Offshore News Digest for Week of September 6, 2004

GLOBAL BUSINESS

COMMONWEALTH VS. INDEPENDENT COUNTRIES: HOW DOES PUERTO RICO’S ECONOMY MEASURE UP?

The option of independence as a political-status alternative for Puerto Rico has received very little support or votes since commonwealth began in 1952. Yet, during the latter half of the 20th century, there has been a proliferation of countries worldwide that have become independent nations. Membership to the United Nations more than tripled from 51 in 1945 to 191 in 2002. Many are small nations with economic performances that differ greatly, and few have done well or performed economically better than Puerto Rico has over the past 50 years. The great majority of these newly formed small nations have not done well economically.

Some of the new independent nations benefited from the impressive expansion of the global economy from 1950 to 2000, growing significantly despite their small scale. Nevertheless, others such as Sao Tome & Principe, Comoros, the Solomon Islands, Bhutan, and Equatorial Guinea remain extremely poor, with a GDP per capita ranging from $280 to $700 a year, wrote Richard Cooper of Harvard University in a paper presented at the World Bank’s Annual Bank Conference on Development Economics in May 2004. The economic growth and success that took place during the second half of the 20th century was not evenly distributed. In the 1950s, world per capita income increased by 2.8%; in the 1960s, it grew to 3%; in the 1970s, it declined to 1.9%; and during the 1980s, it dropped even further to 1.3%, then increased slightly to 1.5% in the 1990s. The per capita income in the U.S., however, has increased by an annual average of 2.2% in the past 50 years. During that same period, Western Europe’s growth averaged 2.7%, while Asia’s was somewhat higher at 3.4%. Latin America’s growth was 1.7%, slightly higher than Africa’s 1%.

Puerto Rico’s economic growth during the 1950s and 1960s was not an isolated case. The whole world was growing, although Puerto Rico was doing so at a faster rate -- as a result of industrialization and trade with the U.S. -- according to respected economic historian Angus Maddison.

NEW US IMMIGRATION CONTROLS INCREASE DIFFICULTY FOR IRISH TO RETURN HOME

Strict new US immigration controls to be introduced next month will make it very difficult for 50,000 undocumented Irish residents to leave the country, because they will not be able to return to the US, Fine Gael TD Jimmy Deenihan has warned. “It is now vital that Washington introduces legislation to regularize the 50,000 plus undocumented Irish emigrants currently living in the US. Otherwise, many will be forced to leave the country or will find themselves unable to return home again for many years to come,” he said.

THE CLASS ACTION INDUSTRIAL COMPLEX

Congress tried to crack down on the class action racket in 1995. Today shareholders suits are bigger than ever, fed by a cozy cabal of lawyers, unions and publis pension funds. The only real looser is you. In the cozy confines of the class action racket, plaintiff lawyers give handily to the politicians who hire them. They hire ex-insiders to woo pension funds, fete clients at cushy conferences and pay referral fees to powerbrokers who hook them up with new pension plaintiffs. None of this is illegal per se, nor does it violate existing rules of legal ethics. But even some lawyers have problems with it.

Last year plaintiff shareholders won $3 billion in class actions against the companies they had invested in, says Institutional Shareholder Services. The take was distributed in small chunks to thousands upon thousands of recipients. But $800 million of it will go to a small circle of very lucky people: securities plaintiff lawyers. The plaintiff lawyers had help in amassing their $800 million take -- from pension fund trustees who are oblivious, defense attorneys who will not challenge the fees because it might prompt the other side to push for an even bigger settlement and insurers who are happy to charge higher premiums to cover the rising costs of litigation.

AMERICAN EXPAT COMMUNITY IN PANAMA HAS SOME DECISIONS TO MAKE

Many people who are dual citizens do not like to advertise that fact. A lot of times it is a matter of being a person with one foot in each nation, being mistrusted by people in both. But there are a lot of us Panagringo duals here, distributed along a 180° cultural spectrum from purely panameño to purely gringo. Then there are the American expatriates, some of whom live in their insulated social bubbles, some of whom try to blend in with Panamanian society, and most existing in a continuum between these extremes. We have all for various reasons chosen not to live in the United States, but we all bring something of Americana with us. How much? Well, that varies.

Despite our differences there some things we Americans hold in common, and other things about which we ought to reach a consensus. Speaking as a Panamanian now, there are also decisions that Panama needs to make about the gringos. For example, people will congregate where they will, but there are laws against housing discrimination in the USA and we should have them here. Gated residential communities that are only advertised in English, in which people are sold a dream of English-only American suburbia (but with lower food prices and cheap maids) can only stir up resentments against all of us. The days of colonialism are over, and a ghetto scene is not such a hot idea either. These are things that Americans should not want and Panamanians should not tolerate.

That is the easy question about the expat influx. Far more complicated are the subtleties of balancing the economic and social effects in places like Boquete and Bocas del Toro, which in turn are similar to the problems and benefits of gentrification in Colon and the Casco Viejo. How do we arrange things so that the arrival of relatively wealthy newcomers benefits long-time community residents rather than driving them out? The problem for Americans is that even if the socially irresponsible speculators and the politicians they buy have the power to enforce “free market” policies at the expense of community interests, aligning the American community with these elements of Panamanian society is an unpopular and in the long run probably a costly thing to do.

MIREYA’S PARDONS CAUSE HEADACHES FOR THE NEW PANAMANIAN GOVERNMENT

Claiming that the men would face extradition to Cuba or Venezuela by the Torrijos administration, and then death at the hands of Fidel Castro’s or Hugo Chávez’s government, Mireya Moscoso on the evening of August 25 included four anti-Castro Cuban exiles who had been jailed here since November of 2000 on a list of 169 persons to be pardoned. The men were whisked away on a private flight to Honduras, where one of their number disappeared into the underground existence, and from whence the other three headed to Miami and a heroes’ reception. Cuba promptly broke relations with Panama, Venezuela recalled its ambassador and the University of Panama’s student radicals took to the Transistmica to block traffic and do battle with riot police.

The protests did not stop there. Martín Torrijos blasted the move, arguing in his inaugural address that “for me there are not two kinds of terrorism, one which is condemned and one which is pardoned. Terrorism has to be fought regardless of its origin.” The anti-Castro and normally staunchly conservative El Panama America also editorially blasted the pardons, as did the president of Panama’s bar association, the Colegio de Abogados.

At their trial the activists’ lawyers claimed that they had slipped into Panama because they had been told that Castro’s chief bodyguard intended to defect, but that it was just a trap, part of which included the planting of the explosives in question by Castro’s agents. After the pardons, however, the men’s supporters in the United States argued not that they had been framed, but that they were indeed trying to kill Castro and that this was a justified action. Nearly half of the other people on Moscoso’s August 25 pardon list were journalists (this reporter was one of them). Also pardoned, in that decree and two subsequent ones, were virtually every Moscoso administration official who had been named in a public corruption scandal over the past five years.

HONG KONG AWAKENS TO POLITICS

Passions rarely run high in this prosperous port city, where order and stability have been cherished for decades and where risk taking is not a virtue when it comes to politics. But, as Hong Kong prepares to vote Sunday in legislative elections, a new spirit boldly defies that old stereotype. “Everything today is being politicized, not unlike the United States, and you have a divided community,” said Frank Martin, president of the American Chamber of Commerce here. “Previously, there was a fairly high level of political apathy in Hong Kong, and I don’t think that is true today,” he said.

Although political parties have existed in the former British colony for more than a decade, politics and governing interested few in earnest. That changed last year, when the government of the Beijing-appointed chief executive, Tung Chee-hwa, introduced draconian national security legislation targeting treason, sedition and subversion against the Chinese government in Beijing.

Dissatisfaction with Mr. Tung’s policies had been simmering since the territory’s 1997 turnover from Britain. Still, many gave Mr. Tung the benefit of the doubt, especially on the economy, which suffered because of external factors, such as the 1997 Asian financial crisis, the global economic turndown and the outbreak of the deadly severe acute respiratory syndrome (SARS) last year.

Hong Kong plays down talk of smear campaign ahead of vote.

A survey two days before Hong Kong legislative elections showed pro-democracy forces, tainted by a sex scandal, may fare less well than expected, but the election chief dismissed talk of dirty tricks by China. In the only exercise in democracy in China, the freewheeling former British colony votes on Sunday for the 60 seats in its Legislative Council, with the democratic camp widely expected to make strong gains against pro-Beijing politicians.

However, the result in the complicated electoral system is expected to be close in the most fiercely fought such poll in Hong Kong’s history. Democrats are riding a groundswell of support for their campaign for votes for all but the pro-Beijing camp is helped by domination of most of the 30 seats that are chosen not by direct election but by limited professional groups.

Scandals have dogged politicians from both sides, the most damaging involving a Democratic Party member arrested last month in southern China and jailed for six months of re-education for hiring a prostitute.

MONACO TO JOIN COUNCIL OF EUROPE

The Council of Europe’s Committee of Ministers decided last week to invite the Principality of Monaco to become the Organization’s 46th member state. The decision follows the favourable opinion adopted by the Assembly on 27 April 2004, and positive developments concerning the revision of the 1930 Convention between Monaco and France. The Principality of Monaco applied to join the Council of Europe on 15 October 1998. On 22 June France and Monaco concluded an agreement to modify the 1930 treaty. Although the text has not been published at this stage it is understood that the revision removes the restriction whereby French civil servants are appointed to many important positions in Monaco.

This marked an important step towards Monaco’s entry into the Council of Europe, and re-confirms Monaco’s status as an independent sovereign state. “Membership will offer fresh protection to Monegasques and other residents, who will now have access to the European Court of Human Rights” said the head of its Strasbourg delegation, Jean-Charles Gardetto.

THE BAHAMAS RETAINS HIGH CREDIT RATINGS DESPITE BLOW FROM FRANCES

Confirming its confidence in the viability of the Bahamian economy, Standard and Poor’s Rating Service affirmed its A- long-term and its A-2 short-term sovereign credit rating of The Bahamas immediately following Hurricane Frances. “The Bahamas’ sound macroeconomic fundamentals and its moderate government debt burden provide a cushion to absorb the losses incurred as a result of the hurricane,” said credit analyst Olga Kalinina.

The Bahamas shocked and awed by Hurricane Frances.

If there is any magic in Freeport and in Grand Bahama on the whole, it is the miracle that the island is still standing after the devastation of Hurricane Frances. Many people there, however, are still in shock and do not realize how fortunate they are to be alive. On the other hand, what many do know is that they are hungry, they are thirsty, they are dirty and tired because food and water are in short supply, and there is no electricity. What they also know is that the existing conditions in that island poses an imminent health problem that has to be addressed directly and immediately.

Frances stirs things up for Bermuda insurers.

Bermuda-based insurers are bracing themselves for another wave of claims and losses as Hurricane Frances took aim at the Florida coast, but there is speculation that ultimately they may benefit. Market analysts said that while damage from the Category 4 storm could leave property and casualty insurance companies exposed to losses and short-term decreases in their stock prices, subsequently they may well increase rates for property coverage in order to offset those losses.

ISLE OF MAN MAKES A BID FOR eBUSINESS

The Isle of Man has launched a campaign to convince UK companies to base their ebusiness operations on the island. The island plans to offer businesses a zero rate of corporate tax by 2006, and, more relevantly to the UK’s IT directors, it has one of the world’s most advanced telecommunications infrastructures and offers 40% grants for hardware, software and maintenance contracts? Several companies have already set up operations on the island, including internet payment providers and online gambling sites.

But not everything is necessarily that easy for interested companies. The Isle of Man has less than one percent unemployment -- great for residents, but not ideal for recruiting local, skilled IT professionals. So if businesses want to set up a base, they will most likely need to convince existing staff to move. The benefit is that the island has one of the highest standards of living in the British Isles, and low personal tax rates.

EU BUDGET REVAMP DOES NOT BRING UK EURO ENTRY CLOSER

Last week’s easing of the EU’s budget rules might make the prospect of joining the euro slightly more palatable to British policymakers but adoption of the single currency still seems a long way off. The EC suggested loosening the EU’s Stability and Growth Pact to make it more growth-friendly and to cool the crisis that has seen France and Germany repeatedly breach the rules. British Finance Minister Gordon Brown has long been critical of the pact which stipulates that government budget deficits should never exceed 3% of GDP, even in an economic downturn.

While reform of the pact has never explicitly been one of the five tests that must be passed before the UK government would think it right to join the euro, many analysts say Mr. Brown would never want to swap his own fiscal rules that do take account of the economic cycle for the euro zone’s stricter regime. Brussels has now proposed the rules be changed to pay greater attention to economic developments when setting deadlines for budget cuts and to take account of whether a country’s debt is sustainable.

If anything, euro membership seems increasingly to be on the backburner as the British and euro zone economies appear to have moved even more out of line. Even if the government deemed the economic conditions right, it would have to overturn public hostility in a referendum. And Prime Minister Tony Blair, under fire from even his own party over his Iraq war policy, is unlikely to have the necessary political capital to force the issue, especially just as he faces a general election which most expect to take place next year.

CBO PROJECTS U.S. RECORD $442 BILLION DEFICIT

The federal deficit will swell to a record $422 billion this election year but fall short of even more dire forecasts, Congress’ top budget analysts projected in a report that became instant fodder for both political parties. The nonpartisan Congressional Budget Office said the shortfall would shrink to $348 billion next year -- still the third worst ever in dollar terms. Last year’s $375 billion gap was the previous record. The projections reverberated on the campaign trail, where Democrats immediately criticized President Bush for what will be the fourth consecutive year in which the budget’s bottom line has worsened. They linked the figure to the 900,000 net job loss since Bush took office and the recent announcement that Medicare’s premiums will rise by 17% next year.

A $422 billion deficit would be the biggest dollar amount in history, though the shortfalls of World War II were larger when the figures are adjusted to even out the impact of inflation. But Republicans noted that the forecast was better than the $477 billion deficit congressional analysts predicted in March and the $445 billion gap the White House expected in July. Coupled with other recent data, they said, the new numbers were evidence of an improving economy.

$2.3 trillion in new debt expected by 2014.

This year’s federal budget deficit will reach a record $422 billion, and the government is now expected to accumulate $2.3 trillion in new debt over the next 10 years, the Congressional Budget Office reported. The expected deficit for the current fiscal year, which ends Sept. 30, is $56 billion less than the CBO predicted in March, as a recovering economy added to tax receipts. But it is $46 billion more than last year’s record shortfall, with even more red ink possible, the nonpartisan agency reported: The expected total 10-year deficit would climb from $2.3 trillion to $3.6 trillion if President Bush is able to extend the tax cuts he enacted. They are currently set to expire in 2011.

Unsound transactions are going to catch up with the government.

A new report from the CBO explains that the deficit is a virtually meaningless measure of the government’s indebtedness. The main reason for this is that the federal government uses cash accounting rather than accrual accounting. What this means is that the government can acquire massive debts far into the future with virtual impunity. The government can also, in effect, cosign for loans and provide insurance that could potentially cost taxpayers hundreds of billion of dollars without it ever showing up in the budget until a check has to be written.

By the CBO’s reckoning, the federal government’s true debt last year was $8.5 trillion -- more than twice the debt held by the public, which we generally think of as the national debt. But even the $8.5 trillion figure is much too low because it excludes the really big debts that are owed for Social Security and Medicare. The CBO estimates the present value of the unfunded liability for Social Security at $7.2 trillion, and even this is virtually nothing next to the $37.6 trillion cost of Medicare. In short, we would need to have about $45 trillion in the bank today earning interest in order to pay all the promises that have been made for future Social Security and Medicare benefits -- over and above the future taxes and premiums that will be collected to fund these programs.

The CBO estimates that we would have to raise taxes by 6.5 percent of GDP immediately and forever to maintain these programs in perpetuity. This year alone, that would mean a tax increase of $800 billion. This is why I believe it was utter insanity for the White House and Congress to have enacted an expansion of Medicare for prescription drugs last year. This one unconscionable action increased the long-term liability of Medicare by 1 percent of GDP forever.

It goes without saying that if any private corporation had behaved the way the government has, it would soon find its executives being sentenced by a federal judge. It is illegal for businesses to keep their books the way the government does, hiding their long-term liabilities from shareholders the way the government disguises its indebtedness from voters. Writing in the Nebraska Law Review last year, George Washington University law professor Cheryl Block compared bookkeeping by the federal government to bookkeeping by businesses involved in corporate scandals. She found little difference.

WHY SCHROEDER IS RIGHT TO PRESS FOR REFORMS IN GERMANY

The reaction of Germans to Gerhard Schroeder’s drive for a makeover of the nation’s economy and its hulking welfare state is understandable. After all having been told for decades by successive governments that their pensions were secure and having enjoyed falling working hours combined with one of the world’s best health services and comprehensive welfare benefits, it naturally comes as something of a shock to discover that the social state is in trouble and that hard-fought for work benefits appear to be disappearing by the day. Emboldened by Schroeder’s moves to press forward with tough reforms including unpopular cuts in welfare benefits and increased health service charges, employers have also now joined the drive to reform Europe’s biggest economy.

Besides successfully pushing forward with a campaign to extend the working week, employers have been retreating from strict work contracts and stepping back from the nation’s collective-bargaining system under which pay settlements in one region are adopted on a national industry-wide basis. The scale of the upheaval and the concerns generated by Schroeder’s so-called Agenda 2010 reform plan have plunged many Germans into a state of gloom about their nation’s future with some declaring that the country is now in a state of decline.

This is certainly something of an overreaction to what is essentially a long overdue process that many industrial nations have already been through with a large number of them (such as Britain) in much worse shape than Germany is today. It is worth noting that Germany is now the world’s leading export nation having overtaken the United States last year. This is hardly the sort economic performance that a nation in a state of decline normally turns in.

Europe is reaching a crisis point.

With all eyes fixed on the American presidential elections, the scale of the looming crisis in France and Germany has gone largely unremarked. But it may so change the political geography of Europe that British arguments for and against the EU will be made redundant. A pervasive sense of decline in both countries, only partially justified but none the less virulent, is destabilizing not just the structures of the EU -- but the political systems of France and Germany.

The French economy is mired in low growth and high unemployment. Government spending at 54% of GDP can go no higher. There is universal agreement that France needs decisive action to reverse economic decline. There are rancorous arguments about not just how the economy should be run and society organised but whether the constitution of the Fifth Republic works any more.

In Germany, Gerhard Schröder is presiding over the wreckage of the SPD, once the standard bearer of European social democracy. If he ends up going, an SPD successor would be forced to abandon recasting Germany’s unemployment benefit system so that it stops offering what amounts to a generous pension for life and, instead, becomes a means of moving the unemployed from one job to another. This is a vital prerequisite to restoring German economic health, but it is the direct cause of Schröder’s crisis. His party cannot and will not accept the need for reform, and neither does an important swath of public opinion. Reform of the welfare state is an imperative, but the reform program threatens the cohesion of the state.

TAXES

HUNDREDS OF DOCTORS AND DENTISTS ARE UNDERGOING A PAINFUL IRS EXAM

For nearly three decades dentist-turned-insurance-agent L. Donald Guess sold financial planning and products to dentists and doctors nationwide through seminars, medical convention booths, deals with doctors’ groups, a “Doctors National Advisory Board” and a network of independent “financial counselors”/insurance agents. Operating with a family of companies known as “Xélan”, he offered such routine services as asset allocation and pension administration. But beginning in the mid-1990s he also advised doctors on how they could accumulate the “critical capital mass” needed to maintain their lifestyle in retirement. How? By paying current income taxes only on those earnings they planned to spend immediately and diverting all “surplus” income into a half-dozen “deductible” Xélan savings plans.

Now hundreds of doctors are being audited by the IRS, and the government has summoned records which would enable it to finger for audit all 2,000-plus docs who participated in one or more of the six programs. Meanwhile, the IRS is investigating whether Xélan has been promoting abusive tax shelters. There is no indication customers are targets in the criminal probe, says Washington tax lawyer Michael C. Durney, who represents 210 of the doctors under audit.

If the IRS decides the Xélan plans violate tax law and the courts agree, it could become the biggest tax mess for doctors and dentists since the shelter craze of the early 1980s, when they loaded up on jojoba bean research partnerships and master music recordings. Even if Xélan’s programs are vindicated -- as its lawyers say they should be -- the investigation is unpleasant for the doctors under audit. But Seattle tax lawyer John M. Colvin, who represents Xélan in those suits, admits the odds are against Xélan, given recent government victories in other shelter summons cases.

NO SH*T SHERLOCK AWARD NOMINEE: BUSH SAYS TAX CODE A “MESS ... FULL OF SPECIAL-INTEREST LOOPHOLES”

President Bush reasserted his call Sunday for a simpler tax system, and aides said he is considering pushing for a flat tax, which would set the same income-tax rate for most taxpayers, as a major priority if he were to win a second term. In arguing for a rewrite of tax laws, Bush said that they are “a complicated mess” and “full of special-interest loopholes”, and that, “Americans spend about 6 billion hours of paperwork and headache every year on the tax code.” He promised that, “In a new term, I will lead a bipartisan effort to reform and simplify and make fair the federal tax code.”

A flat tax, which Congress would have to pass, would have fewer -- or no -- deductions and credits. Administration officials, while saying no decision has been made, said the Treasury Department is studying such a system, and White House proponents assert that it would encourage saving and investment. Sen. John F. Kerry’s campaign contends that because many such proposals do not tax investment income like interest, capital gains and dividends, such a move would have the effect of shifting the tax burden from the wealthy to the working class. “This is the ultimate embodiment of what they’ve done the last four years,” said Jason Furman, Kerry's economic policy director.

A revision of the tax code was one of the major planks of the second-term agenda Bush announced in his acceptance speech at the Republican National Convention on Thursday, and the idea is a new applause line in his stump speech.

KERRY VOWS TO END TAX BREAK FOR COMPANIES THAT OUTSOURCE JOBS

Sen. John Kerry pledged to eliminate in a “nanosecond” a tax break that U.S. companies get for foreign operations, charging that the “stupid loophole” had forced thousands of manufacturing jobs overseas in the past three years. But most experts agree that outsourcing is not to blame for many of the 1.1 million private-sector jobs that have been lost over the past three years. And those jobs that are outsourced are not driven abroad, as a rule, by the small tax break that Kerry decries; economists say most companies that relocate jobs abroad do so to take advantage of lower wages and production costs. The disputed tax break is intended to equalize U.S. and foreign taxes on foreign operations to make U.S. firms competitive, not to reward them for moving U.S. jobs overseas.

“How Kerry became a girlie-man.”

The GOP got a tremendous bounce from their convention that the Democrats failed to achieve, which launched the president into a double-digit lead over Sen. John Kerry. Although the full shape of his vision has yet to be fleshed out, the president presented a comprehensive agenda for creating an ownership society through health-care savings accounts, personal retirement accounts and fundamentally reforming and simplifying our cumbersome tax code to maximize economic growth. With this bold outline, President Bush has thrown down the gauntlet for the Kerry campaign to answer even while the president goes about filling in the blanks that still remain.

For the Democrats, serious questions remain: Does Kerry have faith in free enterprise, faith in the resourcefulness of the American people, faith in the U.S. economy? Is he going to remain pessimistic about our economy? Will he keep saying this is the worst economy since the Great Depression? In short, is he going to allow the Democratic Party to fit Schwarzenegger’s image of “economic girlie-men”? The risk is real. Even New York Times liberal columnist Frank Rich titled his post-GOP-convention column “How Kerry became a girlie-man”.

BRITONS IN TOP TAX BRACKET PAY UP TO HALF OF SALARY IN TAX

According to figures published by accounting firm Smith & Williamson, a family man with two children who earns £40,000 per annum is paying up to 50% to the Treasury through a combination of direct and indirect taxation. It is claimed that said family man would have been paying just 35% when the Labour government came to power in 1997. Meanwhile, a man in similar family circumstances earning £25,000 per year is now paying 38% in combined taxation, up from 33% in 1997.

CANADIAN TAX AGENCY’S 25,000 WORKERS TO STRIKE

Last-minute negotiations between Canada’s tax agency and its largest union have collapsed, putting more than 25,000 workers on the picket lines. The Public Service Alliance of Canada and the Canada Revenue Agency failed to come to an agreement on annual wage increases as well as demands for blue-collar workers and the large number of term employees who work at the agency.

FINNISH ECJ RULING FURTHER ERODES POWERS OF NATIONAL TAX AUTHORITIES

The European Court of Justice has ruled that a Finnish taxpayer is entitled to receive the same tax credit on dividend income from a foreign company as that received from Finnish companies -- a judgement likely to further erode the powers of national tax authorities in favour of the EU. According to the Justices, Finland’s opposition amounted to discrimination and hindered the free movement of capital within the EU, as enshrined in the EC Treaty. Similar tax credits also exist in other EU countries such as the U.K. and France, meaning that the ruling will no doubt have ramifications beyond the Scandinavian member states.

VERN JACOBS ON SAVING TAXES LEGALLY

How to Pay Zero Income Taxes

A lot of people would like to be able to stop paying income taxes. If your tax advisors have told you that it is not possible, they were probably making a value judgment that the available methods were not worth while or suitable for you. Just to satisfy your curiosity, here are some legal ways to pay zero income taxes. But first, I need to emphasize that there are many tax scams and schemes to avoid taxes that are not legal and will not stand up to a challenge by the IRS in any U.S. court.

If you want to avoid income taxes then you must find a legal way to avoid having any income that is subject to tax. There are quite a few types of income that are not subject to tax. The following are a few examples that are described in an extremely simplified and abbreviated manner.

Foreign Earnings Exclusion

This is a huge tax break for certain self employed people who have “portable trades” or businesses. It is also a great break for some employees who have jobs that involve extended international assignments and who do not have to spend a lot of time in the corporate offices. The details are in tax code section 911 and tax form 2555.

U.S. persons who work and live for at least a full year in a foreign country may exclude up to $80,000 of earned income -- or self employment earnings -- from U.S. taxes. (This amount will be indexed to keep pace with inflation after 2002.) To the extent that the foreign country imposes tax on income earned in their country, this is not a way to avoid taxes entirely. The key is whether the country in which you work and live imposes substantially less taxes than what you would have to pay in the U.S. And, in a few cases, you may be able to create a job for yourself in a tax haven country where there is no tax on your earnings.

Tax Protestor Theories

During my 25+ years as a tax author, editor and/or columnist, I have received many dozens of long letters or phone calls from the “true believers” who are convinced that the U.S. tax law is illegal in one or more respects, is invalid or does not apply to the citizens of the various states, etc., etc., etc. I happen to believe that any income tax system is simply a legalized method of theft, wherein the ruler extorts property from the subjects or a majority of the citizens extort property from the more affluent minority of citizens. However, various methods of forceful extortion of property from the subjects of the realm have been common for all of recorded history.

Regardless of my opinion of the nature of any form of enforced taxation, the U.S. income tax, social security tax and estate tax system is considered to be legal by the nine justices of the Supreme Court and all lower courts in the land. Some of the arguments of the protestors might even be valid. But the arguments are purely academic and pointless. The courts at every level have held the income tax to be legal.

THE ORIGIN OF THE U.S. INCOME TAX

“The freedoms won by Americans in 1776 were lost in the revolution of 1913,” wrote Frank Chodorov. Indeed, a man’s home used to be his castle. The income tax, however, gave the government the keys to every door and the sole right to change the locks. Today the American people are no longer the master and the government has ceased to be the servant. How could this be? The Revolution fought in the name of the inherent natural rights to life, liberty and the pursuit of happiness promised to enthrone the gains of individualism. Instead, federal taxation bribes the States and individuals to serve the interests of ever-greater submission to the centralized will.

How did tax slavery come to the land of the free?

ASSET PROTECTION

NAURU PARLIAMENT TO DEBATE FURTHER MONEY-LAUNDERING LAWS

Nauru last year agreed to close down its offshore banking system and bring its laws into line with the demands of the international Financial Action Task Force (FATF). Nauru’s Parliament has since passed several new laws but the FATF announced in July that counter measures against the Pacific state would continue because insufficient progress had been made in tightening up its laws against terrorist financing. Nauru’s new finance minister, David Adeang, said the FATF never seems to be satisfied, but said he would put further legislation to the special sitting of the Parliament.

BAHAMAS’ TRUST SETTLOR MADE TO PRODUCE DOCUMENTS BY IRS

A Dallas, Texas court has ordered that the settlor of a Bahamas trust, John Eulich, should pay a fine of $5,000 a day until he complies with a court order to supply trust documents to the IRS. After 30 days, the daily fine will increase to $10,000. When the IRS served a formal request for documents from the trust, Mr. Eulich refused to provide the documents and claimed that he had no control over the trust and had exhausted his powers to try to get the documents. The District Court judge disagreed, holding that the Settlor could still attempt to get the documents from the trust by appointing new administrators and by filing a lawsuit in the Bahamas. At any rate, the Court stated, it was not going to recognize the Settlor’s “impossibility defense” because the impossibility was self-created, i.e., the Settlor’s own drafting caused the impossibility.

The IRS is investigating Eulich and his wife, Virginia, for the tax years of 1995, 1995 and 1997, and as part of its investigation, sought documents relating to the Bahamian trust, the Mona Elizabeth Mallion Settlement Trust No. 16 and to various corporations controlled by the Trust. To that end, the IRS issued formal document requests and summonses seeking the information.

PRIVACY

SWISS POLICE WANT SPEEDY ISSUE OF BIOMETRIC PASSPORTS

The Federal Police Office is calling for the introduction of biometric passports as early as next year. The United States has given Switzerland and 26 other countries with which it has visa-waiver agreements until October 2005 to start issuing the new travel documents. Under a draft proposal put forward by police officials, the first Swiss passports containing data such as face recognition and fingerprint identification could be issued before the end of next year. The new passport would replace the existing machine-readable document, which was itself only introduced at the beginning of 2003.

The plans come amid mounting pressure from Washington to speed up the introduction of the new passports. The US says they are essential to prevent terrorists from taking advantage of easier entry restrictions in place for some countries. Washington adds that biometric passports will help to identify passengers and make it more difficult to forge travel documents.

The US originally wanted countries to begin issuing biometric passports by the end of October 2004. But the date was put back after it became clear that most of the countries whose citizens are permitted to visit the US without a visa for up to 90 days would not be ready to issue the new passports by the original deadline. Holders of passports issued after October 2005 which do not include biometric data will be required to apply for a tourist visa before arrival in the US.

DAVID BLUNKETT’S SATELLITE TAGGING: THE TRIPE BEHIND THE HYPE

The announcement of the U.K. Home Office’s satellite tracking pilot is a classic of its genre. As is the case with so many Blair government initiatives the earth was noisily promised in the run-up, and continued to be promised by government spokesmen with the announcement, but the pilot itself is so spectacularly modest, so largely low-tech, that it will provide little or no useful information about the viability of the “prison without bars” that David Blunkett will continue to dangle through the upcoming election campaign.

So, as the nonsense flows from the Home Office over the next 12 months, just remember that the tech tinkering cannot and will not take the Home Office’s 5,000 most prolific offenders (as specified in its Strategic Plan) out of circulation by putting them into a virtual pen. Tagging and tracking is (as will become clear in the years following the next election) at best a system that can be used on a relatively small scale in conjunction with early release and rehabilitation schemes for offenders who want to be rehabilitated.

THIS AIRPORT SECURITY DOESN’T FLY

I am a security screener at Dulles International Airport. When I started my job with the Transportation Security Administration in November 2002, I and the other just-hired employees of the newly federalized airport security force believed we would be doing something important in the wake of Sept. 11, 2001. Now, some of us are not so sure. Although management likes to refer to the screeners as “Team Dulles”, in reality many of us believe we are working in a dysfunctional environment. We have come to question the value of what we do. A running joke at the checkpoints in the main terminal at Dulles is, “Guns, bombs and common sense are prohibited by the TSA in the airport.”

TSA policies at Dulles often seem to do little more than improve the appearance of security. For example, the agency allows foot-long knitting needles and bottles of wine and liquor to be carried aboard planes, but not scissors for clipping fingernails or nose hair. A broken bourbon bottle can be a lethal weapon. How does a pair of tiny scissors become deadly? The TSA requires all laptop computers to be removed from their cases and X-rayed separately, but its policy is to allow DVD players and other electronic devices to remain inside suitcases to be X-rayed. Why are laptops categorized as suspect while other electronic devices are not? It was not a laptop bomb that destroyed Pan Am Flight 103 over Lockerbie, Scotland.

In fairness to the TSA, the airlines operating out of Dulles share some responsibility for long lines and missed flights. For instance, the airlines continue to use outdated criteria -- such as buying one-way tickets or paying in cash -- to single out passengers for more time-consuming screening. But, surely, terrorists know these practices bring about extra screening, so the only people being screened -- and delayed -- are regular travelers caught in the airlines’ obsolete “selection” criteria.

I have seen six-inch muskets, bought in Williamsburg as souvenirs for children, confiscated because they were replicas of firearms. I have seen a gavel nearly taken from a circuit judge because it fit the physical description of a hammer. These examples of overreaction by screeners have been fostered by the TSA’s aversion to common sense. I have voiced my concerns to my superiors, my senators, my congressman, and even to the Government Accountability Office. To date, I have received replies from one senator and one member of Congress -- nearly identical letters saying that my concerns will be reviewed by “the appropriate division within TSA.” Uh-huh. The security pageant we now put on at Dulles may be more of a charade than anyone wants to admit.

RFID TAGS: THE PEOPLE SAY NO

When it comes to radio frequency identification tags for humans, the people have spoken. They hate it. CNET News.com recently ran a report on companies with technologies that involve implanting RFID chips under people’s skin or inside a bracelet. The issue has united people with fairly strong religious beliefs and libertarian privacy advocates. Advocates say the tags could help paramedics deliver medical help to people in the field, reduce prison violence or give police a way to track victims of kidnapping, a major problem in Latin America. Even Steve Wozniak, the lovable lug of technology, is promoting human tracking in technology developed by his start-up.

Nearly every reader who wrote News.com about the story expressed outrage and disdain. The fear that the technology will enable governments to keep tabs on everyone was the concern raised most often. Hypothetically, law enforcement agencies or even private security companies will be able to track where you have been, with whom you associate and what you own with this technology. Imagine a semiretired senior citizen in a rented maroon blazer knowing everything about your day. Worse, that person could begin to bombard you (or at least your cell phone) with ads or messages.

A large number of letters also asserted that human RFID tags are a demonic tool. Several pointed out that in the Bible, Revelations 13:16-17 read, “And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads: And that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name.” A few anatomical inconsistencies aside, the description is kind of close. To top it off, others noted that even the so-called advantages are minor at best.

PRIVACY VILLAIN OF THE WEEK: FOREIGN INTELLIGENCE SURVEILLANCE COURT

A document released last week reveals that it is impossible for businesses to challenge secret searches of customer records by federal agents -- because only government lawyers are allowed into the court that would hear appeals! The revelation comes courtesy of the American Civil Liberties Union, which obtained the document in a Freedom of Information Act lawsuit. The document lays out the rules of the secretive FISC, first established in 1978 and still meeting today in the basement of the Justice Department. The rules governing the court simply do not include procedures for outside litigants to argue before the judges, file memorandums or otherwise influence a case. Apparently only government lawyers can appear before the court.

Yet, it is this court which oversees implementation of Section 215 of the USA PATRIOT Act, which allows the FBI to search business records during investigations classified, however loosely, as “counterterrorism” or “counterintelligence”. Businesses searched under such an order cannot reveal the existence of the search. Most of the media coverage around Section 215 searches has revolved around libraries and bookstores, but in fact the provision applies to any and every kind of business.

This revelation undermines the Justice Department contention in a recent court case that, “If and when a Section 215 order is served on these plaintiffs, they will have ample opportunity to challenge it before the court that issues the order (i.e., the FISA Court).” What else is there to say? Businesses are being searched by federal agents, and face criminal penalties for telling the consumers they do business with that they are being watched. And if the searches are made under false pretext, there is quite literally nowhere to turn.

THE SHORT LIFE, PUBLIC EXECUTION AND (SECRET) RESURRECTION OF TOTAL INFORMATION AWARENESS

Was it an Orwellian nightmare or an intelligence savior? John Poindexter says Total Information Awareness was sucked into a vortex of politics and knee-jerk foolishness before anyone could answer that question. Poindexter still slips sometimes and talks about TIA in the present tense. Despite the fact that he resigned from the Defense Advanced Research Projects Agency (DARPA) a year ago, despite the fact that DARPA subsequently dissolved the Information Awareness Office (IAO) he had built, and despite the fact that DARPA ostensibly canceled TIA (the broad-ranging program designed to apply technology-based intelligence as a counterterrorism measure), Poindexter still firmly believes in TIA (he pronounces it Tia, like the woman’s name). In fact, he says, TIA has gone away in name only. And he cautions that if the debate about its merits remains emotional, rather than reasoned, the nation may well end up with a less effective, but more invasive, set of technologies to combat terrorism.

Hardly humbled by the public maelstrom surrounding his project and his eventual resignation (events he says he largely foresaw), Poindexter seems energized by the controversy. If anything, he says now, TIA did not go far enough. It needed to encompass more of the national security infrastructure (not just intelligence) and more of the national policy (not just technology) infrastructure.

A bona fide geek, Poindexter is devoted to the idea that ambitious, creative IT systems can help solve complex problems such as the risks posed by asymmetrical terrorist threats. “The 9/11 Commission is identifying the exact problems that we were trying to get technology to solve. So I keep pushing the idea,” he says. Yet, ideas like TIA must negotiate the roiling confluence of security and technology with democratic principles, including privacy rights. Can the nation strike a balance? These are some of the questions that we were curious to pose to Poindexter, who until recently has been largely absent from the debate that his DARPA initiatives triggered.

NATIONAL ID THREATENS LIBERTY

Washington politicians are once again seriously considering imposing a national identification card -- and it may well become law before the end of the 108th Congress. The much-hailed 9/11 Commission report released in July recommends a federal identification card and, worse, a “larger network of screening points” inside the United States. Does this mean we are to have “screening points” inside our country where American citizens will be required to “show their papers” to government officials? It certainly sounds that way!

As I have written recently, the 9/11 Commission is nothing more than ex-government officials and lobbyists advising current government officials that we need more government for America to be safe. Yet it was that same government that failed so miserably on Sept. 11, 2001. Congress has embraced the 9/11 Commission report uncritically since its release in July. Now Congress is rushing to write each 9/11 Commission recommendation into law before the November election. In the same way Congress rushed to pass the PATRIOT Act after the Sept. 11 attacks to be seen “doing something”, it looks like Congress is about to make the same mistake again of rushing to pass liberty-destroying legislation without stopping to consider the consequences

A national identification card, in whatever form it may take, will allow the federal government to inappropriately monitor the movements and transactions of every American. History shows that governments inevitably use the power to monitor the actions of people in harmful ways. Claims that the government will protect the privacy of Americans when implementing a national identification card ring hollow. We would do well to remember what happened with the Social Security number. It was introduced with solemn restrictions on how it could be used, but it has become a de facto national identifier.

Those who are willing to allow the government to establish a Soviet-style internal passport system because they think it will make us safer are terribly mistaken. Subjecting every citizen to surveillance and “screening points” will actually make us less safe, not in the least because it will divert resources away from tracking and apprehending terrorists and deploy them against innocent Americans!

CONNECTICUT CITY USES SCANNERS TO NAB CRIMINALS

New Haven, Connecticut, with a population of about 125,000, is among the first cities in the U.S. to use infrared scanners that read license plates on moving and parked cars, giving officials immediate access to a database of police and tax records in their hunt for criminals and tax delinquents. The scanners cost about $25,000 apiece and come with laptop computers, an infrared scanning gun and other equipment. The system takes two people to run in the field -- one to drive and the other to aim the gun, which can be aimed out a car window.

Arlington County in Virginia reported success with parking ticket scofflaws and tax delinquents using such devices. Tax agents there get a hit about every 15 minutes when they scanned cars in parking lots, and the scanners paid for themselves in a month, said Mike Longhi, the county’s deputy treasurer for compliance. The county also uses the scanners to check for people who fail to pay parking tickets.

New Haven’s tax office plans to start using the scanners this week, while the police department plans to begin using them later this fall. The city will use the scanner to determine if property taxes are owed on the car, or if the car is stolen, has a stolen license plate or is not registered or insured. Civil libertarians caution that such technology could be abused. But Mayor John DeStefano Jr. said the aim is to cut down on stolen cars and stolen license plates, which are major irritants for city residents, and to ensure that citizens pay their fair share of taxes. “I haven’t heard of and I don’t accept that Big Brother argument,” the mayor said.

Chicago mayor outlines elaborate camera network for city.

From a hi-tech command center, the City of Chicago plans to monitor a vast security network. Thousands of surveillance cameras will be linked -- and authorities will be alerted to crimes and terrorist acts. Some people are concerned about “Big Brother” invading their privacy but Mayor Daley says the cameras will be located in public areas.

The technology that is now so much a part of crime-fighting and anti-terrorism has gone -- as one police spokesman says -- from Stone Age to Star Wars in less than a decade. This step in the evolution will link more than 2,000 public surveillance cameras in Chicago into a unified system. In some Chicago neighborhoods, the cameras have led to a marked reduction in crime.

LAW

RIGGS PROBE SUGGESTS CRIMES BY EMPLOYEES

Riggs Bank investigators have found evidence of possible criminal activities by some former employees who managed the accounts of former Chilean dictator Augusto Pinochet and have referred their findings to federal prosecutors, according to several sources familiar with the matter. The referrals emerged from an internal investigation of possible money laundering in Riggs’s dealings with Pinochet and Chile going back to the mid-1980s, said the sources, who are familiar with the probe and spoke only on condition of anonymity because the investigation is still in its early stages.

Investigators retracing transactions in Pinochet’s Riggs accounts also have found evidence that some of his associates and family members moved large sums of money through at least four other U.S. banks, including Citibank and Bank of America, the sources said. The Justice Department and the U.S. attorney for the District of Columbia are investigating possible money laundering at Riggs involving Pinochet and officials of the government of Equatorial Guinea. Riggs had made a previous referral to the Justice Department related to Simon P. Kareri, who was Equatorial Guinea’s account manager at Riggs and is the subject of a grand jury investigation in the District.

Extraordinary, even hilarious, degree of corruption and humbug in the West evident.

This is a great story. It manages to encompass, somewhere along the line, all of the worst people in the world -- or nearly all. There is a venal, vicious and incompetent African dictator, for a start. And then there are Mark Thatcher, Jeffrey Archer and a bunch of greedy, public-school-educated English mercenaries -- or “adventurers” as they prefer to be called. The Bush family is in there, right up to its collective neck, and so are multinational oil companies, Robert Mugabe, General Pinochet, the Saudis, US banks and the Spanish government. There is even room for a delightful cameo appearance from Osama bin Laden and those 9/11 hijackers. Hell, what more could you want? I am half surprised that Hitler, Graham Norton and Janet Street-Porter are not somehow implicated.

One of the aforesaid mercenaries is Simon Mann, who was just found guilty of illegally buying weapons from the Zimbabwe military -- in order, it is alleged, to mount a coup which would remove from office the President of Equatorial Guinea, Teodoro Obiang Nguema. Obviously, it is a wicked thing to attempt violently to overthrow a sovereign head of state, even if he is as corrupt, murderous and loathsome as Obiang. Obiang runs a regime which is bad even by the remarkable standards of sub-Saharan Africa. But it is the extent of this thug’s financial corruption which truly staggers. Equatorial Guinea should be a rich country, it should be rolling in it -- there are vast oil reserves, some of them still unexplored. But, as the CIA fact sheet on the country dryly observes, there is “little evidence” that any of this wealth has made its way to the half a million or so benighted EG nationals. So, you might be thinking, three cheers for Simon Mann and his band of merry men. Plenty of people seemed to agree, if only tacitly or surreptitiously.

It had occurred to the Americans, too, that Obiang was not necessarily a card-carrying Jeffersonian democrat. But here the waters become a little muddier. After all, Equatorial Guinea provides 350,000 barrels of oil per day to the American market and it is three American oil firms who do the business: Marathon, Amereda Hess and Exxon. A disruption to that oil flow would have a dramatic effect on the US and, of course, a deleterious effect on the finances of those US companies. Further, we might examine where Obiang has been secreting his money. His son has an $8 million home in Los Angeles, Obiang himself has just bought a pad in Maryland for $2.5 million, and his cousin has a house there, too. The dictator’s money is stashed away in one of Washington DC’s oldest and most august institutions, Riggs Bank. One of the most senior executives of one of the old Riggs’ subsidiaries is Jonathan Bush. That is right -- George W. Bush’s uncle. And so you begin to see how the US might be at the least ambivalent about the notion of regime change in Equatorial Guinea.

ORGANIZED CRIME TRANSACTS $2 TRILLION A YEAR, ACCORDING TO U.N. REPORT

Transactions worldwide by organized crime reach $2 trillion every year, and about half that amount goes toward corruption and bribes, the United Nations drugs and crime watchdog said. Drug trafficking accounts for between $300 billion and $400 billion globally as does the illegal arms trade; $1 trillion goes to corruption and the rest comes from smuggling, theft and the trafficking of people.

“These are the consensus figures by specialists,” said Giovanni Quaglia, head of the United Nations Office on Drugs and Crime in the southern cone region of Latin America, in a statement released during a conference on money laundering in Brasilia. The figures include barter transactions, such as swaps of arms for drugs between criminal gangs, said a spokesman at the United Nations agency in Brasilia.

ACLU, DOJ MAKE STRANGE BEDFELLOWS IN E-MAIL PRIVACY CASE

Civil liberties groups made common cause with the Justice Department, a traditional target of their lawsuits, by filing court papers supporting the government’s appeal of a court ruling that said internet service providers are allowed to snoop on their customers. The friend of the court brief (PDF file) argues the 1st Court of Appeal ruling “rewrites the field of internet surveillance law in ways that no one in Congress ever imagined.”

The case centered on Bradford C. Councilman, an online bookseller who offered his customers free e-mail accounts and then sifted through e-mails from Amazon.com to his customers. Councilman was charged in 2001 by the U.S. Attorney’s office with violating the Wiretap Act, which outlaws most interceptions of phone calls and e-mails. The case never made it to trial, as the court dismissed the charge. The Justice Department is pushing to have the ruling overturned because it upsets years of guidance about how to prosecute illegal snooping, and even warns the ruling could open the door to unfettered monitoring of internet phone calls.

NO EVIDENCE FOR TAX HAVEN INVOLVEMENT IN MONEY LAUNDERING IN FINCEN STUDY

The US Treasury’s Financial Crimes Enforcement Network (FinCEN) has just issued a study demonstrating that criminals do not rely on so-called tax havens to launder dirty money. The report also admits that it is almost impossible to stop money laundering.

Money launderers (aka “financiers of terrorism” in contemporary demonology) use a wide variety of ways to move money outside the law, the FinCEN review found. One method is food stamp fraud using electronic benefit transfer cards. The Department of Agriculture’s Food and Nutrition Service estimates that some $395 million of food benefits are diverted each year from their intended purpose through food stamp “trafficking and associated money laundering activities.” It seems more likely that most of such fraud is committed by petty criminals who meet single mothers and the unemployed in the local drug store.

Commenting on the study, the Center for Freedom and Prosperity says that law enforcement resources should be focused on catching and prosecuting people for real crimes rather than imposing huge regulatory burdens that have very little practical impact.

BOTH BUSH AND KERRY LIKE THE PATRIOT ACT

Three times a week, The Associated Press picks an issue and asks the Democratic and Republican presidential candidates a question about it. One of this weeks questions was “Should the Patriot Act be changed to strengthen anti-terrorism protections, civil liberties or both? If so, how?” Answers herein.

HOW TO WATCH THE WATCHERS

Last week President Bush issued four executive orders addressing matters that were subjects of recommendations by the 9/11 commission. One of the four orders created a President’s Board on Safeguarding Americans’ Civil Liberties. While it is laudable that a civil liberties board was included in the first set of presidential actions in response to the commission’s recommendations, the new board falls short of addressing the concerns that led the commission to recommend the creation of a meaningful oversight board in the first place.

For starters, the large size of the president’s board is a problem. With 20 or more people, individual members will not feel personally accountable or responsible, a fatal flaw for an effective civil liberties oversight body. But a more fundamental problem with the president’s panel is the people who will serve on it. All its members are from within government and almost all are from the very agencies and departments whose actions are likely to be the subject of civil liberties challenges and complaints. The 9/11 commission demonstrated the value of a review of government actions by disinterested individuals from outside government. Only outsiders can supply both the independence and the skepticism that are essential to evaluate the merits of governmental assertions of power that intrude on personal privacy.

In fact, the president’s board seems especially unlikely to prevent one of the most serious potential problems brought on by the government’s new powers -- the possibility of applying them in areas that have nothing to do with terrorism. Already, the Patriot Act has been used to investigate official corruption, money-laundering and computer hacking. A properly functioning civil liberties oversight board should also be nonpartisan, and the way to achieve that is through a balanced appointments process. The president’s panel is made up almost entirely of presidential appointees and senior staff members who serve presidential appointees.

There is another problem. While the commission recommended a board that would provide oversight, the president’s board is only an advisory board, which means that it will simply provide advice and information. It has no obligation to disclose its findings to the public. That is a mistake. For such a board to be effective, it must be transparent. To that end, any panel should be required to provide quarterly reports of its findings to Congress and the public. As the 9/11 commission showed with its report, it is possible to remove references to sources and methods of intelligence collection and still provide an informative public accounting.

FLIGHT ID RULES COURT CASE FUEL FRESH FUROR

Lawyers for privacy advocate John Gilmore, who is pursuing a lawsuit challenging the government’s alleged requirement that airlines ask passengers for identification, filed a motion late Tuesday seeking to keep the case open to public scrutiny. The motion opposes the federal government’s request to present its rebuttal of Gilmore’s case to the court alone and in secret. Justice Department lawyers made the request to the 9th Circuit Court of Appeals in San Francisco on Friday, saying that if the requirement to demand ID exists, it would be in a security directive that is classified as “sensitive security information” that it could not reveal in open court. The government did say, however, it would also file a redacted version of its arguments publicly.

Gilmore first challenged the constitutionality of requiring airlines to ask passengers to show identification in U.S. District Court in San Francisco in July 2002, but the government refused to tell that court whether the rule existed. However, the government acknowledged that if the requirement did exist, it would be in a secret security directive that would have to be challenged in an appeals court. Jim Harrison, one of Gilmore's attorneys, lambasted the government”s latest request. “Secret court proceedings about secret laws make for a dangerous environment,” Harrison said in a phone interview. “Just take a look at history.”

Lucy Dalgish, executive director of The Reporters Committee for Freedom of the Press, described the government’s request for a secret hearing, in which Gilmore’s attorneys would not be present, as “absolutely ridiculous”. But she said she was not surprised, given the growing number of secret hearings post-9/11. “All brilliant legal arguments aside, what do they think they are doing? This has gotten to the point of being nutty,” she said.

OPINION & ANALYSIS

WEALTH CREATORS VS. PROTECTORS

A major reason the liberal elites so hate President Bush is the policies he pushes will reduce their power and influence. Sens. John Kerry and Edward Kennedy, Massachusetts Democrats, claim they are the protectors of the little guy and the middle class. Yet their proposals are designed to protect the elite like themselves who inherited rather than created wealth.

Much of the evidence comes from institutional financial consultant, Criton Zoakos, head of Leto Research. Mr. Zoakos reviewed opinion polls of voting behavior and noticed a most interesting relationship between voting preference and share of wealth. Starting with the basics, Mr. Zoakos noted, “Opinion polls suggest that Sen. John Kerry enjoys the overwhelming support of voters self-designated as ‘upper class’. These comprise 4 percent of all voters.” In the 2000 elections, this elite group voted 56% for Al Gore and 39% for George Bush. Mr. Zoakos also noted that in 2000, self-designated “working class” (18% of voters) and “lower class” (2 percent of voters) supported Al Gore by 51% and 46% for Mr. Bush. Mr. Bush did have a small majority of voters who defined themselves as “middle class” in the 2000 election, and recent polls indicate his “middle class” vote base has strengthened.

What is not well known (and contrary to the liberal media myth) is that wealth in America is becoming less concentrated, not more so. This drop in relative wealth holdings by the richest was more than offset by a rise in middle-class wealth holdings. It is the conflicting economic interests between those who perceive themselves as upper class (by virtue of inherited wealth) and those who perceive themselves as middle or entrepreneurial class, which largely accounts for their different political choices. As Mr. Zoakos observed, “The middle class prefers fiscal, monetary and regulatory polices that favor wealth creation and competition.The upper class prefers policies that favor wealth preservation and protection from competition.”

If you already have a great deal of money, you will prefer a tax system that allows unlimited amounts of tax-exempt investment income from low-risk vehicles like state and local government bonds. You may also prefer high tax rates on earned income and capital gains to make it more difficult for those who have little wealth to become wealthy like you. This is the approach Mr. Kerry advocates, even though his rhetoric is about the middle class squeeze -- which his tax policies would only worsen.

BEFORE AL QAEDA WAS TAKING FLYING LESSONS. NOW THEY ARE TAKING LESSONS IN HACKING

Jason Laren is a master hacker. He sports the de rigueur black shirt, black slacks, glasses and ponytail. A 31-year-old programmer at the secretive Idaho National Engineering & Environmental Laboratory in Idaho Falls, he obsesses about the ways in which a terrorist intruder might go online and trip circuit breakers on the electrical grid or open valves at chemical storage tanks. “I could easily turn off the power in a couple dozen cities by the end of the day,” says Larsen. He has hacked into the automated control systems at several big utilities -- usually it takes him all of a week.

Experts like Larson make a living by stoking cyberfear in the rest of us. They say that terrorists could shut down chunks of the Internet, the phone system or the electric grid by hacking into computers. We are not spending enough on computer security, they say, and the consequences could be devastating. These experts have an ax to grind. But they might be right. As the Internet spread like a virus in the 1990s, hundreds of utilities, chemical factories, wastewater plants and the like went online to enable remote monitoring and more instant communications. Yet their antiquated control systems lack protection against digital intrusion, providing an easy target.

The most destructive terrorist act in history began with Islamic radicals going to flight school and ended when they turned airliners into flying bombs. As the third anniversary of Sept. 11 passes, the next threat could be a Net threat: Solid evidence shows that al Qaeda agents and other terrorists are trying to attain the online skills needed to wage cyberwar. Terrorists could use the Internet to disrupt the communications systems of the military’s Pacific Command or turn off the lights in Los Angeles or Chicago. They could open the massive floodgates of Arizona’s Roosevelt Dam or disable huge parts of the World Wide Web. Yet in the U.S. no urgent crusade has emerged to fix the flaws.

INCOME INEQUALITY

Last month, the U.S. Bureau of the Census reported its findings on income and poverty. Median real income remained constant between 2002 and 2003 at $43,000; the official poverty rate rose slightly from 12.1% to 12.5% for a total of 36 million Americans; poverty rates by race remained unchanged at 8% among whites, blacks 24% and Hispanics 22%. Dr. Daniel H. Weinberg, Bureau of Census division chief, added that income inequality remained unchanged with the lowest 20% of households ($18,000 and below) earning 3.5% of national income and the highest 20% ($86,900) about 50%.

The poverty report gives vice-presidential hopeful Sen. John Edwards a little fodder for his “Two Americas” stump speech. That’s the one where he says, “(There’s) one America that does the work, another America that reaps the reward. One America that pays the taxes, another America that gets the tax breaks.” This is demagoguery and unadulterated dishonesty that can only appeal to the misinformed and ignorant.

Who does pay federal income taxes? The top 20% of income earners pay 80%, and the top 50% pay 96.5% of total federal income taxes. Given these figures about who does and does not pay federal income taxes, what are we to make of John Edwards’ stump speech? He is right in one sense. One group of Americans -- those at the top -- work and pay virtually all federal income taxes, and another group -- those at the bottom -- work and pay little or no federal income taxes. What are we to make of politicians, and other charlatans and quacks, who are knowingly dishonest and use the politics of envy to exploit American ignorance for political gain?

FREEDOM’S LIGHT HIDDEN UNDER A SECURITY BLANKET IN D.C.

I was driving along Independence Avenue, headed east toward the Capitol, when I encountered the first of several security checkpoints -- a Jersey barrier adorned with a stop sign and manned by several U.S. Capitol Police officers. “What are you guys doing?” I asked. One officer was giving the interior of my car a quick eyeballing when he replied: “Looking for bombs. You got a bomb in there?” Like I would admit it if I did. “Oh, no, sir,” I said respectfully. “Then you’re all right,” he said and waved me on.

It was Labor Day, and the officer, like the rest of the checkpoint cops, could have been home relaxing with his family. Instead, the officers were obeying one of the most ill-conceived orders ever issued by Capitol Police Chief Terrance W. Gainer and Senate Sergeant at Arms William H. Pickle -- the establishment of at least 14 checkpoints on Capitol Hill in recent weeks, none of which makes anyone safer. At a checkpoint behind the U.S. Supreme Court building, another officer smiled wryly and rolled his eyes when I asked what he was doing.

What the checkpoints fail to accomplish in security, however, they make up for in traffic jams. Heaven help the city if there does come a time for an emergency evacuation. Judging from the lack of protest, however, most people appear to have fallen for the false sense of security that the checkpoints provide. Watching drivers follow the orange signs directing them toward the checkpoints, “Constitution Avenue: Detour,” I wondered whether suspending the Constitution would be as easy. People seemed to do whatever they were told.

GROUP THINKING AND OTHER OXYMORONS

We steer clear of politics. Money is our beat. But we cannot help notice that it is crowds of people that dominate markets as well as politics...and that group thinking leads them both, in similar ways, to do preposterous, absurd things. “Group thinking” is, like “honest politicians”, an oxymoron. Groups do not think. Instead, they desire. They fear. They panic. They go mad from time to time -- sometimes believing they can get rich without working or saving... sometimes believing that they can all live at someone else’s expense... sometimes hoping that expensive stocks will become even more expensive... and sometimes just getting lathered up and setting off, hellbent on some self-destructive mania.

An individual knows he cannot spend his way to wealth. But put him in a group, and he is ready to believe that “consumer spending” can make the whole society rich. An individual knows he cannot kill another individual without risking jail... or hell. But put him in a crowd, and he is ready to declare war on people he has never met for reasons he has never understood. Groups -- such as stock market investors -- are dangerous, unthinking mobs...