Offshore News Digest for Week of February 13, 2006

GLOBAL LIVING & BUSINESS

ABANDON THE RAT RACE, BECOME A CARETAKER OVERSEAS

Bob and Camille Armantrout could hardly contain their excitement as they packed for their next adventure. They had recently responded to an ad in The Caretaker Gazette and received an offer. In a couple of weeks they were leaving Maui, Hawaii to assume management responsibilities at Casa Iguana on Little Corn Island off the coast of Nicaragua. As Bob put it, “We’ve decided to abandon the car culture.” The traffic on Maui had become increasingly fevered. Jammed parking lots and gridlock were commonplace. On Little Corn Island, there are no cars – only beaches and footpaths through lush forest. It seemed like a perfectly rational decision to move from one island to the other. Yet, many expressed concern for their safety upon hearing they were moving to Nicaragua. Camille soon learned to say, “We are going back to the Caribbean because it has always felt like home to us.”

Six years ago, the Armantrouts took a similar leap of faith. It all began in 1996, when they bought “the property of their dreams”, a 7-acre horse property in Virginia. Bob commuted to his corporate job every day while Camille tended their little horse boarding business. On the weekends, when they were not fulfilling social obligations, they worked together on the property. Gradually, they realized that the property owned them and not the other way around. Bob felt as if he were holding onto a live electrical wire and was unable to let go. To address the situation, the Trouts scheduled semi-weekly planning meetings in their hot tub. They wrote a mission statement, which included something about following their hearts. They made lists of the things they wanted in their lives and those things they wished to avoid. Memories of an idyllic stay at a Belizean jungle lodge kept surfacing. They wrote a letter to the owners of the lodge and offered them a year’s worth of work in exchange for room and board. Within weeks, Bob and Camille were making arrangements for the move.

That year in Belize was exactly what they needed to refresh their perspective on life. Most of the staff lived on the property and they all worked as a team. Although there was a lot of hard work involved, there was always time for sharing stories and watching the spectacular life in a broad-leafed rainforest. The Trouts began to get a sense of the security enjoyed by individuals in tribal communities. Life at the lodge was unencumbered by power lines, asphalt, or the media. Most of the food was grown locally and purchased at the market. Avocado, custard apple, bananas, breadfruit, coconut, mangos, guava, pineapple, oranges, grapefruit, lemons and limes all grew on the property. There were weeks when Camille traveled solely on horseback and by foot. Over the course of that year, the Trouts learned that the really important things in life are fresh air, clean water, companions, food, honest work and time to relax, and a dry place to sleep. As an unexpected bonus, they found out how nicely their skills worked together.

Surprisingly, Bob and Camille have never been to Nicaragua. How did Grant and Cathy at Casa Iguana decide that the Trouts were a good fit for their business? For six years, Bob and Camille have been updating their Website with photo essays about their life on Maui and adventures in other parts of the world, including Belize. After reading through a few years of postings, Grant decided they were the ones for the job.

MOVING TO FIJI

We had this crazy dream. It is a common one … a captivating one even. But one that was, for most people, but a dream. The dream was to pack up and take off and live on a beautiful South Pacific island. Islands that seem to float, adrift, on impossibly blue seas. Places of paradise untouched by the ravages of industrial man. For us, this is a dream we dream while we are awake. We bought property in Fiji years ago as an investment. Only 8% of the entire South Pacific is available for purchase to non-indigenous people. It took a total of five years, and all of a sudden we had chartered a new course – uprooted from what was familiar and comfortable, to brave a whole new world. I was a journalist/columnist, Brad a busy chiropractor. Life in California was spinning out of control – poor air quality, high taxes, water that was just too scary to swim in, let alone consume, and influences that were definitely unacceptable for our teenage daughter and young son.

We landed in Nadi International Airport, Fiji. One husband, one wife, 13-year-old daughter, 7-year-old son. It was January 1, it was humid, we were dressed for California winters, and we were wilting. My daughter just realized there was no MTV, no shopping malls, no Starbucks. My son noticed all the men were wearing sulus – the male version of a sarong – translated, skirt. The two of them threw themselves on the baggage carousel hoping to get back to California … back to civilization where men are men and women wear makeup. We had exactly 10 days from touchdown to accomplish the following: find a place to rent, find a crew to help build our home, register the kids in school, and buy a car. We were on a package “deal” that included 9 nights accommodation at a budget resort, and two meals per day. After that, we were on our own. Literally. In all these 330 islands we knew exactly three people – the Australian man who sold us our property, and an American couple who ran a resort within walking distance of our home site. We were refugees. Expats. Renegades. Nomads.

We survived. I would like to say that we thrived, but for the sake of responsible journalism, I would say we muddled through. Perhaps it was because we were brave. I think it was more that we were just too stupid to know any different. Our first week found us a bit overwhelmed by our alien environment, as we sought to explore the nooks and crannies of Fiji. Our home was being built on a hill overlooking the ocean, backed onto a virgin rainforest. In week two we got into the swing of what would be our routine. The first day I kissed the kids goodbye, saw my husband off to the worksite, and shut the door to the harmony of quiet – my first day alone in paradise. Blissfully, blessedly alone. The shackles of civilization were broken, I was free – a butterfly testing its newfound wings.

In the almost 10 years we now have lived in these isles of Fiji, many things have changed. You cannot get that 4-bedroom house with caretaker for $300 any more. Real estate prices are starting to climb as more and more people “want out” of the industrial world. Yet, amazingly, these wonderful, warm and welcoming people who call Fiji their ancestral home remain charmingly the same. Since they retain most of the land, it will never be turned over to commercial developers to become another Hawaii … with miles of sky rises rimming the beaches. It has developed, and tourism is booming, but on a small and intimate scale, and all the while retaining a unique cultural heritage.

My two children were raised on Fijian soil. One has bloomed into adulthood, and the other is nearing completion. The end product of these two fine citizens of the world is a pleasure to behold. They have a global attitude, and a presence we would have never dreamed could be attained. They have learned to embrace cultural diversity, to respect the earth, to tread lightly, yet true. They are becoming what I want to be when I grow up. We have moved again – to a smaller outer island in the Fijian archipelago. The home we lovingly built is for sale, as we make a new place for ourselves. Here, life is simpler still. Away from the “main island” colors seem a bit brighter, palms taller, skies bluer. We have become Kai Viti – residents of Fiji. So that when relatives in the States ask us “when are you ever coming home?” we know the answer. We are home. How much better can one life get?

NEW RESORTS IN MEXICAN BEACH COMMUNITIES ARE ATTRACTING MANY AMERICAN EXPATRIATES

In the past 10 years, new Mexican beach resorts have attracted a flood of American expatriates to retirement and second home communities. Last year, the Dallas Morning News reported that more than 1 million Americans now live in Mexico, at least part time, five times the number of 10 years ago. The U.S. State Department reported in October 2004 that 385,000 live there year round. That number is almost certainly higher today. “Mexico is a foreign setting with a familiar accent,” Bruce Greenberg, an appraiser and market consultant for Mexican real estate, who cites Mexico’s proximity and hospitality as two big draws for Americans.

Mexican beach resorts have another big factor going for them – weather. Winters are warm and summer heat is tempered by the waters of the Pacific, the Sea of Cortez, or the Caribbean. And, even though property prices in Mexico have increased, the costs of homes are still low. In addition, according to Greenberg, there are low property taxes averaging about $300 a year on property of $300,000 and low monthly costs. What is more, creature comforts of American life are increasingly becoming available south of the border. Satellite and cable television bring news and entertainment right into ex-pat’s living rooms, the Internet keeps them in touch with hometown newspapers, and American food brands are available at the supermarket. There may even be a Wal-Mart not far away.

With so many migrants, however, resorts of choice are getting crowded, and other, even newer developments, are springing forth to take up the overflow. There are four major waterfront corridors where Americans live in Mexico, according to Greenberg: southern Baja, from Cabo San Lucas to La Paz; Puerto Vallarta, from San Blas to Manzanillo; Sonora, on the northern arm of the Sea of Cortez, from San Felipe to Puerto Penasco; and the Cancun to Tulum area. He says as they get crowded, newer development go up on their outer edges. Several communities are poised to become the new Cabos and Cancuns.

WHAT IT COSTS TO BE WELL IN SIX OF LATIN AMERICA’S TOP HAVENS

Costs of a GP checkup, physical therapy, a chiropractor visit, an X-ray, emergency room treatment, a hospital bed for one night, a mammogram, cardiac bypass surgery, an ambulance, an eye examination, a dental checkup, and a root canal job compared for Argentina. Ecuador, Honduras, Mexico, Nicaragua, and Panama. A sampling of the survey:

Link here.

A FEW AMERICANS ARE DOING BUSINESS WITH NORTH KOREA. WHAT ARE THEY THINKING?

As a negotiator for the U.S. State Department a dozen years ago, Lynn Turk sat across the table in Pyongyang from his North Korean counterparts, trying to negotiate a perennial pipe dream: a nuclear-free Korean Peninsula. Today he is dealing with the enemy again – but this time it is about the money. As adviser to the Chosun Development & Investment Fund, Turk is convinced there is more treasure than trouble in providing capital for new machinery and technology to revive the Stalinist nation’s all-but-dead mining industries. “We are expecting sizable returns,” says Turk, 58, once a captain in the U.S. Air Force stationed near Seoul.

Dealing with the most backward, isolated and dangerous nation on the planet is a challenge. Kim Jong-il, North Korea’s dictator-for-life, continues to play nuclear blackmail with the West, tolerates no dissent among his desperately poor 23 million countrymen and has starved to death perhaps 2 million of them over the last decade. North Korea’s economy is a shambles. At an estimated $18 billion, its GNP has dropped 36% since 1989. And while foreign investment is permitted under some circumstances, investors must navigate a perilous course among corrupt officials, cumbersome foreign-exchange controls and a legal vacuum. Hurdles, but not impossible jumps, to Turk, a native of Wisconsin. He is trying to raise money from institutional and wealthy investors. North Korea, they insist, is rich in mineral resources and cheap skilled labor. So why not invest in capital equipment and technology, sell gold, magnesite, molybdenum and the like overseas and offer a cut to shareholders? That is the plan. Press Turk on how much he has raised and he gets fuzzy. “We have expressions of interest,” is all he will say.

Few Americans know that it is legal to do business with North Korea, with which the U.S. is technically still at war. In 2000, to take the chill off relations, the Clinton Administration lifted most trading sanctions north of the 38th parallel imposed in 1950 under the 1917 Trading With the Enemy Act, retaining restrictions on technologies and products that could be used in weapons production, space systems and military aircraft. Even fewer Americans know that a handful of U.S. corporations have been trying to get a toehold in the Hermit Kingdom. Do not count on a big deal anytime soon by ExxonMobil or Procter & Gamble. Yet it is worth remembering that only a couple of decades ago the Soviet Union and China looked like hopeless places to set up shop. Someday North Korea might be a vibrant place to do business.

ARISTIDE’S REVENGE

This week’s elections in Haiti confirmed what everyone already knew, that a majority of Haitians support Jean-Bertrand Aristide, the authoritarian populist accused of grave human rights abuses who had to go into exile in South Africa after a bloody uprising two years ago. Whether René Préval, who appears to have won the first round with a very big margin, behaves like a protégé of Aristide or not once he is in power is an open question. But the perception of most of those who voted for him or against him (in the latter case by supporting Leslie Manigat or Charles Henri Baker, the white hero of the business elites, out of a pool of more than 30 candidates) is that he is Aristide’s man.

The context in which this has taken place – the U.N. mission known as MINUSTAH based on a multinational, 9,000-strong stabilization force – has something to do with what has happened. That mission has failed to accomplish its purpose and has become a lightning rod for a grassroots revival of Aristide’s followers and for the horrific violence of many of his followers, including the notorious “chimères”. The fact that Aristide’s opponents, known as the bourgeois entrepreneurs, are anything but bourgeois and entrepreneurial – and certainly not democratic or peaceful – has also given Aristide a major boost in the lawless slums of Cité Soleil and Bel-Air. The U.N. soldiers and the interim government of President Boniface Alexandre and Primer Minister Gerard Latortue have been unable to disarm Haitians. General Urano Bacellar, the former military chief of the U.N. forces, committed suicide a few weeks ago. It is surprising is that he did not lose hope a lot earlier.

If Aristide – the former President who left the country in 2004 just as his palace was about to be assaulted by opposing thugs – had planned it all, he could not have done better. The international mission has failed and his own man, René Préval, who governed the country in between two Aristide administrations, is now the legitimate winner (even if he has to fight a runoff election that will be a mere formality.)

The backdrop to this political nightmare is dirt-poor misery and the absence of any law. Haiti was once the wealthiest colony of the New World. So much so that Napoleon entertained wild dreams of using it as the bedrock of a worldwide empire (the black rebel Toussaint Louverture managed to inflict a military defeat on Napoleon a good while before Wellington did him in at Waterloo). Today it is a country with a per capita income of $390 and a population that is 50% illiterate. Any attempt at resolving these social tragedies needs to start with the establishment of some very basic institutions in a climate of reasonably peaceful coexistence. And that, precisely, is what the eleven governments that Haiti has had in the last 20 years – that is, since the collapse of Baby Doc’s tyranny – failed to do.

Is there a solution? The most important objective – replacing the republic of guns with a republic of laws – is simply not realistic in the near future. The best hope – still a long shot – lies in René Préval obtaining enough personal legitimacy that he may abandon Aristide’s shadow without succumbing to Aristide’s thugs while at the same time keeping the heirs of the Duvalier era at bay. That would allow him to start disarming the various militias and provoke an erosion of their social base. Is all of this, which ultimately depends on Préval becoming his own man both vis-à-vis Aristide, the elites and the U.N. mission itself, remotely possible? Yes, remotely.

U.S. JOBS NEWS EVEN WORSE THAN WE THOUGHT

Last week the Bureau of Labor Statistics re-benchmarked the payroll jobs data back to 2000. I have the adjusted data from January 2001 through January 2006. If you are worried about terrorists, you do not know what worry is. Job growth over the last five years is the weakest on record. The U.S. economy came up more than 7 million jobs short of keeping up with population growth. That is one good reason for controlling immigration. An economy that cannot keep up with population growth should not be boosting population with heavy rates of legal and illegal immigration.

Over the past five years the U.S. economy experienced a net job loss in goods producing activities. The entire job growth was in service-providing activities – primarily credit intermediation, health care and social assistance, waiters, waitresses and bartenders, and state and local government. U.S. manufacturing lost 2.9 million jobs, almost 17% of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job. The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a super-economy that is “the envy of the world”.

The knowledge jobs that were supposed to take the place of lost manufacturing jobs in the globalized “new economy” never appeared. The information sector lost 17% of its jobs, with the telecommunications work force declining by 25%. Even wholesale and retail trade lost jobs. Despite massive new accounting burdens imposed by Sarbanes-Oxley, accounting and bookkeeping employment shrank by 4%. Computer systems design and related lost 9% of its jobs. Today there are 209,000 fewer managerial and supervisory jobs than 5 years ago. In five years the U.S. economy only created 70,000 jobs in architecture and engineering, many of which are clerical. Little wonder engineering enrollments are shrinking. There are no jobs for graduates. The talk about engineering shortages is absolute ignorance. Many engineers have written to me that they cannot even get Wal-Mart jobs because their education makes them over-qualified.

Offshore outsourcing and offshore production have left the U.S. awash with unemployment among the highly educated. There are now hundreds of thousands of Americans who will never recover their investment in their university education. Unless the BLS is falsifying the data or businesses are reporting the opposite of the facts, the U.S. is experiencing a job depression. Most economists refuse to acknowledge the facts, because they endorsed globalization. It was a win-win situation, they said. They were wrong.

At a time when America desperately needs the voices of educated people as a counterweight to the disinformation that emanates from the Bush administration and its supporters, economists have discredited themselves. This is especially true for “free market economists” who foolishly assumed that international labor arbitrage was an example of free trade that was benefiting Americans. Where is the benefit when employment in U.S. export industries and import-competitive industries is shrinking? After decades of struggle to regain credibility, free market economics is on the verge of another wipeout. No sane economist can possibly maintain that a deplorable record of merely 1,054,000 net new private sector jobs over five years is an indication of a healthy economy. The economics profession has failed America. It touts a meaningless number while joblessness soars.

Offshore production for home markets and jobs outsourcing has made the US highly dependent on foreign provided goods and services, while simultaneously reducing the export capability of the U.S. economy. It is possible that there might be no exchange rate at which the U.S. can balance its trade. Polls indicate that the Bush administration is succeeding in whipping up fear and hysteria about Iran. The secretary of defense is promising Americans decades-long war. Is death in battle Bush’s solution to the job depression? Will Asians finance a decades-long war for a bankrupt country?

OUTSOURCING IS CLIMBING SKILLS LADDER

The globalization of work tends to start from the bottom up. The first jobs to be moved abroad are typically simple assembly tasks, followed by manufacturing, and later, skilled work like computer programming. At the end of this progression is the work done by scientists and engineers in research and development laboratories. A new study by the National Academies, the nation’s leading advisory groups on science and technology, suggests that more and more research work at corporations will be sent to fast-growing economies with strong education systems, like China and India. In a survey of more than 200 multinational corporations on their research center decisions, 38% said they planned to “change substantially” the worldwide distribution of their research and development work over the next three years – with the booming markets of China and India, and their world-class scientists, attracting the greatest increase in projects.

Whether placing research centers in their home countries or overseas, the study said, companies often use similar criteria. The quality of scientists and engineers and their proximity to research centers are crucial. The study contended that lower labor costs in emerging markets are not the major reason for hiring researchers overseas, though they are a consideration. Tax incentives do not matter much, it said. Instead, the report found that multinational corporations were global shoppers for talent. The companies want to nurture close links with leading universities in emerging markets to work with professors and to hire promising graduates.

“The story comes through loud and clear in the data,” said Marie Thursby, an author of the study and a professor at Georgia Tech’s college of management. “You have to have an environment that fosters the development of a high-quality work force and productive collaboration between corporations and universities if America wants to maintain a competitive advantage in research and development.” The multinationals, representing 15 industries, were from the U.S. and Western Europe. The authors said there was no statistically significant difference between the American and European companies.

Dow Chemical is one company that plans to invest heavily in new research and development centers in China and India. Today, the company employs 5,700 scientists worldwide, about 4,000 of them in North America, and most of the rest in Europe. But the moves overseas will alter that. The swift economic growth in China and India, William F. Banholzer, Dow’s chief technology officer, said, is part of the appeal because products and processes often have to be tailored for local conditions. The rising skill of the scientists abroad is another reason. “There are so many smart people over there,” Mr. Banholzer said. “There is no monopoly on brains, and none on education either.” Such views were echoed by other senior technology executives, whose companies are increasing their research employment abroad.

The globalization of research investment, industry executives and academics argued, need not harm the U.S. In research, as in economics, they said, growth abroad does not mean stagnation at home – and typically the benefits outweigh the costs. Still, more companies in the survey said they planned to decrease research and development employment in the U.S. and Europe than planned to increase employment. In numerical terms, scientists and engineers in research labs represent a relatively small part of the national work force. Like the debate about offshore outsourcing in general, the trend, which may point to a loss of competitiveness, is more significant than the quantity of jobs involved.

TAXES

COSTA RICAN LAWMAKERS MAY VOTE ON TAX “REFORM” PLAN

Supporters of Costa Rica’s long-awaited fiscal reform package are attempting to schedule a vote in the legislative assembly this week, and reports indicate that a new intake of pro-tax reform lawmakers after the recent tightly-fought election could eventually swing the balance on the controversial issue. First put forward in 2002, the tax package has been a divisive piece of legislation and its opponents have used a number of delaying procedures. The tax plan will introduce some major changes if passed, such as a switch to worldwide taxation from the current territorial tax system, meaning that tax will have to be paid on worldwide income by those resident in Costa Rica. However, foreign individuals living in Costa Rica who can prove that their income has already been taxed in another jurisdiction, or are able to show that income is to be invested in the country, would be exempt under recent amendments.

In a bid to make the corporate taxation system more transparent and efficient, the bill proposes a general tax rate of 30% on all types of economic activity, a departure from the current system whereby companies declare and pay tax separately on each activity. This tax rate may fall to 25% within five years if revenues exceed economic growth. Another important change would be the introduction of value added tax, or IVA, which will replace the 13% sales tax and expand coverage to all but a handful of exempt services, such as water and electricity up to certain usage limits. Generally, it is thought that the tax reforms will increase the amount of tax paid by those earning more than $3,000 per month, and reduce the tax burden on those earning less than this amount.

NEW DATA SHOWS DRAMATIC INCREASE IN U.S. STATE TAX BURDEN

Newly released data from the U.S. Census Department has shown that the state tax burden grew by an average of 41% in the 10 years from 1994 to 2004. The data, which excludes local and federal taxes, shows that individual tax burdens increased in 43 states over the 10-year period, even when adjusted for inflation. The highest tax burden was to be found in Hawaii, whose residents paid average of $3,050 to the state government last year. Wyoming, Connecticut, Minnesota and Delaware completed the top five. Meanwhile, Texans paid the least taxes, at an average of $1,368 per person, followed by residents of South Dakota, Colorado, New Hampshire and Alabama. Residents of New Hampshire saw their taxes grow the fastest in the ten years to 2004, although the state remains relatively lightly taxed at $1,544 per person.

U.S. BUDGET INCLUDES TAX ON FUTURES TRANSACTIONS

The US 2007 budget, sent to Congress last week, contains a proposed transaction tax on futures trading which is intended to pay for regulation of the sector but has been dismissed as counter-productive by the Futures Industry Association. “The proposed tax on futures transactions would raise the costs of doing business on regulated futures exchanges and could discourage institutions and individuals from using futures contracts to manage their risks,” said John Damgard, president, Futures Industry Association. “Institutional players today have many choices. If exchange-traded products become less cost-efficient, they can choose to do business in the over-the-counter derivatives markets or move to more cost-efficient markets.”

RHODE ISLAND PROPOSES FLAT INCOME TAX

Right-wing U.S. commentators were shocked last week when Rhode Island Democratic legislators proposed a flat income tax in response to competition from other states which is leaching away their tax base. Currently, Rhode Island taxes its highest earners at 9.9% of their income, the highest of all the 41 states with broad-based income taxes. Neighboring state Massachusetts taxes its highest earners (and all its workers, since it has a flat tax rate) only 5.3% and Connecticut, 5%.

The legislation proposes an alternative tax rate that top earners could choose to pay beginning in 2007. Instead of the current rate of 9.9% of their federal taxable income, which is then subject to adjustments, deductions and tax credits, those taxpayers could elect to pay 7.5% of their Adjusted Gross Income (AGI), but without any of the reductions. Over the course of five years, the flat rate would be gradually reduced to 5.5% to make it closer to the rate that those taxpayers would pay if they lived in Massachusetts.

Dan Mitchell of the Center for Freedom and Prosperity said, “Any list of the five most left-wing states almost surely would include Rhode Island, so it is especially noteworthy that Democrats – yes, Democrats – in the state legislature are proposing a flat tax. These politicians have not become supply-siders who understand the importance of low marginal tax rates. Instead, their flirtation with good economic policy is driven by tax competition. They realize that high tax rates are driving economic activity to other states, and they feel compelled to lower tax rates to keep the geese that lay the golden eggs from flying away.”

Said the Wall Street Journal, “The answer is … the discovery that Rhode Island’s high tax burden is damaging its economy. Just as the countries of the former Soviet bloc have passed flat taxes to make themselves more competitive, Rhode Island politicians are hoping the idea can help them stop their most talented workers and growth industries from going elsewhere.”

CANTON SCHWYZ INTENSIFIES SWISS TAX COMPETITION

Schwyz has become the latest Swiss canton to cut taxes on business and personal income after residents voted to accept proposals aimed at attracting companies and wealthy individuals to move to the locality. Although the canton already has one of the lowest tax burdens in Switzerland, voters have approved new measures that mitigate double taxation of share dividend income and will reduce taxes on the net assets of individuals. Schwyz is the second canton in recent months to cut corporate and personal taxes as competition to attract high-net-worth individuals, holding companies and manufacturers heats up.

Last year, voters in the small central Swiss canton of Obwalden approved new laws substantially cutting income tax for individuals and corporations. However, the regressive nature of Obwalden’s new tax laws excited opposition from left-leaning political groups, particularly the Social Democrat Party, which has warned that a “race to the bottom” on tax will endanger Switzerland’s public finances. The EC has also complained that certain aspects of the Swiss tax system may distort trade within the EU, and the recent move by the authorities in Schwyz is likely to provoke further opposition. Schwyz, a German-speaking canton in central Switzerland just to the south of Zurich, has made no secret of the fact that is wants to attract individuals who “particularly value entrepreneurial freedom.”

HONG KONG ABOLISHES ESTATE DUTY

Hong Kong began to abolish estate duty, with the aim to attract more local and overseas investment in Hong Kong. According to a spokesman of the Financial Services and Treasury Bureau, the enact of the law will help Hong Kong to increase its competitiveness as an international financial center. It is estimated that the proposal to abolish estate duty will cost the government annual revenue of about HK$1.5 billion (US$194 million). However, the Hong Kong Special Administrative Region (HKSAR) government estimated that he abolition would help promote trading in Hong Kong’s financial markets, and contribute additional revenue from stamp duty and other taxes.

The HKSAR government also believes that as asset management services can foster growth in other financial activities and a series of high-value added professional services, other industries will also benefit indirectly. The community, and hence members of the public, will enjoy the subsequent economic benefits. Hong Kong formerly imposed estate duty as high as 15% to any individual who passed away with a property (real estate, stocks and luxury goods) valued above HK$7.5 million (US$967,742).

I.R.S. OFFERS DEAL TO FIRMS PROMOTING TAX SHELTERS

The I.R.S. is making an unusual offer of leniency to firms that made and sold questionable tax shelters: come forward, pay penalties and turn over information, and you may avoid criminal prosecution. The offer is being made to accounting firms, law firms, banks and investment firms that have created and sold tax shelters that the I.R.S. considers bogus, as well as to firms that carried out the financial transactions that underpin such shelters. Questionable shelters have been sold to thousands of wealthy investors in recent years. Under the offer, the firms must disclose the names of those investors.

Firms that do not come forward face larger fines and possible criminal prosecution, according to a copy of the offer now being mailed to firms. The I.R.S. has extended similar offers to wealthy investors in recent years, but this is the first of its kind to firms that promote tax shelters. The offer has some carrots. The agency is offering to not disclose publicly the names of firms that come forward or the terms of their settlements. It also offers to assess no penalties against the firms for failing to provide information about investors earlier. (Firms are already required to keep lists of investors in shelters that the I.R.S. considers abusive.) Other penalties will still apply. The I.R.S. expects to bring in several billion dollars through the offer once the program is completed later this year, according to people briefed on the program.

Offers will be made to at least 66 tax shelter promoters and possibly more, but probably not to all 118 firms now being actively audited by the I.R.S. for their work on aggressive shelters, according to the people briefed on the program. The I.R.S. began making its offers to promoters in late December, and has so far sent out about 30 letters. It expects to extend remaining offers in coming months. The offers cover questionable transactions sold before October 22, 2004, and give firms 30 days to pay. Under the offer, the I.R.S. reserves the right to refer to its own criminal division any employees from firms that received amnesty whom it suspects of having broken the law. More significantly, the agency reserves the right to refer firms and employees to the Justice Department for criminal prosecution.

Tax lawyers said that the I.R.S.’s offer would not affect the government’s ability to conduct criminal prosecutions in tax shelter cases. Carolyn D. Ciraolo, a tax lawyer in Baltimore, said that any firms that cooperate with the government are more likely to help the government build cases against another firm or other employees. It is unclear how popular the offer will be among promoters. “It is a bad deal,” said one lawyer who represents an accounting firm that has been sued by investors who bought its shelters. He said that the I.R.S. wanted too much information under the offer, citing a requirement that marketing materials and other documents must be turned over, leaving a firm potentially exposed to further investigations and prosecutions.

WORLD TRADE ORGANIZATION CONDEMNS U.S. EXPORT TAX SUBSIDIES (AGAIN)

The WTO Appellate Body on announced that it backed EU claims that “grandfathered” U.S. federal tax subsidies for exporters are illegal under international trade rules. A WTO Panel had previously found in favour of the EU, concluding that despite some changes to its domestic legislation the U.S. has yet to abide by earlier rulings and recommendations of the WTO Dispute Settlement Body on its payments of export tax subsidies preserved in the “transition” and “grand-fathering” provisions of the revised Jobs Act that have been judged to violate WTO rules.

The American Jobs Creation Act (“Jobs Act”) contained a “Grandfathering Clause” which stated that the repeal of the Foreign Sales Corporation and Extra Territorial Income legislation “shall not apply to any transaction in the ordinary course of a trade which occurs pursuant to a binding contract” entered into before 17 September 2003, and contained the following clarification, “a binding contract shall include a purchase option, renewal option, or replacement option which is included in such contract and which is enforceable against the seller or lessor.” Consequently, in practice all standard commercial contracts are covered as all such contracts bind their signatories and are enforceable. It should also be noted that the clause applies to both sales and lease contracts (and their options) which typically run for a number of years from the moment they are signed until final delivery of the goods.

According to the EC, the aim of the grandfathering clause is to ensure that certain U.S. exporters will continue to obtain WTO-prohibited FSC/ETI export subsidies many years into the future on products that have not yet been built or exported, even beyond the expiry of the FSC/ETI transitional period in 2006. Some of the biggest beneficiaries of the grandfathered tax-breaks include Boeing and General Electric. Once the Appellate Body report has been adopted by the WTO in thirty days time the US will have 60 days to bring its legislation into line with its WTO obligations. After that time EU retaliatory measures will be re-imposed, unless the US has complied in the meantime.

U.S. TREASURY SECRETARY PRAISES SENATE FOR EXTENDING LOWER TAXES ON CAPITAL GAINS, DIVIDENDS

Following a fairly tight vote on the matter this week, John Snow praised the Senate for passing measures extending lower tax rates on capital gains and dividends. “I commend the U.S. Senate for resisting misguided calls to increase taxes. Today’s Senate vote to support an extension of the President’s lower rates on capital gains and dividends was a step in the right direction toward lower tax rate permanency, which is vital to maintaining the strength of the American economy: 3.5 percent growth rate, more than 4.7 million new jobs, and unprecedented Federal revenues of $2.15 trillion,” he announced.

He continued, “We know that you always get less of something you tax. By lowering the taxes on capital, the Jobs and Growth Act of 2003 encourages increased long-term investment. Increased long-term investment in turn improves the long-turn outlook of the economy. It makes the economy more productive. With additional capital, labor output rises. And with rising labor output the demand for labor increases and living standards rise. … If Congress fails to extend the 15% rate on capital gains and dividends, the effective increase would strike at the heart of the American economy with damaging long-term effects on economic growth. A slow down in investment would be inevitable, and a slow-down in job growth more than likely to follow.”

IRS UPDATES “TAX GAP” ESTIMATES

IRS officials announced that they have updated their estimates of the Tax Year 2001 tax gap, based on the findings of the National Research Program (NRP). According to the IRS, the updated estimate of the overall gross tax gap for Tax Year 2001 – the difference between what taxpayers should have paid and what they actually paid on a timely basis – comes to $345 billion. This figure falls at the high end of the range of $312 billion to $353 billion per year estimate released last March. IRS enforcement activities, coupled with other late payments, recovered about $55 billion of the tax gap, leaving a net tax gap of $290 billion for Tax Year 2001.

“The vast majority of Americans pay their taxes accurately and are shortchanged by those who don’t pay their fair share,” announced IRS Commissioner Mark W. Everson. “The magnitude of the tax gap highlights the critical role of enforcement in keeping our system of tax administration healthy.”

The IRS believes that the complexity of the tax law is also a significant factor in causing the tax gap, which can be seriously addressed only in the context of fundamental tax reform and simplification. One important administrative step already taken to improve compliance has been the updating of the audit selection system with the NRP information. The newer statistics enable the IRS to audit more efficiently and improve the detection of underreported income and overstated deductions, credits, etc. As with prior estimates, the updated estimate of the tax gap shows that the largest component of this gap, more than 80%, comes from underreported taxes.

RUSSIAN TAX AMNESTY LINED UP FOR JULY

Senior figures within the Russian government have revealed that a proposed tax amnesty on undeclared assets could go into effect immediately after the relevant law has been passed, possibly in July this year. According to Deputy Prime Minister Alexander Zhukov, the tax amnesty bill has been “practically finalized” and will be submitted to the Duma, the lower house of the Russian parliament. The amnesty will last until April 30, 2007. Zhukov said that the amnesty will be a one-off scheme and will not be repeated.

Those declaring monies to the authorities under the amnesty will escape prosecution in return for paying a 13% tax on the previously hidden assets. In an attempt to encourage participation in the scheme, a provision stipulating that newly declared money must be paid into a Russian bank account has been dropped. However, the amnesty will only offer immunity from prosecution for possible violations of tax law, and individuals coming forward under the scheme may still be liable for prosecution for violating foreign exchange laws and the Criminal Code. Shatalov has previously warned taxpayers that penalties for tax crimes after the closure of the scheme will be “very tough”.

President Vladimir Putin is hoping that the scheme will result in the repatriation of at least some of the $160 billion dollars in capital which which has fled the country since the collapse of the Soviet Union in the early 1990s.

VIRGINIA CONGRESSMEN INTRODUCES LEGISLATION TO ABOLISH THE INTERNAL REVENUE CODE

Congressmen Bob Goodlatte (R-Virginia) and Collin Peterson (D-Minnesota) introduced bipartisan legislation to abolish the Internal Revenue Code – the Tax Code Termination Act. “The current tax system has spiraled out of control,” explained Rep. Goodlatte. “With Americans devoting a total of 7.4 billion hours each year to comply with the current tax code, we need tax simplification.” The proposed legislation, H.R. 4725, will repeal the entire tax code – except the portions that deal with Social Security and Medicare – by December 31, 2009, and calls on Congress to approve a new Federal tax system by July of the same year. The legislation has already been passed twice by the House of Representatives, first in 1998 by a vote of 219-209 and then in 2000 by a vote of 229-187.

“Today’s tax code is unfair, discourages against savings and investment, and is impossibly complex,” continued Goodlatte. “The Tax Code Termination Act will force Congress to finally debate and address fundamental tax reform. Whichever simple tax system is adopted, the key ingredients should be: a low rate for all Americans; tax relief for working people; protection of the rights of taxpayers and reduction in tax collection abuses; promotion of savings and investment; and encouragement of economic growth and job creation.” The Tax Code Termination Act has been referred to the House Committee on Ways and Means for further consideration.

ASSET PROTECTION / LEGAL STRUCTURES

NEW ZEALAND REVENUE MINISTER DEFENDS OFFSHORE TAX PLANS

Michael Cullen has reacted angrily to opposition claims that the government has got it wrong with its plans to modify the tax regime in order to discourage New Zealanders from investing offshore. In a statement released last week, National Party finance spokesman John Key suggested that the government had been made to undertake an embarrassing U-turn in its “misguided attempt” to introduce a capital gains tax on offshore investments, after an overwhelmingly negative response from the investment industry.

The government is now reviewing the tax regime that applies to portfolio investment offshore, and expects to announce new proposals in March. However, Mr. Key fears that the modified proposals could be “just as bad” as the former proposals, and he expressed the view that there “is no rationale” for taxing offshore portfolio investments at all as this merely discourages saving. “Worryingly, I understand they are now proposing a cumbersome plan to tax earnings per share, to replace the proposed capital gains tax,” stated Mr. Key. “The problem with this new plan from officials is that there are many ways of calculating earnings per share. It’s something few people understand properly and it’s very technical,” adding that the idea would be “fraught with difficulty”.

However, Revenue minister Dr. Cullen accused the National spokesman of showing his “true colours as a friend of wealthy investors.”

U.S. PLEDGES TO HALT “TAX ABUSE” INVOLVING TRANSFER OF IP TO OFFSHORE SUBSIDIARIES

In a stark warning to the IDA and others who promote U.S. investment in Ireland, senior American cabinet minister John Snow pledged that his administration was developing rules to halt “tax abuse” involving U.S. companies transferring intellectual property and patents to overseas tax havens. The IDA denies that Ireland is a tax haven, and a spokeswoman said the authority did not feel threatened by the remarks of the treasury secretary. However, Snow’s remarks indicated that the American concerns over what Microsoft and other multinationals have been doing in relocating assets, was raising concerns at a high level in Washington.

“We feel the existing rules have not been effective at getting at this problem,” Snow told the senate finance committee meeting. He was questioned about media reports that said U.S. companies have slashed their tax bills by transferring intellectual property to low-tax countries. He was particularly quizzed about details of how Microsoft had shaved at least $500 million from its annual tax bill by vesting $16 billion in an Irish company, Round Island One Ltd. The Irish firm, the reports said, received licensing fees from copyrighted software that originates in the U.S. but pays low Irish taxes on this revenue. While Mr. Snow did not mention Microsoft, he said the pending rules aim to remove “some of the incentives to engage in the sorts of behaviors that deny revenues to the United States treasury … this is a serious issue and we need to deal with it,” the treasury secretary insisted.

His officials are believed to be working on changes in the rules on the migration of intellectual and intangible property offshore and are expected to have new rules in place later this year. However, the U.S. already has extensive transfer pricing Controlled Foreign Corporation laws which apply U.S. tax to unremitted foreign profits, and it is not clear how far these could be strengthened without driving companies out of the U.S. altogether. And nobody has suggested that Microsoft is guilty of “abuse”, although the company gets plenty of abuse from politicians, of course.

ABOUT THE BAHAMAS

One of our faithful readers from Zurich called us to task for quoting Banker magazine as rating The Bahamas as the “top offshore international financial center in the western hemisphere.” Our reader writes that “… The Bahamas sold out years ago to the governments of the U.S. and the UK and to so-called ‘watchdogs’ like the OECD and the FATF. Because of drastic changes in Bahamian legislation with respect to privacy in particular and other issues, we stopped doing business there ten years ago … OCRA Worldwide sold out to both the OECD and the FATF five years ago, as well as to pressure from the U.S. government which stated publicly at the time it was ‘looking for tax dodgers.’

“By printing the article from the Banker magazine you are committing a grave disservice to your readers. We are in complete disagreement with the Banker awards. The Bahamas is definitely not the ‘best offshore financial center in the Western Hemisphere.’ With respect to privacy alone they are the worst. The Isle of Man is also not the best offshore financial center in Europe, although it is useful for certain types of business. In the Asia Pacific region Banker picked Singapore, not the worst in the region, but they should have picked Hong Kong as Number 1 in the region, which it clearly is. They did manage to get one pick correct; Bahrain best for the Middle East region.

“… While Switzerland (where he lives) does have a mutual legal assistance treaty (MLAT) and a tax treaty with countries like the U.S. and the UK, financial privacy there is still protected by strict banking secrecy laws. The same can no longer be said of The Bahamas.”

My reply: Thank you, sir. We stand corrected. It has been a long time since we recommended The Bahamas as a reliable tax haven. But at times we try to look on the positive side, since so many we report on are negative. I agree in most respects with your estimate of what has happened to The Bahamas. Although some insist there is improvement there on the issues you identified, we shall see, as Bahamian national elections approach, if there is going to be true improvement.”

PRIVACY

BREAKING THROUGH BEIJING’S “GOLDEN SHIELD”

In a windowless room in New York City, a computer engineer with owlish glasses – call her “Jenny Chen” – peers at a color-coded bar graph on her PC screen. Her group is launching attacks on the Chinese wall of censorship that blocks access to sites discussing verboten topics like civil rights and democracy. The graph displays how many Chinese that month evaded the country’s censorship to condemn the Chinese Communist Party. Chen, a Beijing-born woman of about 40, runs her own it businesses. Her group, and like-minded “hacktivists” (as they call themselves) spread around the globe, are chipping away at the Golden Shield, the term that describes the filtering system that censors the Internet and e-mail of China’s 110 million Internet users. The invaders slip contraband words and ideas in and out of the country via such means as mass e-mails, proxy servers that are not yet blacked out and code words that are not yet on government blacklists.

Arrayed in battle against the hackers are the Chinese Communist Party and an assortment of Western firms that provide the hardware, software and search services that make the Chinese Internet run – Cisco, Google, Microsoft, Nortel Networks, Sun Microsystems and Yahoo. These companies are in a bind. They cannot do business in China except on terms dictated by the Chinese authorities, and that means zapping Web traffic that strays too far from the party line. But if they comply they become, in the eyes of Chinese dissidents, collaborators with an oppressive regime. Reporters Without Borders fumes on its Web site, “It is one thing to turn a blind eye to the Chinese government’s abuses and it is quite another thing to collaborate.” Try to access that site from a computer in Beijing and you will just get a blank page.

Censorship is quite an industry in China. Every village has spies to watch neighbors. The mail and the poster boards are watched, say expat Chinese. It is said (by dissidents) that China has 40,000 Web police hard at work just in Beijing, looking over the shoulders of Web users and composing lists of banned words that cause a Web search to freeze up or a site to automatically be blocked. They have quite a challenge, not just because e-mail traffic in China is running at 300 million a day (based on China’s own statistics), but because they are aiming at a moving target. They block not only “Tiananmen Square”, but also chat-lingosubstitutes like “Tsquare” and “June 4”, the date of the incident. Block documents with repeated instances of “June 4” and you have a new problem: How does a law-abiding construction firm insist in e-mail that concrete forms have to be in place on June 4? The censors have on their side not just industriousness but the long arm of a police state.

The dissidents, though, have one very big thing in their favor, and that is the dispersed nature of the Internet. There are approximately 800 million Internet users on the globe, and potentially any one of them can serve up offending documents. Something like 35 million Chinese live abroad, beyond the reach of the thought police. They have news-thirsty friends and relatives back home. The government can issue a decree to Google and it will be obeyed. How does it go after Wikipedia? By throwing up their hands at trying to sort the innocuous Wikipedia info from the political and choosing to block the site in toto, the censors have created new enemies – the citizens who used the encyclopedia for academic work. In a short time, say China-watchers, the government has made millions of ordinary citizens into document smugglers. Remarkable what a little suppression can do to turn a small disgruntled group into a large, angry mob.

U.S. lawmakers lash high-tech giants.

Four U.S. high-tech companies found themselves branded collaborators with the Chinese government in suppressing dissent in return for access to a booming Internet market. House members contended that Microsoft, Yahoo, Cisco Systems and Google sought to explain their business practices in China only after a recent crush of negative media and government attention. “Your abhorrent actions in China are a disgrace,” said Rep. Tom Lantos, top Democrat on the International Relations Committee. “I simply don’t understand how your corporate leadership sleeps at night.”

Yahoo’s senior vice president and general counsel, Michael Callahan, said his company was “very distressed” at having to comply with Chinese law. Elliot Schrage, vice president of global communications and public affairs for Google, said Google’s decision to censor its Chinese Internet search engine was “not something we did enthusiastically or something we’re proud of at all. … We have begun a path that we believe will ultimately benefit our users in China.” Rep. Jim Leach, R-Iowa, said Google seemingly had acted “as a functionary of the Chinese government. … This is astonishing.”

Analysts say U.S. high-tech companies trying to tap a market of more than 110 million Internet users also must worry about the perception they are helping China harass dissidents. Lantos, D-California, repeatedly asked whether Yahoo had contacted the family of Chinese journalist Shi Tao. Critics say Yahoo helped police identify and convict Shi after he criticized human rights abuses. Callahan said that Yahoo condemned what happened to Shi and had not contacted his family. The business executives appealed for guidance from Washington, saying they faced the difficult decision of complying with Chinese law or leaving the country.

THE WAR ON PRIVACY

“There was, of course, no way of knowing whether you were being watched at any given moment. How often, or on what system the Thought Police plugged in on any individual wire was guesswork. … But at any rate they would plug in your wire whenever they wanted to. You had to live – did live, from habit that became instinct – in the assumption that every sound you made was overheard, and except in darkness, every movement scrutinized.” ~~ George Orwell

One morning, in his Supreme Court chambers, Justice William Brennan was giving me a lesson on the American Revolution. “A main precipitating cause of our revolution,” he said, “was the general search warrant that British customs officers wrote – without going to any court – to break into the American colonists’ homes and offices, looking for contraband.” Everything, including the colonists, was turned upside down. He added that news of these recurrent assaults on privacy were spread through the colonies by the Committees of Correspondence that Sam Adams and others organized, inflaming the outraged Americans.

Now, the Congressional Democratic leadership has finally found an issue to focus on – the vanishing of Americans’ privacy, as happened before the American Revolution, but currently on a scale undreamed of by Sam Adams, Thomas Jefferson, and the other patriots in the Committees of Correspondence. The rising present anger around the country, across party lines, is reflected in a February 3 Zogby Interactive poll that “finds Americans largely unwilling to surrender civil liberties – even if it is to prevent terrorists from carrying out attacks. … Even routine security measures, like random searches of bags, purses, and other packages, were opposed by half (50 percent) of respondents in the survey. … Just 28 percent are willing to allow their telephone conversations to be monitored.”

On the other hand, nearly half (45 percent) favored at least “a great deal” of government secrecy in the war on terror. But the public’s awareness that the U.S. has increasingly become a nation under surveillance is indicated by resistance not only to random searches and tapping into our telephone conversations. Zogby says, this is a “public obsessed with civil liberties.” Well, not obsessed yet, but growingly apprehensive.

James Madison, the principal architect of the Bill of Rights, warned, “It is proper to take alarm at the first experiment in our liberties.” Because of the continually expanding surveillance technology available to the government, no administration in our history has been engaged in more pervasive “experiments” on our liberties than Bush’s regime. Rumsfeld said flatly that this war to keep us secure from worldwide, dedicated lethal terrorists can last for decades! At last, this crucial difference from all the other wars in which we have been involved is sinking into the American consciousness.

At the core of Rumsfeld’s own remarks is this admission: “Compelled by a militant ideology that celebrates murder and suicide with no territory to defend, with little to lose, they will either succeed in changing our way of life, or we will succeed in changing theirs.” But our enemies are changing our way of life, beginning with the 2001 Patriot Act that, among other invasions, expanded the FBI’s ability to use National Security Letters – without going to judges – to collect personal information about us. This marked the return of the “general search warrant” of our colonial past.

Your papers, please.

John Gilmore attempted to board an airplane on the 4th of July 2002. When asked to produce and ID, he refused. Apparently, there is a secret law that gives the Federal Government the power to check for IDs. Funny, I do not remember seeing that in the Constitution – I need to read it again just in case. Gilmore sued in court. The result is not pleasant, but should not surprise anyone. The 9th U.S. Circuit Court of Appeals ruled that the ID requirement is not unconstitutional:

“We hold that neither the identification policy nor its application to Gilmore violated Gilmore’s constitutional rights, and therefore we deny the petition. The Constitution does not guarantee the right to travel by any particular form of transportation.”

“He was not threatened with arrest or some other form of punishment; rather he simply was told that unless he complied with the policy, he would not be permitted to board the plane. There was no penalty for noncompliance.”

But the Constitution does not say that there should be a TSA either. The right to travel is nothing but the ability of a person to freely engage in a business transaction allowing him to enjoy air travel. Any restriction on this peaceful and legitimate contractual agreement is unethical and incoherent. Not only is this restriction unjustified, it is also unconstitutional.

Until recently, Americans had enjoyed being able to move around the country with little or no interference. Sadly, this is no longer the case. From airports to buses to trains and subways, our movements are carefully watched and controlled. Babies have been added to the no-fly list. And who can forget when Ted Kennedy had his name added to that infamous list? Being a Senator has its perks, and he was able to make some phone calls and he was allowed to travel. But tell this to the thousands of people on this list. There is virtually no way to get names removed. All in the name of safety. All for our own good.

So where to we stand? The dirty paws of the Federal Government are turning local police officers into de facto urban guerillas. We have seen stories of secret courts, secret prisons and secret police. There is no longer a need for conspiracy theories. There is a secret government.

U.S. GOVERNMENT PLANS MASSIVE DATA SWEEP

Little-known data-collection system could troll news, blogs, even e-mails.

The U.S. government is developing a massive computer system that can collect huge amounts of data and, by linking far-flung information from blogs and e-mail to government records and intelligence reports, search for patterns of terrorist activity. The system – parts of which are operational, parts of which are still under development – is already credited with helping to foil some plots. It is the federal government’s latest attempt to use broad data-collection and powerful analysis in the fight against terrorism. But by delving deeply into the digital minutiae of American life, the program is also raising concerns that the government is intruding too deeply into citizens’ privacy.

“We don’t realize that, as we live our lives and make little choices, like buying groceries, buying on Amazon, Googling, we’re leaving traces everywhere,” says Lee Tien, a staff attorney with the Electronic Frontier Foundation. “We have an attitude that no one will connect all those dots. But these programs are about connecting those dots – analyzing and aggregating them – in a way that we haven’t thought about. It’s one of the underlying fundamental issues we have yet to come to grips with.”

The core of this effort is a little-known system called Analysis, Dissemination, Visualization, Insight, and Semantic Enhancement (ADVISE). Only a few public documents mention it. ADVISE is a research and development program within the Department of Homeland Security (DHS), part of its three-year-old “Threat and Vulnerability, Testing and Assessment” portfolio. The TVTA received nearly $50 million in federal funding this year.

A major part of ADVISE involves data-mining – or “dataveillance”, as some call it. It means sifting through data to look for patterns. If a supermarket finds that customers who buy cider also tend to buy fresh-baked bread, it might group the two together. To prevent fraud, credit-card issuers use data-mining to look for patterns of suspicious activity. What sets ADVISE apart is its scope. It would collect a vast array of corporate and public online information – from financial records to CNN news stories – and cross-reference it against U.S. intelligence and law-enforcement records. The system would then store it as “entities” – linked data about people, places, things, organizations, and events.

PRIVACY AND ANONYMITY ON THE INTERNET: JUST HOW FAR DOES BIG BROTHER’S EYE SEE?

Privacy and anonymity on the internet are as important as they are difficult to achieve. Here are some of the the current issues we face, along with a few suggestions on how to be more anonymous. Online privacy issues are in the news every week now. This is good for us, because when it is newsworthy and notable it means people still care about the privacy of their personal information in some fundamental and important way. Privacy on the internet (or rather, a lack thereof) has been with us for ages, but as technology converges we are all forced to make some important new choices about what we are willing to disclose. Let us start with a few examples.

Recent events have found the Electronic Freedom Foundation warning users not to use Google Desktop’s new “search across computers” option, which stores a user’s indexed data on Google servers for up to 30 days. It is making headlines, but it is just the tip of the iceberg. In recent weeks we have also heard about government attempts to subpoena information from Yahoo, Microsoft and Google. Perhaps a subpoena for all the files indexed on your Google Desktop is not that far away. Then there are the wiretaps in the U.S. by those three-letter agencies, which we are just hearing about now. First reported by the New York Times, these were wiretaps on U.S. citizens that were sometimes done without requiring court approval at all. I do not know about you, but even when I am not doing something wrong (which is most of the time), I get very nervous when I hear about privacy issues popping up in this way.

This is on top of all the old news that barely makes headlines anymore – botnet Trojans controlling access to your computer’s data and stealing your identity, rampant spyware infections that have been with us for years and are sometimes quite nasty, the fact that only about a third of the public even know what spyware is, and finally, there is even the occasional military breach that exposes the personal information of people who probably value their privacy very much.

Where are we headed with online privacy? Well, perhaps you should publish your darkets secrets in a public blog right now and get it over with. The fact is, we have not had much, or any, privacy online in quite a while. In the search for privacy, what do we have to do to become anonymous on the internet?

LAW

CLASS ACTION ODYSSEY

Three years ago Microsoft settled an antitrust case with California residents, the first of 15 deals it struck with other state groups that claimed it was bullying people to buy its products. Consumers, businesses and California’s poorest schools would get $1.1 billion worth of vouchers for software and other tech products. Californians are still waiting for payday. So far not a single voucher has been sent, thanks to the single-handed efforts of an obscure lawyer in Sacramento named Charles Q. Jakob. Jakob has filed an objection, an appeal and a request for review to thwart the settlement, arguing it merely puts money in Microsoft’s pocket. “Microsoft wants young people to get hooked on Windows,” says Jakob, 41, a solo business litigator. “These kids should be learning how to think, not how to use Microsoft Office.”

That one man can block the settlement says a lot about the looniness of class action law. The vouchers have lost 6% of their value to inflation since the settlement. On the other hand, Jakob is echoing a familiar complaint about voucher settlements: Many people in the class never bother to redeem them, and they only end up aiding a company that was ostensibly penalized. The lawyers who concoct these settlements, on the other hand, get paid in cash.

Under the settlement, State residents who bought Microsoft products between 1995 and 2001 would get $5 to $29 per purchase, good for software and some types of hardware. Jakob contends that most of the California class – 14 million consumers and businesses – will end up with little or nothing. If California computer users are like other typical members in class actions, most will not claim their vouchers. It appears that so far 5% have filed the paperwork. The company gets back a third of the value of any unclaimed vouchers, while the remainder goes to schools with needy populations in the form of vouchers worth various sums to buy software and hardware. Among the suggested software purchases for the schools are lots of Microsoft products. Half of voucher amounts can be used to buy hardware. Here again Microsoft pushes its own wares. In short, says Jakob, the settlement will essentially force schools to buy technology from the same vendor that law firm Townsend and Townsend and Crew so passionately argued had ripped off their class – Microsoft.

Jakob’s proposal is to link lawyer fees to the number of vouchers claimed (thereby giving more incentive to serve the class). He also wants leftover funds to go to the government’s antitrust arms, or, perhaps better, to be distributed only to those who file, pro rata. “Right now the transaction costs exceed the expected benefits,” he says. The Townsend law firm defends the settlement, though lead partner Eugene Crew sees Jakob’s broader point. “Class action is a noble concept that has been completely perverted in practice,” says Crew. Townsend attempted, unsuccessfully, to separate Jakob from the rest of the class. Could that have something to do with the fact that Townsend cannot collect its third of $100 million in legal fees until Jakob goes away?

RESTORING THE RULE OF LAW AND CONSTITUTIONAL GOVERNMENT

It took only minor concessions by the Bush administration to convince enough Democrats to support the renewal of the USA PATRIOT Act – the vast majority of the PATRIOT Act’s draconian provisions increasing the authority of federal authorities to tap phones, obtain personal records, and search homes will probably be renewed – and end a Senate filibuster blocking the bill’s passage. In fact on both the renewal of the PATRIOT Act and warrantless domestic spying by the National Security Agency (NSA), the Democrats have recently caved in or are signaling that they soon will. In contrast, only a more militant approach – the repeal of the PATRIOT Act, the ending of warrantless domestic spying, and the opening of the process by which national security warrants are approved – will adequately preserve the liberties that the nation’s founders enshrined in the Constitution’s Bill of Rights.

The PATRIOT Act is unlikely to prevent another terrorist attack. Even before 9-11, law enforcement authorities had enough investigative powers to battle terrorism without it. In 1996, the Clinton administration handed law enforcement agencies increased authority via the Anti-Terrorism and Effective Death Penalty Act, but this did not prevent 9-11. The failure to detect and prevent the 9-11 attacks was due to lack of coordination within and among federal law enforcement and intelligence agencies, not because of a lack of snooping authority. Congress should ask whether rewarding such failure with increased authority and funding is the best way to fight terrorism.

The Fourth Amendment’s requirement, in both wartime and peacetime, for a court-ordered warrant belies the White House’s claim that in wartime, the president’s authority is supreme. Even President George W. Bush, on April 20, 2004, obviously hiding his warrantless domestic spying program, said that nothing had changed and that a wiretap still required a court order. The claim that other presidents, including Franklin Roosevelt, took actions that implied such broad presidential authority in wartime does not trump the founders’ clear intent to constrain the nation’s leader from taking the nation to war unilaterally. The issue is whether warrantless domestic spying should be stopped. It should.

And why stop there? That we depend on a secret court to uphold peoples’ rights shows the sorry state of civil liberties in this country. Secret courts are for Nazi Germany and the Soviet Union, not the U.S.A. Why not declassify the FISA court? Regular courts handle espionage and organized crime cases by protecting witnesses. The same could be done for surveillance requests. The court’s lack of public accountability has allowed it to become a virtual rubber stamp for whatever administration is in power. Only a handful of the tens of thousands of secret surveillance requests have been denied. This lack of meaningful oversight erodes the checks and balances of our multi-branch government, as created by the Constitution.

In the current environment of “creeping authoritarianism”, radical measures – such as repeal of the PATRIOT Act, the ending of warrantless domestic spying, and the declassification of the FISA court – are the only things that can restore the rule of law and true constitutional government.

TRINIDAD & TOBAGO GOVERNMENT SCANDAL IS AMERICAN IN SCOPE

Many of us in the Caribbean are commenting on the scandals plaguing America with undisguised schadenfreude. And, who can blame us. After all, for decades, successive U.S. governments have treated us more like feudal territories than sovereign nations. And, these administrations never resisted an opportunity to lecture our national leaders on the requirements of good governance – especially as regards fiscal transparency and the proper exercise of executive power. But with its congress being described as more a den of thieves than the (self-professed) bastion of democratic values and its president being accused of abusing his executive power (e.g., by invading Iraq and spying on Americans), one can appreciate our cynical glee over America’s woes.

Nonetheless, I am always loathe to criticize others for things I am doing myself. And in this case, I cannot revel too much in America’s shame because similar scandals abound in the Caribbean. And, nothing demonstrates this more than the cancer of corruption that has metastasized throughout the Caribbean’s reputed bastion of honest, fiscally sound and politically competent governance – the government of Trinidad & Tobago. Today, no fewer than eight of its former government ministers are facing criminal corruption charges for allegedly expropriating funds from revenues generated by Trinidad’s lucrative oil and gas industry. And, chief amongst those appearing in the dock is former Prime Minister (1995-2001) and current Opposition leader – Basdeo Panday. He is charged, ironically enough, with diverting his ill-gotten gains to secret bank accounts in London – much as American embezzlers and fraudsters are often charged with secreting (and laundering) their dirty money in our Caribbean banks.

And, his co-defendants constitute a rogue’s gallery of former and two current cabinet ministers – reflecting the systemic and bipartisan abuse of executive power that facilitated this alleged looting of the national treasury. But as we are also inclined to wax indignant about the time it takes to bring alleged crooks (like former Republican majority leader Tom DeLay or Ken Lay of Enron) to justice in America, we cannot take much pride in the fact that – at the current rate – it might take a decade before a jury is even empaneled in Panday’s case (and the outlook is hardly more promising for the others). After all, Panday was charged in September 2002. Yet since then, his lawyers have made such a circus of the legal process that Carnival clowns would feel right at home in their courtroom. Stay tuned …

SELECTIVE PROSECUTION

It has recently been disclosed that Lewis Libby “testified to a grand jury that his ‘superiors’, whom he did not name, had told him to leak classified information to reporters to justify the Iraq war.” (N.Y.Times, February 13, 2006) The information did not, apparently, relate to the identity of Valerie Plame, but was concerned “with a different but related disclosure of classified information from a report about Iraq’s nuclear capability.” The information was, apparently, “from a National Intelligence Estimate in June and July 2003 about Iraq’s nuclear capability.” Libby’s testimony became public, it is said, because it was in a letter from prosecutor Pat Fitzgerald that was disclosed by Libby’s lawyers in a filing in his case. The information raises a question not yet mentioned in the media insofar as I know, the question of unlawful selective prosecution.

One is not speaking of selective prosecution of Libby, who is not being prosecuted for disclosing classified information but for lying to the grand jury. One is speaking, rather, of those persons whom Bush has ordered found, and whom he and his Administration henchmen have made clear will be prosecuted if found, who have disclosed things that Libby’s two “superiors”, Bush and Cheney, did not want revealed – like the secret NSA program of electronic surveillance of American citizens. Persons who have disclosed classified information that Bush and Cheney did not want disclosed will be criminally prosecuted. People who disclose classified information that Libby’s two “superiors” wanted disclosed for their own selfish political purposes, will not be prosecuted for the disclosures.

It is obvious that this kind of selective prosecution to advance selfish political objectives is the worst kind of abuse of the criminal law to advance the interests of the group in power. It is an abuse of the executive power in order to make the Executive hegemonous, a result greatly feared by the founders whose views Bush falsely professes to worship. As Abraham Lincoln once said, better to live in Russia where they take their tyranny straight, without the filter of base hypocrisy.

OPINION & ANALYSIS

ARE WE WITNESSING THE RISE OF THE FOURTH REICH, SKIDS GREASED BY CHURCH SUPPORT?

Without a doubt, comparisons to Hitler have been overdone. It seems that when a writer disagrees with the policies of a sitting president, be he Republican or Democrat, there exists a ubiquitous temptation to compare him with the ignoble German leader. Some will no doubt charge this author with having succumbed to this temptation. Perhaps I have. However, as a student of both the Bible and history, I believe we in America are living in times that are eerily reminiscent of the days leading up to the rise of the Third Reich. If after reviewing this thesis, the reader wants to dismiss its conclusions as insipid and irrelevant, he or she is certainly free to do so.

There are many facets and aspects of the Third Reich which could and should be analyzed. For the purpose of this column, however, I want to focus on the attitude and actions of the ministers and churches of Germany at the time of Hitler’s rise. I have been the pastor of an Independent Baptist Church for more than 30 years. I believe that while any nation might survive corrupt politicians, greedy merchants, and sinful citizens, it cannot survive cowardly, compromising churches!

In the case of Nazi Germany, it was the German churches first and foremost that failed their country. It was the churches that provided Hitler with moral and spiritual cover. It was the ministers and churches that allowed Hitler to seduce the nation. Some ministers were no doubt deceived themselves. Many others, like Adam, partook of the forbidden fruit with their eyes wide open. Either way, without the help and assistance of Germany’s churches, the Nazi Party could never have become such a horrible leviathan. Therefore, let’s examine the attitudes and actions of Germany’s ministers and churches and compare them to America’s ministers and churches today to see if there is any similarity. I want to strongly recommend that the reader purchase and devour a book entitled Hitler’s Cross, written by Erwin Lutzer and published by Moody Press. The book is absolutely phenomenal!

It is a fact that when Adolph Hitler began his ascent to power, many, if not most, of Germany’s Christians believed he was an answer to their prayers. They believed that to resist Hitler was to resist God. And why not? After all, Hitler revived Germany’s collapsed economy. He literally brought the German people out of poverty and despair and made them a great and proud people once again. As a result, the German people, including German Christians, loved him. Unfortunately, as Hitler was building Germany’s economy and strengthening its military, he was also taking away the rights and liberties of the German people. Remember, Germany was a republic before Hitler came along. The principles of individual freedom and constitutional government were at one time precious to Germans. However, most German people were willing to gladly trade their liberty and freedoms for Hitler’s promise of security and strength. It was a bad trade then. It is a bad trade now!

Lutzer documents the fact that at the time of Hitler’s rise, there were some 14,000 evangelical churches in Germany. To win the support of these churches, Hitler literally wrapped himself and the Nazi Party in the Cross of Jesus Christ. In short order, Germany’s pastors and churches were convinced that the Nazi Party was God’s party and Hitler was God’s man. Germany’s Christians forgot that Christ’s kingdom “is not of this world.” Their desire to restore Germany’s greatness and their patriotism somehow dwarfed their commitment to Christ and their fidelity to republican principles. Accordingly, their trust in God was supplanted with trust in Hitler, and their allegiance to principles of freedom was replaced with allegiance to the Nazi Party.

Of course, Hitler knew exactly what he was doing. He knew he needed the support of Germany’s churches and pastors and he played the role of Christian leader magnificently. Privately, however, he despised Germany’s clergymen. He said, “The parsons will dig their own graves. They will betray their God to us. They will betray anything for the sake of their miserable jobs and incomes.” How right he was! Out of 14,000 German ministers, all but 800 gave Hitler their unequivocal and unflinching loyalty. Among the 800 was the great Christian patriot Dietrich Bonhoeffer who was later assassinated by Hitler’s henchmen. Virtually all of the 800 courageous pastors who refused to support Hitler were sent to concentration camps. What would have happened if 10,000 Christian ministers had not allowed the Nazi Party to supplant their loyalty to God’s Word?

It seems clear to me that the attitudes and actions of Nazi Germany’s ministers and churches are being repeated in the United States today. To a large degree, Evangelicals have wrapped the Cross of Christ in the banner of the Republican Party. They quote Romans chapter 13 to justify their unflinching, yes, even blind support for President Bush. They are willing to surrender their freedoms and liberties so that President Bush might protect them. They castigate and denigrate in the most caustic terms anyone who dares to challenge or even question President Bush. They are willing to let the president lead them into multiple wars, even wars of aggression, based solely on Bush’s word. They refuse to hold the president accountable to the principles of our Constitution and Bill of Rights. It seems to me that President Bush has taken on the aura of an American Fuhrer in the minds of many Evangelicals.

Just how far are Evangelicals willing to allow Bush to go? They already support unbridled spying on American citizens. They have gladly surrendered their Fourth Amendment rights. Would they be willing to support the imprisonment of fellow Christians who do not support Bush if the Department of Homeland Security ordered it? I believe many would. And if so, how is that different from the attitudes of Christians in Nazi Germany?

LIVING WITHOUT TELEVISION

Over 10 years ago, my wife and I decided to out TV from our lives. We are not television snobs, far from teetotalers, and believe that many aspects of life can be enjoyed in moderation. But television had become something of a negative for us, and we wondered what our lives would be like if we tried giving it up for a short period and then see what happened. We did, choosing the period of Lent in 1995, and that short period continues to this day. I rank our disposing of the national pacifier among our most important joint decisions, right up there with deciding to get married or where to raise our children.

Our problems with television would be familiar for many. Watching the tube was time consuming, taking us away from other activities. We knew we would receive much more long-term benefit, in terms of living a fuller life, from reading books, being engaged with others socially, and bonding with our kids. Also, we found it quite controlling. We would catch ourselves being interested in television characters who in real life we would consider morons. While there was often programming we found worthwhile, such programming was rare. But we would still watch.

I remembered an incident when I lived in an apartment complex in San Antonio. Walking from the parking lot to our apartment involved passing over 20 identical living rooms, and one evening, after taking out the garbage during one of Clinton’s televised addresses, I noticed that every one of these living rooms had the president’s happy mug on a television screen. Every one. Having read Orwell in a high school English class – something that was common before the federalization of public education – I found this development appalling. Was this Texas or Oceana? Also, our decision to out TV came from wanting to make a conscious choice not to live out lives watching other people live. Life is vicarious enough. Why add to it?

While we watch occasional movies and other offerings available on DVDs, we often watch TV when staying in hotel rooms or relatives’ houses, events that occur two or three times a year. This arrangement allows us to use TV on our terms. We use it. It does not use us. Becoming informed takes some work. This traditionally involved reading books, newspapers, and magazines to develop opinions about what you believed (or did not). Unfortunately, some of the most uninformed people I meet each day receive their news solely from TV, which reduces complex social problems into emotional, highly manipulative one- or two-minute segments. And these people vote.

The Framers of the Constitution created a decentralized republic, and explicitly not a democracy, because they knew that the latter tended toward centralization and tyranny. Even Jefferson believed that the small role actual voting would play in the new country would only be tolerable with an educated electorate. Not only would he hate television, he would despair over a culture that promotes democracy and television as goods that must be universally available. What does it mean for freedom when so many voters are only informed to the extent possible through CNN and Fox News?

For me, the benefits are much greater than simply being more productive during the day, although that certainly is a plus. I think our family is closer than it would otherwise be, although I can never know for sure. I am sure our kids are less aware of the material world than their television-watching peers – and they seem more innocent. Surely this has something to do with the fact that they are not exposed, on a daily basis, to sex as a mere consumption good or to the sports-worshiping culture that pervades much television. So every Lent, which begins next month, I remember that time in 1995 when my family decided to enter through the narrow gate that brought us into a world without television. Giving up pacifiers is never easy. In our case, it was important for our living a more purposeful and happy life.

AMERICAN “CONSERVATIVES” HAVE BECOME BROWNSHIRTS

Last week’s annual Conservative Political Action Conference signaled the transformation of American conservatism into brownshirtism. A former Justice Department official named Viet Dinh got a standing ovation when he told the CPAC audience that the rule of law must not get in the way of President Bush protecting Americans from Osama bin Laden. Former Republican congressman Bob Barr, who led the House impeachment of President Bill Clinton, reminded the CPAC audience that our first loyalty is to the U.S. Constitution, not to a leader. The question, Barr said, is not one of disloyalty to Bush, but whether America “will remain a nation subject to, and governed by, the rule of law or the whim of men.”

The CPAC audience answered that they preferred to be governed by Bush. According to Dana Milbank, a member of the CPAC audience named Richard Sorcinelli loudly booed Barr, declaring, “I can’t believe I’m in a conservative hall listening to him say Bush is off course trying to defend the United States.” A woman in the audience told Barr that the Constitution placed Bush above the law and above non-elected federal judges. These statements gallop beyond the merely partisan. They express the sentiments of brownshirtism. Our leader uber alles.

Only a few years ago this same group saw Barr as a conservative hero for obtaining Clinton’s impeachment in the House. Obviously, CPAC’s praise for Barr did not derive from Barr’s stand on conservative principle that a president must be held accountable if he violates the law. In Clinton’s case Barr’s principles did not conflict with the blind emotions of the politically partisan conservatives demanding Clinton’s impeachment. In opposing Bush’s illegal behavior, Barr is simply being consistent. But this time Barr’s principles are at odds with the emotions of the politically partisan CPAC audience. Rushing to the defense of Bush, the CPAC audience endorsed Viet Dinh’s Fuhrer Principle over the rule of law.

THE PENTAGON’S WAR ON THE INTERNET

The Pentagon has developed a comprehensive strategy for taking over the internet and controlling the free flow of information. The plan appears in a recently declassified document, “The Information Operations Roadmap”, which was provided under the FOIA (Freedom of Information Act) and revealed in an article by the BBC. The Pentagon sees the internet in terms of a military adversary that poses a vital threat to its stated mission of global domination. This explains the confrontational language in the document which speaks of “fighting the net”, implying that the internet is the equivalent of “an enemy weapons system.”

The DoD places a high-value on controlling information. The new program illustrates their determination to establish the parameters of free speech. The Pentagon sees information as essential in manipulating public perceptions and, thus, a crucial tool in eliciting support for unpopular policies. The recent revelations of the military placing propaganda in the foreign press demonstrate the importance that is given to co-opting public opinion. Information-warfare is used to create an impenetrable cloud around the activities of government so that decisions can be made without dissent. The smokescreen of deception that encompasses the Bush administration has less to do with prevaricating politicians than it does with a clearly articulated policy of obfuscation. “The Information Operations Roadmap” is solely intended to undermine the principle of an informed citizenry.

The Pentagon’s focus on the internet tells us a great deal about the mainstream media and its connection to the political establishment. Why, for example, would the Pentagon see the internet as a greater threat than the mainstream media, where an estimated 75% of Americans get their news? The reason is clear. Because the MSM is already a fully-integrated part of the corporate-system providing a 24 hour per day streaming of business-friendly news. Today’s MSM operates as a de-facto franchise of the Pentagon, a reliable and sophisticated propagandist for Washington’s wars of aggression and political subterfuge.

The internet, on the other hand, is the last bastion of American democracy … a virtual world where reliable information moves instantly from person to person without passing through the corporate filter. Online visitors can get a clear picture of their governments’ depredations with a click of the mouse. This is the liberalization of the news, an open source of mind-expanding information that elevates citizen awareness of complex issues and threatens the status quo. The Pentagon program is just one facet of a broader culture of deception, a pervasive ethos of dishonesty that envelopes all aspects of the Bush White House.

The ultimate goal of the Pentagon is to create an internet-paradigm that corresponds to the corporate mainstream model, devoid of imagination or divergent points of view. They envision an internet that is increasingly restricted by the gluttonous influence of industry and its vast “tapestry of lies”. The internet is the modern-day marketplace of ideas, an invaluable resource for human curiosity and organized resistance. It provides a direct link between the explosive power of ideas and engaged citizen involvement (aka, participatory democracy). The Pentagon is laying the groundwork for privatizing the internet so the information-revolution can be transformed into an information-tyranny, extending to all areas of communications and serving the exclusive interests of a few well-heeled American plutocrats.