Offshore News Digest for Week of January 24, 2004

GLOBAL BUSINESS

BILLIONAIRES UNITED IN LONDON

More dollar billionaires live in London than in any other city in the world. It has 44 members of the super-rich, compared with New York’s 34 and Moscow’s 21. Other major centers in the world, like Los Angeles, Paris, Hong Kong and Tokyo, trail a long way behind. Each year, Forbes trumpets the number of dollar billionaires based in New York. But research by the Evening Standard reveals it should be London that deserves the plaudits as the number-one destination for the world’s richest people. Obviously, the favorable exchange rate has helped, but based on the same criteria applied by Forbes, it is London that should receive the credit and not New York.

For Russia’s rich, Britain -- and London in particular -- occupies a similar status to that enjoyed by Paris in the 19th century. They devour all things British and want to live here. Some billionaires, such as the Duke of Westminster and Sir Richard Branson, have always had homes here, have built their fortunes here and, crucially, continue to stay here. Many, though, like mineral magnates Lakshmi Mittal and Roman Abramovich, the owner of Chelsea FC, who are numbers one and two in the ranking, are originally from abroad and able to choose any place on the planet. They have picked London.

It is impossible to quantify the contribution they make to the London economy. Bearing in mind that they bring their often extended families and are surrounded by minders and staff, the figure must be huge. Without them, a vast swathe of local business, from casinos, private clubs and limousine dealers to estate agents and nanny providers, would suffer. Incredibly, given Labour’s historic Leftist credentials, one of the reasons they are attracted to London is the nature of our government. Tony Blair has repeatedly displayed a willingness to court them -- and, significantly, has done nothing to close advantageous tax loopholes. Confirms rich list compiler, Philip Beresford, “It helps having a Labour Government that is actually the friend of the billionaire class, with its benign tax regime and its need to cosy up to them to prove it has lost its socialist tendencies.”

WILL MONTEGRO BE THE HONG KONG OF EUROPE?

Montenegro adopted the euro as the country’s legal tender and thereby minimized the inflation taxation of its citizens. The adoption of the new tax law will introduce one of the lowest corporate tax rates in Europe, a mere 9%. Capital-exchange restrictions have been eliminated and the repatriation of profits made by foreign investors in Montenegro is free. Treating foreign investors just like domestic ones, enjoying the same rights and legal protections, is intrinsic to Montenegro’s privatization, investment and business regulations. The aluminum industry, which accounts for 60% of total exports, is in the process of being privatized.

As anywhere else in the world, the most vigorous objections to the implementation of economic freedom in Montenegro come from rent-seeking groups, monopolists, and people that benefit from state redistribution. But Montenegro also has to overcome a barrier that is peculiar to its political situation. As one of the basic preconditions for signing the Association and Stabilization Agreement with the EU, Brussels insisted on the “harmonization” of economic systems between Serbia and Montenegro. Given the fact that Montenegro wants to develop an open and service-oriented economy while Serbia wants to protect its agriculture and inherited heavy industries, the harmonization of these systems is more than just problematic.

Needed cooperation from Serbia-Montenegro for EU integration is lacking so far.

Among countries in the Western Balkans, Serbia-Montenegro has the farthest to go in its progress towards integration in the EU and NATO. The government in Belgrade has set three major foreign policy goals for 2005: obtaining a positive Feasibility Study by April, launching Stabilisation and Association Talks with the EU, and entering NATO’s Partnership for Peace program by the end of the year. All these goals are potentially within reach. But none can be attained until the country makes visible progress in its co-operation with the International Criminal Tribunal for the former Yugoslavia (ICTY).

During his visit to Belgrade on January 24, EU Enlargement Commissioner Olli Rehn made it clear that Serbia-Montenegro’s progress towards integration depends on meeting all international obligations, including full co-operation with the UN tribunal. An EC delegation arrives in Belgrade this week to determine whether to launch a Feasibility Study for Serbia-Montenegro. There appears to be little chance of a positive outcome. Officials in Brussels have been quoted as saying that they will shelve the study indefinitely rather than make a negative report.

U.S. withholding $10 million in aid to Serbia and Montenegro that was allocated for 2005.

The action follows a previous decision to withhold more than $16 million of assistance in 2004. The U.S. is cutting off assistance because of Serbia and Montenegro’s failure to cooperate with the UN International Criminal Tribunal for the former Yugoslavia.

U.S. FACES MORE TENSIONS ABROAD AS DOLLAR SLIDES

After a first term in which terrorism and war dominated President Bush’s foreign policy agenda, his allies in Europe and Asia suspect that his next confrontation with the world could take on a very different cast: a potential currency crisis, in which a steep plunge in the value of the dollar touches off economic waves around the world. Already, the tensions over the dollar are becoming a recurring source of friction, a conflict that does not reverberate as loudly as the differences over Iraq but may be as deeply felt. At a recent meeting, the finance ministers of Germany and France complained that Europe had unjustly borne the brunt of the dolla’qs decline, and called for coordinated action to stop it.

Two months ago, similar sentiments came from China’s prime minister, Wen Jiabao, whose nation is at the center of a struggle with Washington over currency policy. He complained about the fall of the dollar, asking, “Shouldn’t the relevant authorities be doing something about this?” Should the dollar continue to fall -- if, for example, global investors determined that Mr. Bush did not have the will to hold spending down -- it would not only add to tensions, analysts said. It might also force up interest rates at home.

To be sure, the dollar’s fall may never reach crisis levels, and in the last few weeks the dollar has stabilized a bit. But across Asia and Europe, a wide range of officials and analysts worry that Mr. Bush’s economic team may not be up to the challenge of grappling with the issue. Many European politicians and exporters cannot shake the suspicion that the Bush administration, despite its statements supporting a strong currency, has been perfectly happy to watch from the sidelines while the dollar heads down.

Treasury Secretary John W. Snow described the current situation as one of America’s remaining the economic envy of the world, where yawning deficits are being addressed and where there is little risk that foreigners will rethink the wisdom of lending the U.S. hundreds of billions of dollars a year to finance the trade gap and to cover the vast borrowing needs of the federal government. Mr. Snow suggested some in Europe are seeking a convenient scapegoat, particularly after the tensions over Iraq, to blame for the Continent’s own inability to generate stronger growth.

White House predicts $427 billion deficit, including $80 billion in Iraq war costs.

White House officials said that they were still on track to fulfill Mr. Bush’s campaign promise of cutting the budget deficit in half by 2009. But the administration is already well behind on its goal. The White House predicted last summer that the budget deficit would decline in 2005 and continue to sink after that. The officials said Mr. Bush would ask Congress next month for the extra $80 billion when he submits his budget next month for fiscal 2006. The new request would bring total costs of the war to more than $200 billion by the end of this year, with spending likely to continue at near current levels through at least 2006.

The new estimate calls for the budget to climb slightly, and a new report earlier today by the nonpartisan Congressional Budget Office shows that deficits will remain above $350 billion through 2009 and climb sharply after that. The Congressional Budget Office estimated that continued costs of the war in Iraq and other aspects of the war on terrorism could add $285 billion over the next five years.

The congressional agency also noted deficits would climb much more sharply in the subsequent five years. Extending Mr. Bush’s tax cuts would cost $1.8 trillion over the next 10 years. Preventing an expansion of the alternative minimum tax, a parallel tax that was designed to prevent wealthy people from taking advantage of loopholes, would cost about $500 billion. Even without the wars in Iraq and Afghanistan, and despite expectations of strong economic growth over the next two years, the Congressional Budget Office said the federal budget outlook worsened since last year. Congressional analysts predicted that interest costs on the federal debt will double over the next decade to more than $300 billion a year.

Long-term budget estimates are notoriously unreliable, being based on assumptions both about economic activity and policy decisions yet to come. The budget agency stressed that the figures were not meant as a hard and fast prediction, but as a benchmark that policy makers could use to inform decisions about new proposals.

BELIZEANS REJECT BUDGET

Prior to last week’s Budget Presentation in the House of Representatives, there had been a definitive bellow heard throughout all corners of Belize that the people, the Business Community, the Unions, and the opposition UDP would not accept any new taxes from the Government unless certain reforms were put in place. The Government met several times with representatives of the Business Community and the Unions, the so-called Social Partners, supposedly to consult on the development of a new Budget and a plan to take us out of our current problems.

All throughout, the “Social Partners” have made several financial and reform-related recommendations to the Government. These recommendations were intended to avoid similar financial situations in the future and eliminate, or at least minimize, the need for new taxes. As we reported last week, the Government had provided the “Social Partners” with draft estimates of revenue and expenditure, which, under any circumstances, were totally unrealistic. This sentiment was clearly corresponded to the Government.

Nevertheless, on Friday the Government went ahead with its Budget Presentation, save for two major adjustments. Total estimated expenditure was reduced from $655.8 million to $640.2 million while total estimated revenue and grants were increased from $511.4 million to $574.2 million. The increase in revenue estimates included $55.7 million in new taxes. It was at the point of introducing the new tax measures that the opposition UDP decided to stage a ‘walk-out’ from the House. The bottom line is that a broad cross-section of interests in Belize has thrown down the gauntlet against the Government Administration.

AS THE EMERALD ISLE RISES TO THE TOP FIVE, THE LESSON IS: THERE ARE NO EXCUSES

These days, every economic textbook should finish with four words: “Now go study Ireland”. In the past decade, the Irish economy has emerged as the most successful, and therefore the most interesting in the world. Most people are aware that the Irish have been getting richer. Last week, the OECD confirmed just how much progress Ireland had made when it released figures on per capita GDP, based on purchasing power parities for 2002. The list had not changed much since 1999, the last benchmark year, with one exception. Ireland was bumped up a slot, joining the small group of “high income” nations alongside the U.S., Norway, Switzerland and Luxembourg. The OECD flagged that as a “remarkable development”.

Let us get this straight. Ireland, which was considered one of the region’s poorer nations when it joined the EU in the 1970s, is now among the five wealthiest places in the world. Maybe it should be even higher. Dan McLaughlin, the chief economist at Bank of Ireland, says Ireland is now wealthier than the U.S. as well. He cites Irish per capita GDP of €36,000 in 2004 compared with the U.S.’s $41,000 (less than €32,000).

Rankings aside, the most striking thing about the Irish success story is that the country possesses no special advantages. The U.S. is a superpower, with the world’s reserve currency of choice. Norway has lots of oil, and not many people, while Switzerland and Luxembourg are secretive banking centers. Ireland has little to offer that other countries do not already have. It has even been lumbered with the euro. So what can Ireland teach the world about how to manage a modern economy?

“The big lesson is that you have to open up,” says Danny McCoy, a senior research officer at the Economic and Social Research Institute in Dublin. "The Irish economy really liberalized, and there was a lot of encouragement for foreigners to come in.” There are three main lessons that other countries should draw from the transformation of the Irish economy. Firstly, history does not count for anything. Next, resources and geography do not count for much either. Lastly, policy makes a difference. Ireland got a few big things right. It has lowered taxes. The corporate tax rate is just 12.5%, one of the lowest in the developed world. Income taxes are in line with European averages, with a top rate of 42%. Overall, government spending in 2003 was slightly more than 35% of GDP, about the same as the U.S. and relatively low by European standards.

The punchiest lesson of the Irish miracle is also the simplest: there are no excuses. If the Irish can work their way into the super-league of the world’s wealthiest nations, there is nothing stopping others from doing so. Except maybe themselves.

ASSESSMENT OF THE IMPACT OF HURRICANE IVAN ON CAYMANS REPORTED

Part Two of a five part series which summarizes “The Impact of Hurricane Ivan in the Cayman Islands”, an 85 page report, released by the U.N., describes the damages to tourism, agriculture and commerce. “The Ivan Report by the Economic Commission confirms our initial assessment that we had nearly $3 billion in damage,” said the Hon McKeeva Bush, Leader of Government Business. “There was a tremendous impact on the tourism sector which plays a huge part in our economy, as well as the financial sector. This report is important because it affects all aspects of business. It will also be used to pinpoint deficiencies.”

The impact of Hurricane Ivan, although not severe enough to affect the sector’s viability and capacity to host foreign visitors, generated significant losses. Tourism contributes over 50% to GDP and 27% to employment and has revenues of CI$30.7 million. The direct impact stems from the damages to hotels, condominiums, apartments, villas, boats and yachts and estimated at CI$281.9 million. As a consequence of Ivan the loss of cruise ship arrivals is estimated at 320,438 visitors for 2004. Again based on the revenue that each cruiser represents the loss of revenue from cruise ship activity stands at about CI$25 million.

In the crop sector, it is estimated that 91% of crops were destroyed in Grand Cayman. Given the fairly shallow soils most of the many fruit trees were uprooted. Damage in the commercial sector has been estimated at $463.4 million, of which, $429 million or over 92% was direct damage derived from destruction of locations including warehouses and shopping spaces. Since commerce accounts for 13% of GDP and 14.5% of employment in the Cayman Islands, its rapid recuperation is essential to the functioning of the economy.

PANAMA TRYING TO JAZZ UP IMAGE AND LURE TOURISTS

Like much of Central America, Panama does not get much respect. Best known for suffering under the dictatorship of Manuel Noriega during the 1980s, incurring an invasion by the U.S. in 1989 and allowing the U.S. to control its primary economic asset -- the Panama Canal -- for nearly a century, the country has not enjoyed much positive publicity or the tourism dollars that go with it. Hoping to change that, Panama has turned to a novel attraction -- jazz. Over the past few days, several of the world’s foremost jazz stars -- from Chicago-born drum legend Jack DeJohnette to Panama-born pianist Danilo Perez -- ventured there for the Panama Jazz Festival, a citywide event funded mostly by the local government.

The festival was part of a larger campaign to pump up tourism to Panama, which regained control of the canal in 1999 but has been working since Noriega’s fall in 1989 to lure visitors from around the world. A national tourism budget that was $14.8 million in 1993 shot up to $21.7 million a decade later, with visitors more than doubling from 365,000 in 1993 to 897,000 in 2003. Last year the figure nearly doubled again, with 1.6 million people visiting Panama as its tourism budget soared to $24 million. Still, Panamanian officials believe they are just warming up. “We haven’t been as successful as we should in letting the world know about Panama,” said Panama City Mayor Juan Carlos Navarro, who recently began a second 5-year term. “And I think the jazz festival is one way to share Panama with the world.”

HONG KONG, CHINA, AND THE WORLD

At a Heritage Foundation luncheon in honor of Rep. Henry J. Hyde, Chairman of the House International Relations Committee, and his bi-partisan congressional delegation, Mr. Hyde gave the keynote speech: “Of the many competing forecasts of the century now unfolding, all agree that the rise of China will be a central determinant of its course. So great is China’s potential that some have prematurely termed this the ‘Chinese century’. Once hazily distant, that imagined prospect is rapidly becoming a tangible reality right before our eyes.

“In its scale and speed, in the ambitions of its leaders and hopes of its people, this development is unprecedented. Far from maturing into a more settled pace of change, the rate appears to be accelerating and broadening as more and more of the country is drawn into the modern world. The process can be compared to the birth of a new and enormous star, its internal temperature soaring as a critical mass rapidly accumulates to the point of ignition, its gravitational waves already beginning to realign the heavens around it.

“Were China a country of modest size, this process would be an interesting, even fascinating, one, with soft ripples of influence confined within nearby horizons. But China is one-fifth of humanity. Its enormity ensures that there can be no insulating boundary between its internal transformation and the world outside. Our attention is focused on the dramatic developments within that country, but we are simultaneously witnessing the emergence of a new and powerful actor on the global stage, one whose actions and decisions will reach deeply into every country on the planet.

“Whether that impact will be positive or negative, cooperative or combative, cannot yet be predicted with any confidence. ... A central fact of China’s revolution is that it is becoming ever more undirected. Despite increasingly strenuous efforts by a once all-powerful regime to preserve its control in all areas, its reforms have released powerful and transforming forces that by their nature are uncontrollable. ...”

The old “evil” city is a powerhouse.

Back in the 1930s, shanghai was the wickedest city on Earth. Just beyond the stately buildings of the Bund, Nanjing Road and the European Concessions lay squalid hovels, armies of leprous beggars, thousands of child prostitutes, and opium dens. Shanghai teemed with gun runners, con men, spies, mysterious White Russians and Jewish refugees. Shanghai still retains a sinister flavor. But today, it has become China’s economic powerhouse, the world’s second busiest port, exporting $74 billion annually, with 13 million registered residents and 7-10 million itinerant laborers, making Shanghai more populous than Australia.

Shanghai’s natives are brash, often pushy, commercially gifted, and always in a rush. A native New Yorker like me feels right at home here. Shanghai has also resumed its role as China’s hippest, most avant-garde, cosmopolitan city, filled with cultural events, galleries, spectacular restaurants and dazzling architecture that makes the downtown look like a cross between Manhattan and a futuristic capital in a science fiction film. The city has now become one of the world’s hottest destinations.

When the communists took over Shanghai in 1949, its business elite fled to British Hong Kong, quickly turning that port into an economic giant. Today, Shanghai is beginning to eclipse snooty Hong Kong, which is looking rather old and tired compared to Shanghai’s pulsating economic power. Shanghai’s hinterland has become the world’s factory, producing everything from black socks to the most advanced technology. Growth is held back only by shortages of power and steel. Unrestrained credit, a torrent of foreign investment, and China’s get-rich- quick policies are producing a dangerous credit bubble and runaway 11-15% annual growth. The communist party clearly has a tiger by the tail.

TAXES

UK TOLD TO SCRAP GIBRALTAR TAX BREAKS

The Government was today given a one-month deadline to agree to scrap tax breaks for thousands of companies registered in Gibraltar. The EC said the scheme violated EU rules on competition-distorting state aids and warned in a statement, “The Commission intends to put a definitive end to the last offshore tax regime in Gibraltar.” If the Government agrees, the system will be abolished by the end of 2010. If it does not, the Commission said it will launch full-scale legal proceedings for maintaining an illegal state aid regime.

The UK Government amended the Rock’s “Exempt Company” scheme after the Commission first complained that it was illegal. But Brussels was still not satisfied and launched a court action which is still pending. Under the current regime in Gibraltar, an “Exempt Company” pays no income tax on its profits, subject instead to a low, fixed annual tax of between £225-£300. Such companies cannot trade within Gibraltar. But thousands of offshore companies take advantage of the generous tax concession to register there. The Commission says it has no doubt the regime amounts to an illegal state aid -- companies subject to the general company taxation regime in Gibraltar pay a standard rate of tax on profits of 35%.

Commenting on the Commission’s announcement, Neil Parish MEP (South West of England and Gibraltar) said, “The British Government owes it to Gibraltar to stand up to the Commission and kill off this proposal. A major part of Gibraltar’s economy is made up of the companies that benefit from the current arrangements and we expect the Government to do everything it can to keep enterprises in Gibraltar. We should be encouraging tax competition in Europe, not tax harmonization.”

Gibraltar “welcomes” EU offshore tax ruling.

Gibraltar’s Chief Minister Peter Caruana welcomed an EU commission decision ordering Britain to phase out a tax break for offshore companies based in the British territory on competition grounds. The decision will see the scheme limited to some 8,500 companies whose benefits will be entirely phased out from 2010. Given the “extremely difficult negotiations” which led to the EC’s decision, Caruana described it as “reasonably good”.

Is there life after 2010?

At least since the future of the tax-exempt company became questionable, operators in the finance centre have been channeling certain work to other offshore jurisdictions in an effort to, at least, retain some of the Income derived from such operations. Company formation firms in the Caribbean and the Channel Islands have been receiving business from Gibraltar. This means that, whereas in the past, tax-exempt companies were being registered in Gibraltar, such business is now being transferred to other jurisdictions from those clients who would rather that such operations are not undertaken direct with the other offshore centers but continue through Gibraltar.

Certainly, not all business is going in that direction, but with the tax-exempt company in Gibraltar now pronounced dead over a 5-year phasing out period, it remains to be seen how the company registration and related business develops. Although the chief minister has put a brave face to the negative situation that has engulfed the finance center, it is well known that the government had been describing the tax-exempt regime as “the mainstay of the finance center” -- and when it was speaking of its vital importance, it already knew what the EC was due to ratify, as such a deal was finally agreed last month.

The Opposition is expected to come out strongly denouncing the way the Government has handled the threat to the tax-exempt company regime. Now that the Government’s position has produced what it has, it is believed the Opposition feel it is now right and prudent to establish their own view on this important matter. The battle against Brussels has been lost by Gibraltar, with Commission sources making the point that, at last, the end of the tax-exempt regime is in sight. Brussels does not recognize that there have been negotiations with Gibraltar as such, but with the UK as the member state.

UK TAX BREAKS ARE STEADILY CHISELED AWAY

The last seven years have witnessed a gradual tightening of the tax noose round the neck of the rich. Gordon Brown, the chancellor, has closed loopholes, failed to raise many allowances and exemptions in line with inflation, overseen stricter enforcement of existing legislation by the Inland Revenue and condoned rises in national insurance and council tax. The wealthy may feel there are few legitimate ways left to reduce the tax they pay, but accountants, unsurprisingly, feel differently.

“There has been a shift in attitudes,” says Simon Rees, senior tax manager at PwC, the professional services firm. “It feels as if trying to pay less tax is seen in itself as an abusive approach.” The industry has some justification for arguing that people have never needed expert advice so much because many of the government’s measures require careful interpretation and an increased burden of compliance and disclosure.

The government has been particularly enthusiastic in its attack on special schemes set up to avoid tax which, since last August, must now be notified to the Inland Revenue. In December various types of film and partnership tax reliefs were also abolished as well as schemes that allowed employers to reduce tax on bonuses paid to employees. The government has also tightened the net on inheritance tax avoidance, for example by targeting the use of offshore trusts. Even more significant are the new rules on pre-owned assets, which have sought to clamp down on people giving away assets to heirs while still benefiting from them. The new rules are aimed at closing sophisticated schemes such as double trusts. These allowed donors to avoid the “gift with reservation of benefit” rules and, for example, in effective give away their house to their children while still living in it. The legislation is retroactive and applies to all arrangements entered into since 1986.

There are still legitimate ways to reduce your tax bill. However, accountants warn that you should be aware that tax avoidance schemes that exist today could be targeted in the future. “The government has made clear that it takes tax avoidance very seriously and will not hesitate to take action against the most offensive examples,” the Revenue says sternly.

HITTING IT BIG ON TV BRINGS OUT NEW FRIENDS -- SUCH AS UNCLE SAM

When I read that Richard Hatch was charged with tax evasion for neglecting to report the $1.1 million he won on the first season of Survivor, my first reaction was, “What was he thinking?” My second question was, “Why wasn’t any tax withheld on those winnings?” Most gambling winnings over $5,000 are subject to federal tax withholding. But it turns out that game shows generally are not required to withhold federal tax on contestant winnings. That does not mean, of course, that they are not taxable.

A complaint filed by the U.S. attorney for Rhode Island says Survivor Entertainment Group issued checks to Hatch in the amounts of $1 million (for winning the game) and $10,000 (for appearing on the final show). Despite receiving national publicity, Hatch allegedly failed to include those amounts -- plus $321,139 he earned from a Boston radio station -- on his 2000 and 2001 federal tax returns. He reportedly plans to plead guilty to two charges of filing false returns in exchange for a reduced sentence. His lawyer did not return phone calls. Neither did CBS, the network that airs Survivor.

CPA Mike Gray says it is probably no coincidence that the Hatch charges were made public just as tax season gets under way. “This is a very high-profile person,” he says. “It’s very typical for these kind of stories to come out at this time of year.” The message is, taxpayers are liable for federal tax on virtually all winnings -- from gambling, lotteries, sweepstakes and game shows -- whether the prize is cash or a beautiful new dinette. Audience members who received a “free” Pontiac from the Oprah show last year learned this the hard way. Although all winnings are subject to tax, the rules regarding federal and state withholding and tax reporting are more complicated than the rules for craps. Here is a quick rundown, but if you win any money, it is good to check with a tax professional and imperative if you win a lot.

TORRIJOS BLINKS, BUT STAYS ON COURSE TOWARD A TAX HIKE

The Panamanian government’s problem is a foreign debt that is running at more than $9 billion, chronic problems meeting ordinary expenses like paying teachers’ salaries and maintaining crumbling infrastructures, and a tax system that 20 years ago used to skim off 14% of the national economic gross and now captures just 8%. After a generation of acceding to the demands of the most powerful and wealthy special interests and listening to the advice of neo-liberal economists who said that lower taxes would stimulate the economy and thus bring more revenue into government coffers, Panama finds itself disappointed. More to the point, Martín Torrijos has some ambitious plans, the most costly of which would be a modernization of the Panama Canal, and without putting the budget in order he would find the interest rates on financing these programs prohibitive.

Thus the need to raise taxes, with the obvious payers those who can afford to pay but have until now been largely exempt. Exempt as in tax-free “gastos de representación” or unitemized payments for sometimes real but mainly theoretical expenses. Exempt as in many years’ worth of accreted tax breaks to encourage this or that business. Exempt as in business profits that would show up if Generally Accepted Accounting Principles were used, but in a country where the Supreme Court has banned that system of keeping the books.

So after a great deal of secrecy, Torrijos announced a tax package that, boiled down to its essentials, meant higher taxes for corporations and for individuals at the upper end of the income scale. Most controversial of all was IRMA, the Minimum Alternative Income Tax, whereby companies must pay a percentage of their gross receipts if that percentage turns out to be more than they would otherwise pay in corporate income tax. In the original proposal IRMA was set at 2%, but after protests the Torrijos administration backed it down to 1.4%. It appears that despite all objections, President Torrijos will get his tax package through the legislature and that starting next year the nation’s overall tax bill will go up substantially. It will no doubt cost the president approval rating points in the public opinion polls.

Panamanian minister proposes tax reform bill.

Economy Minister Ricaurter Vazquez on sent congress a tax reform bill meant to raise $300 million by increasing taxes on business and cracking down on tax evaders. Vazquez told lawmakers that the proposal will “introduce tax fairness” into a system that he said was “generous to evasions”. The measure is supposed to be debated until Feb. 4. President Martin Torrijos introduced it after making last-minute changes due to protests from business. Among the proposed taxes is a 1.4% surtax on profits and an increase to $250 from $100 in a once-a-year fee on every single business in the nation. The government said the measure should reduce the deficit to 1% from 5% of the GDP, which was $700 million during the last year. Vazquez noted that 40% of Panamanians live in poverty and half of those in extreme poverty. Businessmen warned that the measure could effectively make the country less competitive.

U.S. SUPREME COURT BACKS TAXATION OF GROSS VALUE OF LEGAL AWARDS

The Supreme Court ruled that the full amount of a court award or legal settlement is taxable to the successful plaintiff, even if a sizable portion goes directly to a lawyer under a contingent fee agreement. The lower federal courts have been split on the question. Acting on government appeals in two cases, the justices voted 8 to 0 (ailing Chief Justice William H. Rehnquist did not participate) to overturn decisions by the federal appeals courts in San Francisco and Cincinnati. Both courts had rejected the IRS’s position that all economic gain is taxable to the person who has earned it, unless specifically exempted by Congress.

Shortly before the cases were argued in November, Congress changed the tax law in favor of a subcategory of lawsuit-winning taxpayers. Under that law, taxpayers can deduct lawyers’ fees and court costs “in connection with any action involving a claim of unlawful discrimination.” Discrimination is broadly defined to include many kinds of employment disputes. Writing for the court, Justice Anthony M. Kennedy said the new law would probably have applied to the cases at issue, both involving employment-related lawsuits. But the law is not retroactive and does not apply to other kinds of lawsuits. Consequently, the Justice Department had urged the court not to find the cases moot.

Legal expenses can generally be counted as miscellaneous itemized deductions. But the awards in the cases made both men subject to the alternative minimum tax, which eliminates miscellaneous itemized deductions. Under the new legislation, the deductions may be taken even when the AMT applies. In his opinion in favor of the IRS, Justice Kennedy cited the long-established rule that “a taxpayer cannot exclude an economic gain from gross income by assigning the gain in advance to another party,” even if the assignment was a valid business arrangement that was not undertaken for the purpose of avoiding taxes.

MAN BARRED FROM SELLING HOME-AS-PARSONAGE TAX SHELTERS

Your home may be your castle, but do not try to call it your parsonage. A federal judge in Los Angeles has ordered a Palmdale man to stop telling people they can avoid taxes by taking a vow of poverty and declaring their homes a parsonage. Joseph Saladino and his organization, the Freedom & Privacy Committee, sold how-to kits promoting the parsonage ploy via the Internet for $200 to $3,000. Customers would pay an initial fee of $200 to join Saladino’s organization, and had pay more to purchase specific forms to set up supposedly nonprofit entities and claim refunds for past tax payments, according to court documents filed by the Justice Department.

U.S. District Judge Florence-Marie Cooper barred Saladino from promoting the schemes, and ordered him to post a copy of her order on his website. The poverty-parsonage program is a fairly common tax scheme, according to the IRS. In it, the taxpayer declares himself the prelate of his own church and has all of his income shuttled into his “corporation sole” -- a supposed nonprofit church -- which then pays all the prelate’s expenses. Saladino’s also maintained that income earned for labor was not taxable, so anyone who paid income taxes could stop doing so and claim refunds for the last three years. The only glitch is that neither claim has had any success in the courts. Judge Cooper held that Saladino knew or should have known that both claims were false or fraudulent.

SWEDISH THINK TANK URGES GOVERNMENT TO CUT TAX BURDEN

Leading Swedish economic and social policy think tank, the Center for Business and Policy Studies (SNS), has called on Sweden’s government to lower the nation’s tax burden by reducing taxes on wealth, labor and shares. At 50.6% of GDP, according to the latest available figures, Swedish taxes are already the highest in the EU and in a report released this week, SNS warned that upward pressure on expenditure may push Swedish taxes even higher. SNS noted that Sweden’s tax system currently has a top marginal rate of 57%, and urged a reduction in income tax to 20% from 25% for the highest earners, along with the phasing out of wealth tax, the elimination of double taxation on share dividends and a review of capital taxes.

2004 JOBS ACT OVERHAULED TAX SHELTER RULES

The American Jobs Creation Act of 2004 was enacted on October 22, 2004. While the Act made changes in many areas of the tax law, the rules relating to tax shelters were significantly overhauled -- principally by imposing various draconian penalties that will apply to taxpayers who fail to disclose their participation in a wide range of transactions (usually, but not always, tax-motivated) that are thought to be potentially abusive. These legislative changes are the most recent in a long series of initiatives undertaken over the past seven years by Congress, the Department of the Treasury and the IRS to shut down the tax shelter industry.

Prior to the Act, the last legislative attempt to deter the proliferation of tax shelter transactions came in 1997 when Congress enacted enhanced registration and penalty requirements relating to certain specified tax-motivated transactions. Although the Treasury Department went on to promulgate several sets of tax shelter regulations in 2002 and 2003, Congress believed that the various rules relating to taxpayer disclosure, tax shelter registration and investor list maintenance should be revised and streamlined so as to better address the current tax shelter landscape, and enforced through the imposition of meaningful penalties.

The new legislation has amended the Internal Revenue Code to require the disclosure of a wide range of potentially abusive transactions by both taxpayers and certain “material advisors”, and has introduced a series of substantial monetary and other penalties to punish any failure to comply with these disclosure requirements. The new enhanced penalty and other provisions described in this article will generally apply only to the extent that a taxpayer has participated in a “reportable transaction” and has failed to disclose it to the IRS as required. There are currently six different types of “reportable transactions”. Under applicable reporting rules, a taxpayer must disclose participation in a reportable transaction by filing a statement on IRS Form 8886 with the taxpayer’s annual income tax return or, under some circumstances, by completing the new Schedule M-3.

ASSET PROTECTION

PHISHERS DROP HOOKS INTO SMALLER STREAMS

As the nation’s largest financial institutions deploy increasingly sophisticated measures to prevent Internet scams, online fraudsters are targeting smaller, regional U.S. banks whose customers may be less attuned to the threat. Experts say the shift is the latest trend in a technological arms race between Internet con artists dubbed “phishers” and the e-commerce and banking companies they target. Phishers use fake Web sites and e-mail messages in an attempt to trick customers into disclosing valuable personal financial information.

The majority of attacks still involve a handful of global financial institutions with hundreds of billions of dollars in assets. These banks are attractive targets because they often boast large numbers of customers who opt for online banking services. The new targets, by comparison, often operate in only a handful of U.S. states and serve fewer customers. In October, phishers first targeted customers of Madison, Wisconsin-based First Federal Capital Bank, which has 90 branches in three states and about $3.3 billion in assets. In November, scams struck Wayzata, Minnesota-based TCF Bank and Columbus, Ohio-based Huntington Bancshares, each a regional institution covering six states. That same month, attackers hit People’s Bank, which has branches only in Connecticut.

The new attacks varied in complexity, but all shared a common technique. Bank customers received an e-mail message urging them to update or verify their account data. A link in the message took them to a genuine-looking bank Web site -- actually a fake created by the attacker -- where any information entered would fall into the hands of the e-mail sender. The shift toward targeting smaller banks coincides with a surge in the number of phishing attacks recorded in 2004. The Anti-Phishing Working Group found 9,019 new and unique phishing e-mail messages in December, nearly four times the number reported in August. The group tracked 1,707 phishing Web sites in December, a 24% increase from November.

Even a scam that nets just one or two active credit card accounts out of a million solicitations can be a profitable haul, said security expert Ken Dunham of Internet security firm iDefense. “Your average credit card has a limit of about $5,000,” Dunham said. “The startup costs for these kinds of attacks is next to nothing, so in many cases the phisher only needs to snag a few accounts before it becomes worth the effort.”

MOST IDENTITY THEFT HAPPENS OFFLINE

A report, penned by Javelin Reasearch for the U.S. Better Business Bureau, said that most ID fraud was still carried out by thieves using lost or stolen wallets or check books. Computer crimes make up just 12% of all identity fraud cases, the report said. Of those 12%, more than half are attributed to spyware. The study also found that those who access their bank accounts on-line can detect identity theft earlier and thus minimize losses, and says that identity fraud is often committed by a friend, relative, in-home employee or someone else known by the victim.

Before we think we can relax, it is worthwhile to point out that 12% is actually quite a high percentage when you take into account how much ordinary fraud is committed offline. Also the study was sponsored by CheckFree, Visa USA and Wells Fargo Bank -- three companies that promote online banking and other services and want you to feel safe.

CHIRAC CAUSES WAVES IN SWITZERLAND WITH PROPOSED TAX ON BANKING SECRECY

At the opening of the World Economic Forum meeting in Davos this week, Chirac put forward a set of “experimental measures” to finance the fight against Aids. He called for at least $10 billion (SFr12 billion) to be spent annually on combating the disease instead of the $6 billion currently spent. Among the measures was a proposal that countries which retain banking secrecy -- including Switzerland -- be charged for income lost through tax evasion. He also called for a tax on international financial transactions, airline tickets, and some fuels.

Michel Dérobert, general secretary of the Swiss Private Bankers’ Association said Chirac had “confused separate issues”. Swiss Bankers Association spokesman James Nason went further in his criticism: “The idea is rather bizarre and has a ring of Saint-Simon and early 19th century utopian socialism about it. Tax evasion and capital flight are symptoms of internal problems in a country and are not caused by the existence of banks in, for example, Monaco or Switzerland. A far better idea would be if the oh-so-pious French were to impose a tax on nasty tin-pot dictators who purchase real estate on the Côte d’Azur, topped up with a tax on French bank loans and arms sales to countries with brutally repressive regimes.”

But Swiss NGOs welcomed Chirac’s ideas as a sign that politicians were taking up the ideas of opponents of globalization. “It’s a very good idea,” commented Andreas Missbach of the Berne Declaration. He said that countries like Switzerland that had banking secrecy swallowed up the tax money of other countries, and it made complete sense to impose a special tax on them.

REPORTING FOREIGN FINANCIAL ACCOUNTS

It is not necessary to report a foreign financial account on the federal tax return of a U.S. taxpayer if the balance of all accounts held by the taxpayer is less than $10,000 at all times during the calendar year. The question in Part III of Schedule B of the IRS Form 1040 do not state that this is an exception, but the instructions to Form TDF 90-22.1 does provide this information.

PRIVACY

PRIVACY FEARS AS AUSTRALIAN BANKS SEEK RECORDS

Banks are seeking access to high-level personal information such as driver’s licence details, passport information and government departmental records in a bid to stop identity theft, fraud and terrorism. The Australian Banking Association is drawing up blueprints for a powerful computer system capable of tapping into government departments holding personal information about Australians. The banks will soon hold talks with Passports Australia, driver’s licence issuers and other state and federal government departments to work out how such a system could work. Civil liberties groups are alarmed at the idea of banks seeking this information. “It’s but one step from there to a national ID card system,” Australian Civil Liberties Council president Terry O’Gorman said.

RFID: THE BIG BROTHER BAR CODE

State and federal lawmakers have joined a growing chorus of people sounding the alarm over RFID, a new technology with enormous potential for invading privacy. RFID has prompted bills in California, Utah, Missouri and Massachusetts, and raised the concern of civil liberties and privacy groups from around the world. Once you understand the stealthy nature of the technology, we think you will agree that the privacy concerns it raises warrant immediate attention.

RFID stands for Radio Frequency Identification, a tracking technology that uses tiny computer chips to identify items from a distance. We have nicknamed them “spychips” because of their stealthy potential. These chips are connected to miniature antennas so they can beam back information about items to which they are attached, invisibly and silently by radio waves. These waves are similar to the ones used to broadcast FM radio programs. Like FM radio waves, RFID radio waves can travel through solid objects such as walls, briefcases, purses, and wallets -- the things we normally rely on to protect our privacy.

RFID chip and antenna combinations, called “tags”, typically range from the size of postage stamps to the size of pagers. Some can be as small as the period at the end of this sentence. RFID tags without an independent power source, called “passive” tags, can transmit information from a couple of inches away to up to 20 or 30 feet. Tags with attached batteries can transmit information up to a mile or more. RFID tags can be embedded into or affixed to virtually any physical item, from car tires and aircraft parts to underwear and eyeglasses. They can be undetectable when sandwiched between layers of cardboard, incorporated into product labels, encapsulated in plastic, or sewn into the seams of clothing.

RFID first hit the business headlines in 2003 when Wal-Mart and the Department of Defense issued requirements that companies supplying their inventory must invest in the technology. Both have mandated that their top suppliers affix an RFID tag to every crate and pallet slated for delivery to them. Other retailers, such as Albertsons and Target, have followed suit with RFID mandates of their own. These “supply chain” retailer mandates have fueled investment in RFID technology and the infrastructure required to implement it.

Homeland Security to test RFID tags At U.S. borders.

As part of the project, visitors entering the country will be issued RFID tags that will track their comings and goings at border crossings, according to the Department of Homeland Security. Initially, the government will test RFID tags at a simulated port this spring. After that, the government will test the technology at border crossings in Arizona, New York, and Washington state from the end of July through spring 2006. The department sees RFID technology as a means to improve the ability to match entries to exits without significantly increasing processing time or invading visitors’ privacy. It also will enable the US-Visit (United States Visitor and Immigrant Status Indicator Technology) system to detect a visitor’s tag and provide the primary inspection process with information and a procedure for establishing an accurate and timely record of exits without slowing a traveler through the process.

To protect privacy, the government assures tags will not include visitors’ personal or biometric information, but will only contain serial codes that links to visitors’ information securely stored in databases used by US-Visit. The tags will not be susceptible to skimming -- the use of unauthorized reading devices to capture information -- the government contends. Also, authorities say, it will be impossible to track the whereabouts of someone holding such a passive tag without a corresponding reading device. The government has not decided whether the RFID tag would be affixed to passports, visas, or other documents visitors must carry during their stay in the U.S.

NONSTOP SCRUTINY, AS ORWELL FORESAW

Picture Minority Report combined with Orwell’s 1984 and Francis Ford Coppola’s The Conversation: in an effort to prevent future crimes and predict what certain individuals are likely to do, the government has begun working with high-tech titans to keep tabs on the populace. One company has come up with a digital identity system that has tagged every adult American with a unique code. Another company is intent on gaining control of all records -- including state and local files, financial information, employee dossiers, DNA data and criminal background checks -- that define our identity. In addition to iris scanners, voice analyzers and fingerprint readers, there now exist face recognition machines and cameras that can identify an individual by how he or she walks.

One government group is working on infrared detectors that could register heat signals around people’s eyes, indicating an autonomic “fight or flight” response. Another federal agency has floated a proposal to assess risk by examining airline passengers’ brain waves with “noninvasive neuro-electric sensors”. This surveillance state is not a futuristic place conjured in a Philip K. Dick novel or Matrix-esque sci-fi thriller. It is post-9/11 America, as described in Robert O’Harrow Jr.’s unnerving new book, No Place to Hide -- an America where citizens’ “right to be let alone”, as Supreme Court Justice Louis Brandeis once put it, is increasingly imperiled, where more and more components of our daily lives are routinely monitored, recorded and analyzed.

These concerns, of course, are hardly new. The digital revolution of the 1990’s, however, exponentially amplified these trends by enabling retailers, marketers and financial institutions to gather and store vast amounts of information about current and potential customers. And as Mr. O’Harrow notes, the terrorist attacks of Sept. 11, 2001, “reignited and reshaped a smoldering debate over the proper use of government power to peer into the lives of ordinary people.” Some of the material in No Place to Hide is familiar from news coverage. Still, Mr. O’Harrow provides in these pages an authoritative and vivid account of the emergence of a “security-industrial complex” and the far-reaching consequences for ordinary Americans, who must cope not only with the uneasy sense of being watched (leading, defenders of civil liberties have argued, to a stifling of debate and dissent) but also with the very palpable dangers of having personal information (and in some cases, inaccurate information) passed from one outfit to another.

Big Brother is now a realistic possibility.

The United States has now reached the point where a total “surveillance society” has become a realistic possibility, the American Civil Liberties Union warns in a new report, Bigger Monster, Weaker Chains: The Growth of an American Surveillance Society. “Many people still do not grasp that Big Brother surveillance is no longer the stuff of books and movies,” said Barry Steinhardt, Director of the ACLU’s Technology and Liberty Program and a co-author of the report. “Given the capabilities of today’s technology, the only thing protecting us from a full-fledged surveillance society are the legal and political institutions we have inherited as Americans. Unfortunately, the September 11 attacks have led some to embrace the fallacy that weakening the Constitution will strengthen America.”

The ACLU said that its report is an attempt to step back from the daily march of stories about new surveillance programs and technologies and survey the bigger picture. The report argues that even as surveillance capacity grows like a “monster” in our midst, the legal “chains” needed to restrain that monster are being weakened. The report cites not only new technology but also erosions in protections against government spying, the increasing amount of tracking being carried out by the private sector, and the growing intersection between the two.

LAW

WORLD PLANS TO GET SERIOUS ABOUT MONEY-LAUNDERING

Governments are increasing their efforts to reduce the conversion of dirty money into respectable assets. It is estimated that between $1 trillion and $1.5 trillion is circulating worldwide as a result of international crime, bribery and terrorism. A high proportion has always been in U.S. dollars but the euro is gaining ground, partly because the EU now has a greater population than North America.

Nonetheless, a series of counter-measures and conferences are scheduled for this year with the emphasis shifting to the war against terrorism. Thus, the EU is about to issue its third directive since 1991 against laundering money, this time focusing on funds used by groups like al-Qaeda in reaction to Sept. 11. It follows the introduction of the U.S. Intelligence Reform & Terrorism Prevention Act at the end of last year, which includes the monitoring international transactions. Among other measures worldwide, Britain is to coordinate its financial and criminal policing under a Serious Organized Crime Agency based in London.

All this is in response to 48 recommendations -- such as suppressing bogus charities -- made by the investigative arm of the OECD, the FATF. The FATF system has already forced most offshore havens to tighten supervision, but five countries are still listed for lack of controls -- Cook Islands, Nauru, Indonesia, Myanmar, Nigeria and Philippines. Many countries now have a system of reporting suspicious transactions, from insurance to diamonds and from stockbrokering to real estate. Last year’s suspicious transactions tally in the UK doubled to 63,000, while Australia’s financial monitor, AUSTRAC, counted 11,500 -- an increase of 42%. Six of the worst 10 countries for misuse of banks are in Latin America, but experts reckon that the biggest area where accounts can be opened without too many questions is the U.S.

Riggs Bank Agrees to money laundering Guilty Plea And Fines of $41 Million

Riggs Bank admitted it was criminally liable for failing to take adequate measures to prevent potential money laundering by former Chilean dictator Augusto Pinochet and officials of Equatorial Guinea. Riggs pleaded guilty to one felony count of failing to file suspicious activity reports and agreed to a fine of $16 million. The fine, if approved by U.S. District Judge Ricardo M. Urbina on March 29, will bring to $41 million the total civil and criminal penalties paid by the 160-year-old bank to resolve anti-money-laundering deficiencies in its former embassy and international operations.

Urbina questioned both Riggs and prosecutors about the size of the fine and whether it was truly punitive. “What I’m trying to get a feel for is, how much is $16 million?” he asked. “Is it just a business expense for the bank?” Lawyers for both sides said the fine was far more than any benefit Riggs derived from doing business with Pinochet and Equatorial Guinea. Department of Justice officials yesterday said that while the size of the criminal fine is small compared with other recent fines involving corporate wrongdoing -- Alabama’s AmSouth Bancorp. was assessed a $40 million fine in a similar criminal proceeding last year -- it was large for a company as small as Riggs, which is one-tenth the size of AmSouth. The amount is more than the bank’s combined earnings of $14 million for 2002 and 2003.

While the guilty plea clears a legal cloud over Riggs and its holding company and is expected to allow it to be sold this spring, prosecutions against individuals are expected. “This is an active and ongoing investigation,” said Kenneth L. Wainstein, U.S. attorney for the District. The bank has agreed to cooperate with investigators.

AUSTRIAN POLITICIAN CALLS FOR REVOKING SCHWARZENEGGER’S CITIZENSHIP

An Austrian politician says California governor Arnold Schwarzenegger should be stripped of citizenship in his native Austria for approving the execution of a convicted killer. Peter Pilz, a top official with the Green Party, said Mr. Schwarzenegger, who holds dual citizenship, broke Austrian law by allowing Donald Beardslee’s death by lethal injection. The Green Party official said according to the law, citizenship can be revoked if an Austrian in the service of another country heavily damages the interests of Austria.

U.S. HIGH COURT UPHOLDS DOG SNIFFS AT TRAFFIC STOPS

The U.S. Supreme Court ruled that police do not violate the constitutional right to privacy when a dog sniff of a vehicle during a lawful traffic stop turns up contraband. The justices by a 6-2 vote, in a majority opinion written by Justice John Paul Stevens, set aside an Illinois Supreme Court ruling that such searches required reasonable suspicion of wrongdoing. “In our view, conducting a dog sniff would not change the character of a traffic stop that is lawful at its inception and otherwise executed in a reasonable manner, unless the dog sniff itself infringed” on the individual’s constitutionally protected privacy rights, Stevens wrote.

The case involved Roy Caballes, who was stopped in 1998 on an interstate highway in LaSalle County for driving 6 mph over the speed limit. Trooper Daniel Gillette asked Caballes for consent to search the car, but he refused. Trooper Craig Graham arrived and began walking around the car with the dog. The dog acted as if the trunk contained drugs. Gillette searched the trunk and found marijuana. Stevens said Caballes did not have a legitimate expectation of privacy for contraband in the trunk of his car. He said that was different from the expectation that information about perfectly lawful activity will remain private. Justices David Souter and Ruth Bader Ginsburg dissented.

DEFERRING PROSECUTION OF CORPORATE CRIME

A growing number of companies settling charges of accounting fraud have agreed to a form of corporate probation that enables them to avoid criminal prosecution in exchange for good behavior. Companies that have agreed to “deferred prosecution” provisions include Time Warner, Computer Associates International, American International Group, PNC Financial Services Group, and AmSouth Bancorp. And “we’re going to see a lot more of these,” said Robert Giuffra, an attorney with Sullivan & Cromwell who headed an internal probe into accounting fraud at Computer Associates.

Deferred prosecution “[shows] compassion for the people who work for the company,” said Robert Nardoza, a spokesman for U.S. Attorney Roslynn Mauskopf in Brooklyn, according to Bloomberg. Many critics of the government’s actions following Enron’s bankruptcy have complained that prosecutors unnecessarily harmed thousands of careers by driving its auditor, Arthur Andersen, out of business.

Under a deferred prosecution agreement, the government’s choice is not simply between indicting a company and letting it get away altogether. Instead, typically, the company must acknowledge that it has a problem and agree to a series of facts that can be used against it in court, pay fines or restitution, and put corrective measures in place over a period typically lasting one to three years. If the company lives up to the deal, prosecutors agree to dismiss criminal charges.

BRITISH OFFICIALS PROPOSE NEW ANTI-TERRORISM POWERS

British officials proposed sweeping new powers to control and monitor suspected terrorists without charge or trial, including house arrests, electronic tagging and curfews. The measures were designed to address legal challenges to a post-Sept. 11, 2001, law under which the government has kept 11 foreign nationals imprisoned without charges for up to three years for allegedly posing a threat to national security. The Law Lords, a panel of judges that acts as Britain’s highest court of appeals, ruled the detention law violated the European Convention on Human Rights and was discriminatory because it applied only to foreign nationals, not to British citizens, and because it was not proportional to the potential security threat posed by the men.

Members of the two main opposition political parties cautiously welcomed the proposals. But David Davis, Conservative Party spokesman for internal security affairs, told the Commons, “Millions of British subjects have sacrificed their lives in defense of the nation’s liberties, and it would be a sad paradox if we were to sacrifice the nation’s liberty in defense of our own lives today.”

THE BILL OF RIGHTS: SEARCHES AND SEIZURES

The 4th Amendment to the U.S. Constitution is rooted in the horrific government abuses arising from “general warrants” in English history and “writs of assistance” in British colonial history in America. With the aim of protecting the American people from similar abuses at the hands of U.S. federal officials, the 4th Amendment was worded as follows: “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”

The case that ultimately set the basis for the 4th Amendment is Entick v. Carrington, decided in 1775, which the U.S. Supreme Court later described in the landmark case of Boyd v. U.S. (1886) as “one of the landmarks of English history. It was welcomed and applauded by the lovers of liberty in the Colonies as well as in the mother country. It is regarded as one of the permanent monuments of the British constitution, and is quoted as such by the English authorities on that subject down to the present time.” As every American statesman, during our revolutionary and formative period as a nation, was undoubtedly familiar with this monument of English freedom, and considered it as the true and ultimate expression of constitutional law, it may be confidently asserted that its propositions were in the minds of those who framed the 4th amendment, and were considered as sufficiently explanatory of what was meant by “unreasonable searches and seizures”.

General warrants entitled law-enforcement officials to go into a person’s home for the purpose of making a random search in the hope of finding incriminating evidence. In the English colonies, the “writs of assistance” on which government officials relied were general warrants that allowed agents to search for smuggled items -- namely molasses, tea, and rum -- within any suspected premises. Writs of assistance were the primary means by which government officials would uncover smuggled goods and then punish the smugglers. Fury against writs of assistance that helped fuel the Revolution, the conflict in which British citizens living in the New World took up arms against their own government.

Today, there are Americans who argue that the Constitution is an outmoded and antiquated document that is ill-suited for modern times. They argue that modern-day federal officials would never engage in the types of abuses engaged in by British officials and, therefore, that they should be trusted with omnipotent power. Nothing could be further from the truth. How would U.S. officials operate without a 4th Amendment and an independent judiciary to enforce it? Worse than British officials did with their general writs and writs of assistance! How do we know this? Because we have seen how they have operated with omnipotent power in occupied Iraq. With omnipotent power, U.S. officials have behaved much more abominably in occupied Iraq, especially in the area of search and seizure, than British officials behaved in colonial America, which is a primary reason that many Iraqis are reacting to such mistreatment in much the same way that the British colonists reacted to similar mistreatment.

OPINION & ANALYSIS

GLOBAL INTERVENTIONISM AND THE EROSION OF DOMESTIC LIBERTY

There is a tendency of many people to separate domestic and foreign issues. For instance, many supporters of the free market advocate government activism abroad. But categorizing issues as “foreign policy” or “domestic policy” can be artificial and misleading. Developments in one arena frequently interact with and affect developments in the other. Most analyses of this phenomenon have focused on how domestic attitudes and interests influence the style and substance of foreign policy. Less attention has been paid to the opposite phenomenon -- the impact of foreign policy aims or requirements on domestic institutions and practices. Yet that feedback may ultimately have a more important impact on the health of American liberties.

The foreign policy of the U.S. has obviously changed dramatically since “isolationism” held sway at the end of the 1930s. Over the past half century, the republic has acquired and maintained a host of global political and military commitments. Washington has linked America’s security to that of the other hemispheric nations through the Rio Treaty and has done the same with Western Europe through NATO. It has negotiated multilateral pacts such as ANZUS (with Australia and New Zealand) and concluded bilateral security treaties with such nations as Japan, South Korea, and Pakistan.

Surviving wartime powers have been an important factor in the permanent expansion of the size and scope of the political state. One “temporary” measure enacted during World War II was the withholding provision of the federal income tax. That device has had the insidious effect of disguising the true tax burden on most Americans by “painlessly” extracting the money from their payroll checks before they get an opportunity to see (and use) those funds. For such taxpayers the category of gross salary or wages is little more than a meaningless bookkeeping entry on their payroll check stubs. One suspects that citizens would be decidedly less willing to carry their current bloated tax burden if they had to write annual or quarterly checks to the IRS. Indeed, it is likely that there would have been a massive tax revolt long before the federal government began consuming more than a quarter of the nation’s GDP.

Bourne’s observation about war being the health of the state is not sufficient, however. It is not only an actual state of war that creates the regimentation and massive violations of civil liberties he feared. An atmosphere of perpetual crisis and preparation for war can produce the same result. The creation of a national security state to wage the Cold War produced many of the same domestic problems and distortions associated with periods of actual combat in earlier eras. America has been essentially on a war footing for more than half a century, and the result has been a significant erosion of liberty. Perhaps most ominous, the end of the Cold War has not produced a retrenchment in either the nation’s foreign policy or pervasive garrison-state mentality.

The adverse domestic consequences of global interventionism raise serious questions about the future of individual liberty in the U.S. At the dawn of the Cold War, social commentator Garet Garrett warned that America could not indefinitely remain a republic at home while taking on the trappings of empire abroad. He noted a fundamental contradiction between the desire to play the role of global policeman and the objective of maintaining long-standing American traditions of limited government, free enterprise, and individual liberty. Garrett’s warning is even more applicable today. Americans are rapidly reaching the point where they must confront a stark choice. Either the U.S. will adopt a more circumspect role in the world in order to preserve domestic freedom, or that freedom will continue to erode (perhaps beyond the point of recovery) to satisfy the requirements of a globalist foreign policy. That choice will determine not only how the United States is defended but whether this country retains the values and principles that make it worth defending.

FDR II?

In view of the ideological chasm that seems to separate the admirers of Franklin D. Roosevelt from those of George W. Bush, one might suppose that these two presidents exhibited completely different character and conduct, yet a close examination reveals that they actually have much in common. The similarities, however, are scarcely reassuring to those who are worried about what President Bush might do next.

Roosevelt and Bush came from similar class backgrounds, each being the scion of a wealthy, well established Northeastern family. Neither man ever achieved any notable success on his own in the private sector, and both leaped at opportunities to trade on their family background and social connections by involving themselves in politics at an early age. Despite the advantages of study at premier educational institutions, neither man possessed much interest in or capacity for deep thinking, specializing instead in conducting themselves as bon vivants and backslappers. Neither had to dwell on the concerns that cause ordinary people to lose sleep, such as earning an honest living or meeting the challenges of an occupation, trade, or profession. Neither possessed sterling personal character. Roosevelt seems to have had the wit to know that he was lying; Bush seems content to live in a reality-free environment, confidently awaiting the divine intervention that will transform his fantasies and wishful thinking into facts on the ground.

Both men sought successfully to plunge the nation into war, and having done so, both then gained stature from serving as a “war president”, although Roosevelt’s war was the greatest cataclysm of all time, whereas Bush’s is a much smaller conflict, albeit one replete with important global consequences. Both men engaged in war with cavalier disregard for constitutional scruples. Both men preferred, especially in the conduct of foreign policy, to do as they wished, taking Congress or the courts into account only as a courtesy or in pro forma consultations and hearings.

Neither man learned anything from political opponents or from the failure of his polices to pan out, lapsing instinctively into an “us against them” mentality for dealing with differences of opinion, interpretation, or moral judgment. Both Roosevelt and Bush presided over a huge spurt in the growth of government financed in substantial part by running up debt. No doubt other parallels might also be mentioned, but the foregoing remarks suffice to establish the main point. In government, as many commentators have noted, no failure goes unrewarded. Indeed, the greater the failure, the greater the reward. Franklin D. Roosevelt and George W. Bush exemplify in strikingly similar ways the veracity of this observation.

Or is it Napoleon II?

As I read the text of George W. Bush’s second inaugural address, my reaction began as alarm, transformed into perplexity, and finally came to rest at disgust. My assessment was formed around one central idea. It appears to have been written by individuals who, at their very core, do not understand the history and fabric of America. America was created with specific ideas in mind. Any literate person can easily read the founding documents of our nation. The Federalist Papers, the Anti- Federalist Papers, and the speeches of our Founders are there for all to see. America was fashioned according to the ideals of individual liberty and limited government. The economic manifestation of that philosophy is laissez faire capitalism. The external manifestation of that philosophy is armed neutrality.

Throughout our nation’s history, various groups have arisen to challenge these principles. They have suggested that the founding ideals are incorrect, incomplete, or that they somehow are no longer valid to contemporary circumstances. Throughout most of the 20th Century, American liberals advocated an economic ideology that revolved around high taxes, big government, and centralized planning. That entire intellectual tradition was in profound contradiction to the clearly stated beliefs that accompanied our nation’s creation. President Bush’s speech represents, in my opinion, the formal introduction of yet another ideology which seeks to displace traditional Americanism as the central core of our governance. Not since Woodrow Wilson, has a president enunciated a more breathtakingly belligerent and Jacobin ideology.

Bush’s address was much more appropriate for France in 1789 or Moscow in 1917 than for the United States of America. If I had to pick an historical analogy to President Bush, it would probably be Napoleon Bonaparte. I say this not because Bush has even a modicum of Napoleon’s military experience or genius, but rather because Bonaparte represented a stage of the French Revolution that is similar to the current stage of neo-conservatism in which we now find ourselves enmeshed.

These guys mean it.

Readers in numbers beyond my ability to reply individually have challenged me whether President Bush’s inaugural speech is a statement of his intentions or merely a celebration of himself and American democracy. Surely Bush does not believe America has the power to remake the world in its own image other than by being an example for others to follow? The answer is that it does not matter whether Bush believes, or even understands, what he said. The neoconservatives believe it, and they control the Bush administration.

The neoconservatives are Jacobins. The neocons are the greatest threat America has ever faced, and they have the reins of power. Americans need to wake up to this fact and stop indulging their macho “kick their Muslim butts” fantasies and their “end times” Rapture fantasies. The Bush administration is not establishing any democracies. It is starting a war that will last a generation. That is the neocon plan. They have put their intentions in writing just as Hitler did. It is no protection that their plan is detached from reality. Robespierre was detached from reality, and that did not stop him. So were Hitler, Lenin, Stalin, Mao, and Pol Pot. People with power in their hands who are detached from reality are the most dangerous people of all.

Bush’s speech: a translation.

I never thought I would end up as a presidential translator since I am fluent only in one language. Yet, here I am, serving as your translator for President Bush’s speech. That speech was written in a dialect that I do not speak but can, with great effort, read: purple English. My natural dialect is plain English. Why did the President’s programmers not have him speak in plain English? A couple of plain reasons. First, many pseudo-intellectuals confuse ineffability with profundity. The more obscure the meaning, the greater must be the minds that confuse us. Second, this speech is part of realpolitik. Its practitioners think you need to spend a zillion years getting a Ph.D. at a prestigious institution to understand it, but it is a game children play all the time. Speak with forked tongue to keep your opponents off balance. Do not say what you really mean and no one will hold you accountable.

But I believe in puncturing pretension and holding people accountable, so here is my translation of the speech from purple to plain English. Bush promises a Wilsonian-messianic crusade for democracy oblivious to how Wilson’s crusade pretty much ruined a century, and created the artificial country of Iraq that Bush is now trying to keep together by brute force. God bless us, Mr. Bush? God help us!

THE EMPIRE STRIKES OUT

How the U.S. became the world’s dispensable nation.

In a 2nd inaugural address tinged with evangelical zeal, George W. Bush declared, “Today, America speaks anew to the peoples of the world.” The peoples of the world, however, do not seem to be listening. A new world order is indeed emerging -- but its architecture is being drafted in Asia and Europe, at meetings to which Americans have not been invited. Consider Asean Plus Three (APT), which unites the member countries of the Association of Southeast Asia Nations with China, Japan and South Korea. This group has the potential to be the world’s largest trade bloc, dwarfing the EU and NAFTA. The deepening ties of the APT member states represent a major diplomatic defeat for the U.S. Recent moves by South American countries to bolster an economic community represent a clear rejection of U.S. aims to dominate a western-hemisphere free trade zone.

Consider, as well, the EU’s rapid progress toward military independence. American protests failed to prevent the EU establishing its own military planning agency, independent of NATO. Europe is building up its own rapid reaction force. And despite U.S. resistance, the EU is developing Galileo, its own satellite network, which will break the monopoly of the U.S. global positioning satellite system. The participation of China in Europe’s Galileo project has alarmed the US military. But China shares an interest with other aspiring space powers in preventing American control of space for military and commercial uses. And in an unprecedented move, China recently agreed to host Russian forces for joint Russo-Chinese military exercises.

The U.S. is being sidelined even in the area that Mr. Bush identified in his address as America’s mission: the promotion of democracy and human rights. The EU has devoted far more resources to consolidating democracy in post-communist Europe than has the U.S. Nor is American democracy a shining example to mankind. The present one-party rule in the U.S. has been produced in part by the artificial redrawing of political districts to favor Republicans, reinforcing the domination of money in American politics. In other areas of global moral and institutional reform, the U.S. today is a follower rather than a leader. Human rights? Europe has banned the death penalty and torture, while the U.S. is a leading practitioner of execution. The international rule of law? The neoconservatives who dominate Washington today mock the very idea.

That the rest of the world is building institutions and alliances that shut out the U.S. should come as no surprise. The view that American leaders can be trusted to use a monopoly of military and economic power for the good of humanity has never been widely shared outside of the U.S. The trend toward multipolarity has probably been accelerated by the truculent unilateralism of the Bush administration. In recent memory, nothing could be done without the U.S. Today, however, practically all new international institution-building of any long- term importance in global diplomacy and trade occurs without American participation.

In 1998 Madeleine Albright, then U.S. secretary of state, said of the U.S., “We are the indispensable nation”. By backfiring, the unilateralism of Mr Bush has proven her wrong. The U.S., it turns out, is a dispensable nation. Ironically, the U.S., having won the cold war, is adopting the strategy that led the Soviet Union to lose it: hoping that raw military power will be sufficient to intimidate other great powers alienated by its belligerence. To compound the irony, these other great powers are drafting the blueprints for new international institutions and alliances. That is what the U.S. did during and after the second world war.

Beware The Ides of March.

Last weekend I attended a production of Shakespeare’s Julius Caesar. A friend of mine was acting in it. But I was glad to go for other reasons as well. I thought the play would have something relevant to say given the naked imperialism of the U.S. invasion and occupation of Iraq. While by the time of Caesar the territory under the control of Rome was vast and stretched far beyond Italy, the Romans did not think of themselves as an Empire. Caesar had become renowned as a populist politician and military figure. It should be carefully noted that the man many consider the forerunner of modern dictators appealed to the masses against the elites. The play begins with Mark Antony offering Caesar the crown as king of Rome. He refuses as the Romans are not quite ready for that but many senators suspect that it is only a matter of time before Caesar centers all authority in himself.

In the play, Caesar is warned by a soothsayer to “Beware the Ides of March [March 15th]”. For it is on this day in 44 BC that Brutus, Cassius and a number of other leading Romans assassinate Caesar by stabbing him 23 times in the Senate. Here is the thing that struck me. The assassination of Julius Caesar did not stop the move towards Empire -- 21 years later Octavian, Caesar’s adopted son, with the title of Augustus Caesar was named Emperor for life and given complete control of the State. The Roman Empire continued to grow.

The relevance to our own time is that a focus on the personal evil of a Clinton or George W. Bush misses the point. Conservatives became maniacally focused on Clinton during his years as President and now liberals have become focused on Bush. But the real problem we have is far bigger than either of these men. If Clinton had been impeached, would it really have changed all that much? The sanctions on Iraq and the military presence in the Muslim holy land of Saudi Arabia would have continued anyway, provoking 9/11 or something like it. Let us imagine that George W. Bush was somehow impeached. (It is difficult to figure out what further malfeasance beyond what he has already done would be required for such a thing to happen.) Would the Empire then be shut down the next day? I do not know if troops would be withdrawn from Iraq even if the “opposition” were suddenly in power.

If we are to have any real change it will not be because half the country sees the light and switches party affiliations. It will be because individuals come to question deeply the nature of the State and the proper role of civil government. (As always, I make a distinction between civil government, which will always exist in human societies in one form or another, and the monopolistic State, which is merely one form of civil government and is deeply flawed). The scholarly introduction to the Pelican edition of Julius Caesar has this sobering thought: “After Brutus, Caesar, Cassius, and Antony, the plebeians are the most important ‘character’ in the play. It is their corruption that defeats the Republican cause from the start.” Beware the Ides of March, because it will do no good.

Long live secession!

The idea of an American right of secession -- a state’s right to abandon the union -- today invites a veritable cyclone of scorn and bafflement. Secessionism, you will be told, is immoral, treasonous, seditious, the failed machination of slave-holding Southerners whose nutty dream died in the judgment of 1865. What you will not hear is that secessionism is as old as the states themselves, that it was not always a reviled idea, that it cleaves to the heart of a celebrated but perhaps outmoded American principle -- the rebellion against centralized power -- and that it is a founding American act enshrined in our most revolutionary document. “[W]henever any Form of Government becomes destructive,” counsels the Declaration of Independence, “it is the Right of the People to alter or to abolish it, and to institute new Government.”

Although secessionism today is politically impossible, if tenuously legal, the secession specter has arisen again, waking to the Declaration’s call to self-governance. In 2005, it is the blue-state Northerners, bitter from the defeat of Nov. 2, who are, ironically, wearing its robes. If their plaints have an epicenter, it is in Charlotte, Vermont, in the wood-frame house of Thomas Naylor, professor emeritus, agitator, author, Rage Against the Machine fan, and founder and chair of the “Second Vermont Republic”. Naylor seeks the rebirth of Vermont as the independent nation it was between 1777 and 1791. White-haired and soft-spoken, Naylor describes his little band of “rebels” (the Second Vermont Republic boasts 125 card-carrying members) as “a peaceful, democratic, libertarian, grassroots movement opposed to the tyranny of the United States,” which has become “too big, too centralized, too intrusive, too militarized, and too unresponsive to the needs of individual citizens and small communities.”

Like the original red-state secessionists, it is to the founding documents -- the Declaration of Independence and the Constitution of the United States -- that Naylor turns to buttress his belief in the morality and legality of secession. There are also secession movements afoot in Hawaii and Alaska, both complaining, with some validity, that fraud and coercion forced their entrance into the union.

A NEW YORK TIMES LEFTIST SCREED MASQUERADES AS A BOOK REVIEW

I suppose Tom Woods should have seen it coming. His newest book The Politically Incorrect Guide to American History has made the New York Times best-seller list for non-fiction, so it was only a matter of time before the Gray Lady herself would weigh in on its contents. Recently, Adam Cohen did just that (on the editorial page, no less), and the results are utterly predictable.

Begins Cohen, “If you’re going to call a book The Politically Incorrect Guide to American History, readers will expect some serious carrying on about race, and Thomas Woods Jr. does not disappoint. He fulminates against the Civil Rights Act of 1964, best known for forcing restaurants and bus stations in the Jim Crow South to integrate, and against Brown v. Board of Education.” In other words, Woods is a racist, or at least that is what the Times wants us to believe. In a fit of racial hatred, apparently Woods decided to “set the record straight,” don his white hood, and sit down at his computer to compose something akin to Protocols of the Elders of Zion.

Rather than dealing with the veracity of Woods’ claims, the purpose of my piece is to deal with the language and content of what Cohen has written. I do this because from where I see it, Cohen’s attack on Woods in what the publication self-proclaims to be the “newspaper of record” is composed of one set of logical fallacies after another. It is one thing to use the historical record to point out mistakes that someone else has committed. It is quite another to use the faulty rhetorical devices Cohen employs.

Noticed by the New York Times.

Although I am happy to report that the response to my new book, The Politically Incorrect Guide to American History, has been quite enthusiastic, I have also taken my share of hits (though, truth be told, not nearly as many as I expected). Thus far, however, hardly any of the serious criticisms of the book have even tried to dispute its facts. Amazon reviewers who actually raise specifics and think they are nailing me have invariably misstated my argument. I knew that the New York Times review, which I had heard was coming, would be in a class by itself. But I had no idea that I was such a dangerous person that it would run on the editorial page. I told radio talk show hosts all week that if the Times’s review of my book was not a hatchet job, I would buy them dinner. Needless to say I will be eating at home this week.

A STRANGELY IMPORTANT FIGURE

To call Ayn Rand, the high priestess of the human will, a mere force of nature would to her have been an insult as well as a cliche. But how else to describe this extraordinary, maddening, and indestructible individual? Born a century ago this year into the flourishing bourgeoisie of glittering, doomed St. Petersburg, Alisa Zinovyevna Rosenbaum was to triumph over revolution, civil war, Lenin’s dictatorship, an impoverished immigrant existence, and bad reviews in the New York Times to become a strangely important figure in the history of American ideas.

Even the smaller details of Rand’s life come with the sort of epic implausibility found in -- oh, an Ayn Rand novel. On her first day of looking for work in Hollywood, who gives her a lift in his car? Cecil B. DeMille. Of course he does. Frank Lloyd Wright designs a house for her. Years later, when she is famous, the sage of selfishness, ensconced in her Murray Hill eyrie, a young fellow by the name of Alan Greenspan becomes a member of the slightly creepy set that sits at the great woman’s feet. Apparently he went on to achieve some prominence in later life.

To Rand, none of this would really have mattered (well, the fame was nice). To her, an intensely Russian intellectual despite everything, it was ideas that counted. They were everything. When, after nearly 50 years, her beloved long-lost youngest sister, Nora, made it over from the USSR, they promptly fell out -- over politics, naturally. Poor Nora was on her way within six weeks, back to the doubtless more easygoing embrace of Leonid Brezhnev. Scarred by her Soviet experiences, Rand was a woman on a mission. She could not stop: not for her sister, not for anyone. She had plenty to say, and she said it -- again, and again, and again. She wrote, she lectured, she hectored, she harangued. Words flowed, how they flowed. And somehow her work has endured in the the country she made her own. Her creed of ego and laissez-faire, and the reception it won, was one of the more interesting -- and encouraging -- cultural phenomena of mid-20th-century America.

Sex can be savage in Rand’s fiction, and Elliott Wave International lead article.so is argument. Her sagas deal in moral absolutes, her protagonists are the whitest of knights or the blackest of villains, caricatures of good or evil lacking the shadings of gray that make literature, and life, so interesting. Yet Atlas Shrugged and The Fountainhead, at least, have a wild, lunatic verve that sweeps all before them. Like Busby Berkeley, the Chrysler Building, or a Caddy with fins, they are aesthetic disasters, very American aesthetic disasters, which somehow emerge as something rather grand.

Rand’s nonfiction may have a greater claim to intellectual respectability, but it was the lurid, occasionally harsh, simplicities of her novels that would deliver her message to the mass audience she believed was out there. She was right. Her key insight was to realize that there was an appetite among Americans for a moral case for capitalism. In a restless age that believed in the Big Answer, neither historical tradition nor utilitarian notions of efficiency would suffice. Ayn Rand gave Americans that case, perhaps not the best case, but a case, and she knew how to sell it.