no one offered a quick solution. She called Denise Hartse, a reporter at the Miles City Star, who put her in touch with the FBI’s counterterrorism specialist in Billings, who suggested that she call the FAA. The number the phone book gave for the FAA in Bergen County turned out not to be in service.

Next, she called the Transportation Security Administration. Pay dirt! A Mrs. Boyd at the TSA told Johnnie Thomas that she was on an FBI “no fly” list because John Thomas Christopher was one of the aliases used by Christian Michael Longo, who had been arrested on January 13th at a beach camp in the Yucatán and charged with murdering his wife and three children. He is now safely in jail in Oregon awaiting trial. Longo was born in 1974 and has blue eyes and reddish-blond hair. O.K., Thomas thought, it is a big, complicated country. Perhaps the TSA could remove her name from the list? No, said Mrs. Boyd. Only the FBI could do that.

Thomas called FBI headquarters in Washington, where she was directed to the Fugitive Publicity Unit, which told her to talk to Supervisory Special Agent Rob Haley, in the Criminal Investigative Division. He told her that airline watch lists are generated from many different sources. He would check further, but he was not optimistic that he could get her name removed. “He said to be patient,” Thomas said. Mrs. Boyd, meanwhile, informed her that four other law-abiding John Thomases had called to complain. By this time, Thomas had been making calls for two weeks.

On April 13th, she checked in at US Airways at LaGuardia for another trip. This time her name had the word “error” next to it on the computer screen. The ticket agent consulted briefly with his supervisor and checked her through. “Obviously, somebody had talked to somebody,” Thomas said. When, four days later, she returned through Logan, her name on the screen carried a new label: “Not allowed to fly”. The agent consulted with his supervisor, and Thomas was directed to a back room, where her checked luggage was X-rayed. At the security gate, her carry-on bag was opened. At the ramp, her carry- on bag was opened again, and she stretched her arms wide for the top-to-toe wand. “Something different happens every time,” she said last week. “It’s scary.”

Confusing control and security.

Suppose you were a sadist and really hated your fellow men – what type of job would you try to get? Well, you might try to become head of airline security for the TSA. People are being unnecessarily abused by agents of their government because those charged with our security all too often fail to distinguish between security and control, fail to use basic cost-benefit analysis when designing systems and procedures, and are ignorant or insensitive to civil liberties. If TSA would use sensible cost-benefit and probability analysis, they would put more resources into bomb and chemical detection and let us have our pocket knives and sewing materials. But, like the French, they prefer to fight the last war.

If the TSA, and for that matter all other law enforcement agencies, were required to subject every rule, regulation and procedure to strict cost-benefit analysis, as well as review by civil liberties experts, they would provide better security at lower cost, with far less harassment and intrusion.

GAO concerns at passenger screening program.

The government’s latest computerized airline passenger screening program does not adequately protect travelers’ privacy, according to a congressional report that could further delay a project considered a priority after the September 11 attacks. Congress last year passed a law that said the TSA could spend no money to implement the program, called Secure Flight, until the Government Accountability Office reported that it met 10 conditions. Those include privacy protections, accuracy of data, oversight, cost and safeguards to ensure the system will not be abused or accessed by unauthorized people. The GAO found nine of the 10 conditions had not yet been met and questioned whether Secure Flight would ultimately work. “The effectiveness of Secure Flight in identifying passengers who should undergo additional security scrutiny has not yet been determined,” the report said

EU NEEDS MORE TIME FOR BIOMETRIC PASSPORTS

The EU told the U.S. Congress the bloc needed another year to implement new U.S. rules on secure biometric passports, which include a computer chip with data such as a digital photo of the passport holder. EU justice and interior ministers had said last year they would meet this year’s October 26 deadline. But only six of the 25 EU countries – Belgium, Finland, Luxembourg, Germany, Austria, and Sweden – will be ready to issue biometric passports by that date. After Oct. 26, citizens from 27 visa-exempt countries will have to apply for a visa or have a biometric passport.

The EU’s Justice and Home Affairs Commissioner Franco Frattini wrote to James Sensenbrenner, head of the U.S. House of Representative’s Judiciary Committee that although the bloc had made substantial progress, it would require more time, until August 28, 2006, to introduce the new passports. “Despite all the progress ... we would urge the Congress to consider a second extension of the deadline,” Frattini said in the letter. The U.S. had already extended the original October 26, 2004, deadline by a year. Frattini said the issuing of similar U.S. passports was also experiencing “a certain slippage” due to problems in adapting the new technology to passports. Japan also will be unable to meet the U.S. deadline, officials said.

So-called biometric features can reduce patterns of fingerprints, irises, voices and faces to mathematical algorithms that can be stored on a chip or machine-readable strip. EU countries also want to include a fingerprint on the chip.

U.S. PASSPORT CHIP CRITICISM GROWS

Business travel groups, security experts and privacy advocates are looking to derail a government plan to insert remotely readable chips in American passports, calling the chips homing devices for high-tech muggers, identity thieves and even terrorists. But the U.S. State Department, which plans to start issuing the new passports to citizens later this year, says its critics are overstating the risks. Officials say that the chips will cut down on passport forgery, improve security and speed up border crossings. The State Department is also adding technical features to prevent the radio-frequency identification devices, or RFID chips, in new passports from being “skimmed” by unauthorized readers, according to Frank Moss, the deputy assistant secretary for passport services at the State Department.

The 64-KB chips will include the information from the photo page of the passport, including name, date of birth and a digitized form of the passport picture. The chips include enough space so that fingerprints or iris prints can be added later. Border agents, using special readers, will be able to call up all the passport information included on the chips on a computer screen. They will also use facial-identification software and a digital camera to verify that the person presenting the passport is the person who was issued the passport. But Bill Scannell, a publicist and freelance civil liberties provocateur, thinks the risk is far greater than the State Department is admitting. This week, Scannell launched an internet campaign called RFID Kills to stop the government’s plans.

The site accuses the State Department of putting Americans abroad at risk, saying the chips “turn tourists into targets, and American business travelers will transmit their identities to kidnappers wherever they go.” Scannell and some security experts suggest that the government should use other technology to make passports more secure, such as bar codes or chips that require physical contact to read and cannot be scanned from afar. Scannell has a track record of delaying or derailing government efforts he considers invasive. A recent government report revealed that the 500 mostly negative comments on a government airline-screening proposal – a large majority of which came through Scannell’s UnSecureFlight.com website – led to a substantial delay in the system’s development.

Two business travel groups – the Business Travel Coalition and the Association of Corporate Travel Executives – also announced their opposition to the chips. “The thought that your travel documents could be broadcasting your nationality to those with an interest in harming U.S. citizens is bad enough,” said ACTE President Greeley Koch in a written statement. “But it could also be pinpointing likely targets for pickpockets, thieves, and even providing information to steal.” Security expert Jon Callas, the chief technical officer for PGP, a leading encryption vendor, thinks it is more likely that common criminals, rather than terrorists, will be the ones trying to read chips surreptitiously to pick out targets. For Callas, opposing the proposal is also about preserving the ability to maintain a low profile while traveling.

LAW

IF BACKGROUND CHECKS DO NOT WORK, WILL “WATCH LISTS” BE ANY MORE EFFECTIVE?

Should people lose rights because they are sympathetic to, but do not actually help, terrorist groups? Should law enforcement be the arbiter of those sympathizers who should be placed on “watch lists”? Democrats said “yes” to both questions recently as they released a report showing that 35 gun purchases during the first half of last year were made by people on terrorist “watch lists” and called it a major public security risk. Their solution? Ban the sale of guns to people law enforcement places on the “watch list”. Democratic Senators such as Hillary Clinton, Jon Corzine, Ted Kennedy, Carl Levin, Charles Schumer, and Frank Lautenberg quickly came out strongly saying that “suspected” individuals should be prohibited from buying guns.

The 35 “suspected” purchases, out of 3.1 million total transactions, were allowed because background checks found no prohibiting information. No felonies or disqualifying misdemeanors, for example. They were neither fugitives from justice nor illegal aliens. Nor had they ever disavowed their U.S. citizenship. The FBI was alerted when these sales took place, but the transactions were not stopped because the law didn’t prohibit them.

Sen. Ted Kennedy was understandably upset last year and publicly complained to the Senate Judiciary committee when he was prevented from flying on an airplane because his name was placed on just such a “watch list”. Rules did not allow him to be told at the airport why he was being denied a ticket, but fortunately for him being a U.S. senator meant the problem was solved with a few telephone calls. People need to remind themselves that a “watch list” is only that. It is not even probable cause. If you had probable cause that these suspects had done something illegal, you could arrest them. Yet Sen. Carl Levin, for example, has been more solicitous of the constitutional rights of foreign combatants held in Guantanamo to “due process” then he is to the rights of Americans. He believes Americans can lose their rights to own a gun without an evidentiary hearing. Democrats may think that people on “watch lists” should be denied their rights to own a gun, but what is next? Why not just make the system much “more efficient” and simply put all people “watch lists” directly in prison?

DRIVERS’ RIGHTS ABUSED IN A FLASH

There is nothing wrong with city or state government taking measures to keep our roadways safe. But the measures they take should be effective. If they are punitive, the measures should give motorists due process, and there should be minimal potential for abuse. Traffic cameras fail on all three counts.

Clearly, speed cameras err. But motorists issued tickets might be surprised to learn that they are generally considered guilty until proved innocent. It is up to a car’s owner to prove he was not driving when the ticket was issued, that the camera misread his plates, or that the camera itself is faulty. In many cases, the private companies who run the cameras get a cut of each ticket issued, and appeals of tickets are settled by the company itself, not a judge or traffic court. Camera manufacturers have also been known to train cops on how to testify against appeals, and in some cases have paid officials to advocate the cameras to other cities. That is an unsettling kind of justice.

REVISING THE PATRIOT ACT WOULD MAKE IT STRONGER

There is nothing unpatriotic about improving the Patriot Act. Insisting on preserving the rights of law-abiding citizens is not a retreat from the war on terror. Groups that have banded together to address lingering concerns about the anti-terror law are making valid points about the need to revise the statute. The changes proposed will not make the nation less safe but will underscore the principles of a free society.

In the wake of the attacks on Sept. 11, 2001, Congress acted swiftly to address concerns about terrorism. In the sense of urgency at the time, there was an overwhelming desire to impose new safeguards wherever potential vulnerability to terrorism could be found. The law served its purpose, and most of its provisions are necessary. But the sweeping law also included some provisions that went too far. The current Congress should address those flaws – not to kill the law, but to make it stronger. Many aspects of the Patriot Act will sunset at the end of this year if not renewed. The Bush administration has expressed support for the law as it now stands, rejecting suggestions that it should be amended. But the unusual alliance that now fights for changes, which includes the American Conservative Union and the American Civil Liberties Union, is a good indication of the breadth of concern over the law.

The administration’s response to the calls for changes is that no abuses have occurred. First, that is impossible to know because much of the government’s activity is classified. Second, even if the current administration had a clean record, a future government could easily take those guidelines and abuse the spirit of the law. Calling something the Patriot Act does not inherently make the law and all its provisions worthy and workable. The concerns that have existed almost since the day the measure was passed have not gone away. Congress should revisit and revise the law.

U.S. CONFIRMS THAT MONEY LAUNDERING IS PRIMARILY A PROBLEM IN THE “ONSHORE” WORLD

The U.S. State Department has issued its annual International Narcotics Control Strategy Report, and it lists 55 nations/jurisdictions of “primary concern”. Interestingly, only 10 of those jurisdictions are so-called tax havens, fewer than one-fourth of the nations and/or territories that were on the OECD’s original blacklist. Speaking of the OECD, 17 of its 30 members are listed as nations of “primary concern”. Yet how many of these nations have ever been placed on any FATF blacklist? Not surprisingly, the answer is zero. It also is not surprising that politicians from the “onshore” world of glass houses continue to throw stones.

U.K. TAGGED TERROR SUSPECT SPEAKS OF SYSTEM’S STUPIDITIES

One of the UK’s most dangerous terror suspects (allegedly...) was free to walk into the offices of a major newspaper, despite being subject to a control order, and despite intense (or not...) surveillance by the security services. Mahmoud Abu Rideh, one of the terror suspects recently released from custody into a regime of restrictions, tagging and surveillance was we stress able to do this entirely in accordance with the terms of his control order – he was merely dropping in to the Guardian in order to explain the confusion and sheer, barking madness of Britain’s new “prison without bars” system of terror controls.

Rideh is one of those detained without trial by David Blunkett over three years ago. These detentions were ruled to be in breach of human rights legislation late last year, and the control order system was brought in under the Prevention of Terrorism Act this month in order to provide an equivalent form of restriction of men the Government still insists are dangerous. So they were in prison or in Broadmoor secure mental facility, and now they are at home (or in some cases Home Office accommodation), but subject to curfews, restrictions on what they can do, who they can meet and the communications devices they can use. Depending on how you imagine this, it could sound rather like being in prison, but according to Rideh it is a lot weirder and more random than that.

Under the circumstances it would probably be unwise for Rideh to speculate loudly about how the subject of one of the Home Office’s new hi tech prisons without bars might go about meeting dangerous wanted terrorists, making bombs or even planting them – but frankly, it does not look hard to us, if that was what any of them actually wanted to do.

OPINION & ANALYSIS

GINGRICH WARNS G.O.P. ABOUT LONG-TERM RISKS OF PLAYING LOOSE AND FAST WITH RULES

Ten years after their historic capture of the House of Representatives, Republican congressional leaders increasingly maintain control with the same hardball tactics they once denounced when Democrats ruled the chamber. In their 1994 “Contract With America”, Republicans promised to “transform the way Congress works”, to “end its cycle of scandal and disgrace”, and to shrink a federal government “that is too big, too intrusive and too easy with the public’s money.” But when it comes to manipulating the rules on ethics, pork-barrel spending, redistricting and the rights of the minority to debate and amend legislation, House Majority Leader Tom DeLay, Speaker Dennis Hastert and other GOP leaders have rivaled and sometimes trumped the Democrats they replaced.

The short-term benefits of “machine” politics have helped the GOP majority advance President Bush’s agenda in Congress, but the long-term effects could prove damaging to the party and the nation, warns former House Speaker Newt Gingrich, architect of the 1994 Republican takeover of Congress. “Everywhere I go, people complain about the deficit. Everywhere I go, people complain about the pork-barrel spending,” Gingrich says.

The GOP picked up 52 seats in the House in 1994, ending 40 years of Democratic control, in part because Gingrich and his allies convinced the country that Democratic Speakers Thomas P. “Tip” O’Neill, Jim Wright and Tom Foley ran “corrupt” political machines. In 1987, after Wright held a roll-call vote open for 15 minutes as his aides worked to persuade a reluctant Democrat to change his vote, then-Rep. Dick Cheney, a Wyoming Republican, called it “the most arrogant, heavy-handed abuse of power I’ve ever seen here.” Then the Republicans took power. ...

ARE CONSERVATIVES NAÏVE OR JUST PLAIN STUPID?

Is President Bush a fiscal conservative? Can he be trusted to rein in Congressional spending? Bill Whalen of the Hoover Institution thinks so. In a Hoover Institution weekly essay, “A Bow to Fiscal Conservatism”, which was also published in the New Republic and the Weekly Standard, and recently appeared on the inside back cover of Reason magazine, Whalen notes that “Congress this past year approved more than 10,600 ‘pork’ items totaling nearly $23 billion – a 13 percent increase over the previous year – at a time when the federal deficit surpassed $422 billion and the national debt topped $7.5 trillion.” His solution: restoring the presidential line item veto. Although Whalen admits that it probably will not reverse “the rising deficit tide”, he claims that “it would send a positive message to a cynical public: if Washington can’t halt runaway spending, at least it is willing to hand over the reins to the president and let him try to slow down the horses.”

Are conservatives naïve or just plain stupid? Conservatives need to wake up and look in the mirror. The problem is not the Democrats or the liberal news media. The sad fact is that conservatives have no problem with trillion-dollar budgets as long as they are in charge of the government just like they have no problem with war as long it is their war. The fact that conservatives would have crucified Clinton if it was his trillion-dollar budget and his war shows that they are hypocrites without a shred of integrity.

IMPORTANT CHANGES TO YOUR CITIZENSHIP AGREEMENT

IMPORTANT NOTICE FOR U.S. CITIZENS ABOUT CHANGES TO YOUR CITIZENSHIP AGREEMENT. PLEASE READ AND RETAIN FOR YOUR RECORDS.

We would like to explain certain changes in the terms of the Citizenship Agreement for your U.S. citizenship (“Agreement”). Some of the terms in this notice may already be in effect on your account and will not change. Any terms on your account not changed here remain in effect until such time as we (“We”) decide they do not. To help you understand the changes in the terms of your Agreement, We explain the most important changes in the Summary of New Terms below. The changes described will take effect for citizenship cycles beginning Jan. 20, 2005, and will apply to all existing and future balances on your account.

SECTION 5
The Freedom of Speech section of the Agreement is amended to distinguish between Regular Preferred Speech and Non-Preferred Speech. The Non-Preferred Speech rate applies to all speech which is not in good standing as defined under the “Preferred Citizen Rate Eligibility” section of your Agreement. Both the rate and your freedom of speech may vary based on changes in the National Terror Alert Level.

SECTION 9
The Rates and Fees Table, including rates for personal and corporate income tax, estate tax, Social Security tax, and all other Federal taxes, levies, duties, and surcharges, remains unchanged, except that it is to be read while being held up to a mirror.

...

YOUR RIGHTS REGARDING THE CHANGES YOU CAN CHOOSE NOT TO ACCEPT:
The changes described above in this Notice that you can choose not to accept will not become effective if you send Us a written letter stating that you choose not to accept them, in which case your Citizenship Agreement will be terminated and your Account will be closed (if it is not already closed). Your letter must be received by June 1, 2005, at the following address: Customer Service Center, J. Edgar Hoover Building, 935 Pennsylvania Ave., NW, Washington DC 25035-0001. You will be required to pay your debt to society under the previous terms of your Agreement.

PLEASE RETAIN THIS NOTICE FOR YOUR RECORDS.

THREE STRIKES FOR EMPIRE

Three seemingly unrelated recent events highlight the imperial nature of the Bush administration’s foreign policy: U.S. F-16 sales to Pakistan, the creation of an office in the State Department to plan for future U.S military interventions in developing nations and the indefinite detention in Guantanamo prison of a German man held on the basis of secret evidence that even U.S. intelligence disputes.

Ever since his second inaugural address, President Bush and his surrogates have launched a grandiose campaign that claims to “democratize” the world. Of course, one of the glaring exceptions to the administration’s rhetoric, demonstrating the cynical opportunism of the whole policy, is the U.S. coddling of the Pakistani dictator General Pervez Musharraf. Musharraf has tightened his grip on power in Pakistan, winked at and protected the world’s worst nuclear smuggling ring emanating from his country, and conducted a half-hearted effort to round up Osama bin Laden and other top al Qaeda suspects, who are likely on Pakistani soil. The U.S. has decided to reward such unacceptable behavior with the sale of F-16 fighter jets. Unfortunately, the end result in Pakistan could resemble that of the Shah’s Iran in the late 1970’s.

To facilitate imperial intrigue and smooth the rough edges of the U.S. imperial sword – discovered during the “recent unpleasantness” in Iraq – the Bush administration is setting up a new office in the State Department to manage future occupations of sovereign nations in the wake of U.S. military interventions. The creation of the office assumes the U.S. should invade and remake foreign societies in the U.S. image. How far we have come from the nation’s founders’ policy of staying out of other countries’ business! Also taken for granted is that the debacle in Iraq was merely caused by poor planning, which can be corrected by adding a new bureaucracy. Although planning was poor, the main reason for the mess in Iraq is imperial hubris.

Finally, a seemingly unrelated development to the Bush administration’s brand of modern day imperialism may have the most consequence: the indefinite detention of a German man, Murat Kurnaz, by a kangaroo U.S. military tribunal on the basis of flimsy secret evidence that he is a member of al Qaeda. Detaining people indefinitely without a jury trial, and instead using a military tribunal that allows secret evidence and no legal representation for the defendant, may be normal practice in authoritarian regimes (such as Pakistan) but should not be used in the “home of the free and the brave”. Worse than using arms sales to play off opposing sides against one another in volatile conflicts and institutionalizing empire by creating large imperial bureaucracies is the slow erosion of the Founders’ notion of republican government. Republic and empire do not mix.

WARREN HARDING: BY DOING NOTHING IN OFFICE HE DID NO HARM

Occasionally, subjects of a kingdom get a rotten monarch who cannot leave well enough alone ... and occasionally they get a bonnie prince and good king, who spends his time dallying with courtesans and leaves his countrymen in peace. Even a bad king like Charles I was better than a self-righteous hustler like Cromwell, who cut his head off. As long as Cromwell lived, England knew no peace; after he was gone, the whole country gratefully and eagerly brought back another Charles, dusted him off, and put him back on the throne. Oliver Cromwell was more like a modern president – a leader by intention and design, rather than by dumb luck. This made him immeasurably less suited to lead, in our opinion, because he was full of foolish ideas and ruinous plans – like Woodrow Wilson or FDR. But having no royalty, Americans have only their elected presidents to bow before. Too bad, they always seem to choose the wrong ones.

An honest and upright man has no place in national politics. A man with his wits about him is too modest for the role. He suffers greatness as a sort of hypocrisy. He has no better idea of how the nation should be led than anyone else – and he knows it. Many of the best American presidents – such as Garfield, Harding, and Arthur – are rarely even mentioned. Lincoln, Wilson, Roosevelt, on the other hand, are routinely described as national heroes. Nobody really knows which president was good for the nation and which was bad. We would have to know what would have happened if the man in the Oval Office had done something different. Would the nation be better off if Lincoln had not slaughtered so many southerners? Would world history have been worse if Wilson had not meddled in WWI? We cannot know the answers. We can only guess. But the historians who guess about such matters have a disturbing tilt – not towards mediocrity, but towards imbecility.

Most historians rate Lincoln, Wilson and Roosevelt as our greatest presidents. But every one of them might just as well be charged with dereliction, gross incompetence and treason. For every one of them at one time or another betrayed the constitution, got the country into a war that probably could have been avoided, and practically bankrupted the nation. A president who does nothing is a treasure. James A. Garfield took office in March of 1881. The man was a marvel who could write Latin with one hand and Greek with the other – at the same time. He was shot in July and died three months later. “He didn’t have time to accomplish his plans,” say the standard histories. Thank God.

Millard Fillmore was one of America’s greatest presidents. He did little – other than trying to preserve peace in the period leading up to the War Between the States. Preserving peace was an achievement, but instead of giving the man credit, historians hold up the humbug, Abraham Lincoln, for praise. America has never suffered more harm than on Lincoln’s watch. Still, it is the Lincoln Memorial to which crowds of agitators and malcontents repair, not the Fillmore Memorial. Andrew Johnson is often held up as an example of a failed presidency. Instead, he seems to have made one of the best deals for the American people ever – buying Alaska from Russia for $7.2 million. Who has added so much since? Who has actually made the nation richer, rather than poorer?

But our favorite president is Warren Gamaliel Harding. As he rose from one office to the next he “never distinguished himself”. His speeches were vacuous. He had few ideas ... and those that he had were probably bad ones. As far as we know, the nation and everyone in it was no better off the day Warren Harding stepped into office than they were they day he was carried out of it. Harding was so full of such thunderous twaddle that he stormed into office ... and then drizzled away until he died. Bravo! Well done.

LETHAL BUMBLERS

The World Bank must be some kind of elephant burial ground for most ambitious of the world improvers. After a career of ruinous destruction, they lumber over to the plush offices of the World Bank, lie down, and die. We have been studying the life and times of Robert McNamara. What distinguished Mr. McNamara and his time in office was his insistence that the world would be a better place if people in Vietnam lived with the sort of government he approved of … rather than the sort of government they might end up with if left to their own devices.

As we now know, McNamara’s war in Vietnam turned into a sordid debacle, just as Charles de Gaulle had said it would be. But as late as March of 1965 – exactly 40 years ago – it still looked as though the U.S. might meddle in Southeast Asia successfully. Later, after 58,000 Americans – and 3 million Vietnamese – were dead, Mr. McNamara left the defense department for the World Bank. The world improver turned from meddling in military affairs to meddling in financial ones, with similarly disastrous, but much less deadly, results.

Now, our meddler du jour, Paul Wolfowitz, is following in McNamara’s well-trod tracks. He seems to never have met an intervention he didn’t like. In Iraq, he expected the locals to throw flowers on the ground in front of U.S. invaders. Oil revenues would finance the whole thing, he told us. Naturally, and in keeping with the tradition of Robert McNamara, he was wrong. But wisely, he is getting out of Iraq while the getting is good … and moving on to the World Bank. We hope we have seen the last of him.

ISABEL PATERSON AND THE IDEA OF AMERICA

Some readers of Stephen Cox’s recently published biography, Isabel Paterson and the Idea of America: The Woman and the Dynamo, may succumb to the same temptation I did. I immediately scanned the index for references to Ayn Rand and then I turned directly to those pages. This reflected my main purpose in reading Paterson’s biography: to see what light it shed on that other and (to me) more important figure with whom Paterson had associated. After a few minutes, I shut the book and began reading from the acknowledgements page onward.

The reason: if the entire book was as well written as the pages I had just read and Paterson as consistently captivating, then both the book and the woman deserved undivided attention. And I deserved the pleasure of meeting the amazing person of whom Cox states, “No one in the 1930s defended individualism more vigorously and consistently than Paterson.” What a woman! Cox’s masterful portrayal of Paterson builds from the statement with which he concludes the introductory chapter 1, “Who she was and what she did has something important to say about the risks and possibilities of life in America.” This understatement is corrected by the book’s subtitle (and subsequent text), which accurately identifies Paterson as an embodiment of the very idea, the very spirit of America, the ideal America of freedom, individualism, and realized human potential.

For me, this was a discovery. Like most libertarians, I knew of Paterson primarily through her classic book, The God of the Machine (1943), in which she explores the societal principles that make productivity possible. Paterson eloquently argues that productivity, as well as freedom, sprang from the Western world’s embrace of a “society of contract” as opposed to the “society of status” which had defined feudalism.

The visceral power of Paterson’s presentation in The God of the Machine – and elsewhere – resides largely in her vivid imagery and exquisite turn of phrase. For example, the book’s most frequently quoted chapter is entitled “The Humanitarian with the Guillotine”. Paterson unpacks the logic leading to this remarkable image: “Most of the harm in the world is done by good people. ... It is the result of their deliberate actions, long persevered in, which they hold to be motivated by high ideals toward virtuous ends. ... Something is terribly wrong in the procedure, somewhere. What is it?” She answers: “The means is the power of the collective; and the premise is that ‘good’ is collective.” Thus, “The humanitarian in theory is the terrorist in action.”

The God of the Machine assures Paterson a slot in libertarian anthologies and history. But those who settle for that one book instead of the incredible Paterson package are cheating themselves. The Woman and the Dynamo presents that package by developing both Paterson and the progress of the American ideal in tandem, so that America’s intellectual history becomes an integral part of understanding the woman herself. Buy this book. Not just because Paterson has waited decades for her place in history but because you deserve the pleasure of meeting her.

TOCQUEVILLE ON LIBERTY IN AMERICA

This year is the bicentennial of the birth of Alexis de Tocqueville, one of the most famous political commentators about America. Although not always a consistent thinker, he stands squarely in the classical liberal tradition of understanding the capacity of society to self organize in the absence of a controlling central state. Charles Eliot Norton described his two- volume Democracy in America (1835 and 1840) as “constructive and non-partisan”, whose focus on principles made him “objectively pro-American”. The Edinburgh Review in 1865 called it “one of the wisest works of modern thought.” It has been said that more people have interpreted America through the lens of Democracy in America than through the work of any other writer.

In part because of its title, most readers have focused on its analysis of democracy. However, in many ways, its central focus was liberty. One early American reviewer stated that “the intelligent American reader can find no better guide” for understanding and preserving liberty. As de Tocqueville wrote to Henry Reeve, his English translator, his reviewers “insist on making me a party man, and I am not ... the only passions I have are love of liberty and human dignity.” That passion shaped his analysis. As Henry Steele Commager said, “Liberty must be worked at, must be achieved, and it has rarely been achieved anywhere in the whole of history. It requires a most extraordinary self-control, self-denial, wisdom, sagacity, vision to protect liberty in the face of all the forces that mitigate and militate against it. And Tocqueville regarded centralization as the most dangerous of all the threats to liberty.”

The bicentennial of Alexis Charles Henri Maurice Clerel, the Comte de Tocqueville, is an apt time to revisit the insights on liberty in Democracy in America. That is especially true today, since he recognized that liberty and democracy are not the same thing, despite the common modern confusion between them. Even more crucial, he recognized that democracy can be the enemy of liberty, and that of the two, liberty is far more important. Some quotes:

“... the species of oppression by which democratic nations are menaced is unlike anything that ever before existed in the world. ... Above this race of men stands an immense and tutelary power, which takes upon itself alone to secure their gratifications and to watch over their fate. That power is absolute, minute, regular, provident, and mild. It would be like the authority of a parent if, like that authority, its object was to prepare men for manhood; but it seeks, on the contrary, to keep them in perpetual childhood. ... For their happiness such a government willingly labors, but it chooses to be the sole agent and the only arbiter of that happiness; it provides for their security, foresees and supplies their necessities, facilitates their pleasures, manages their principal concerns, directs their industry, regulates the descent of poverty and subdivides their inheritances: what remains, but to spare them all the care of thinking and all the trouble of living?”

“After having thus successively taken each member of the community in its powerful grasp and fashioned him at will, the supreme power then extends its arm over the whole community. It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energic characters cannot penetrate, to rise above the crowd. The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd.”

“... the people shake off their state of dependence just long enough to select their master and then relapse into it again ... they think they have done enough for the protection of individual freedom when they have surrendered it to the power of the nation at large. This does not satisfy me: the nature of him I am to obey signifies less to me than the fact of extorted obedience.”

“Despotism, therefore, appears to me peculiarly to be dreaded in democratic times. I should have loved freedom, I believe, at all times, but in the time in which we live I am ready to worship it ... the question is ... how to make liberty proceed out of that democratic state of society in which God has placed us.”

WHISTLEBLOWER DANIEL ELLSBERG ON THE BUSH ADMINISTRATION, CIVIL DISOBEDIENCE AND HELL

Pentagon insider-turned-peace activist Daniel Ellsberg has wit cut sharp as a razor and insight that has not faded with age. At 73 he is out of the limelight but still trying to shake up our nation. Ellsberg recently finished a U.S. “Truth-Telling” tour, spoke in Israel and will soon be traveling to Hiroshima. And after publishing his first memoir Secrets: A Memoir of Vietnam and the Pentagon Papers, he is polishing off his second book about America’s fatal attraction to nuclear threats.

Ellsberg publicized the Pentagon Papers 30 years ago, helping tip public opinion against our last major attempt at imperial democracy. And on this day in 1973, the last American combat troops left Vietnam, ending the direct involvement of the U.S. in the Vietnam War. Now Ellsberg is talking again. Shouldn’t we be listening?