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TAX EVASION CASE DEFENDANT SAYS OFFSHORE MONEY WAS EARMARKED FOR GOOD WORKS
Jailed and held without bond in the nation’s largest alleged personal tax-evasion scheme, telecom investor Walter Anderson says the federal government has got it all wrong. He is not a tax cheat, he said in a conference room at the D.C. jail. Sending millions of dollars to offshore havens – which the government alleges he did to evade around $200 million in taxes – was part of a legitimate and long-standing plan. He was going to use the money to change the world. To fight for arms control and human rights. To promote family planning and space exploration. He was going to give the money away, starting next year.
U.S. Magistrate Judge Alan Kay ordered Anderson held at the D.C. jail until a March 11 hearing. He decided Anderson posed too high a risk of fleeing the country. Anderson angrily stood up during the hearing to complain about the prosecution. “The government’s allegations are inflammatory,” he said. “I’m trying to run legitimate businesses, and I don’t intend to let the government ruin my credibility.” It was not his first complaint about the government. In the 1980s, he launched a campaign against high-occupancy-vehicle lane restrictions on Interstate 66 and was repeatedly ticketed for violating them.
At times referring to notes scribbled on the back of his indictment, Anderson said the assets the government claims he hid belong to the Smaller World Foundation, which he controls and endowed with full ownership of various companies he runs, such as Space Inc. and Iceberg Transport SA. The plan was for the foundation to begin giving money away in 2006, after the assets had had time to grow, he said. Anderson said he lost any personal interest in money some time ago, as long as he had a place to live and enough to buy dinner.
Despite the arrest, he said, he has no motivation to disappear. “After all I’ve achieved in my life, I’m not going to be satisfied to weave baskets in some backwater country because I can hide from the government,” he said. But Anderson would not address some topics, including his alleged use of the name Mark Roth to incorporate a Panamanian holding company. He said he registered his Smaller World Foundation and holding companies in offshore havens for legitimate tax savings and privacy, partly to avoid being inundated with solicitations for contributions. He said he made a good-faith effort to file tax returns on time and accurately, and added, “I am not a tax resister.”Link here.
HOW CLOSE ARE WE TO A FASCIST AMERICA?
The idea that America is turning fascist has been popular on the Left for as long as I can remember. In the 1960s, when antiwar radicals raged against the Machine, this kind of hyperbole dominated campus political discourse and even made its way into the mainstream. When the radical Symbionese Liberation Army went into ultra-Left meltdown and began issuing incoherent “communiqués” to an indifferent American public, they invariably signed off by declaring, “Death to the fascist insect pig that preys on the life of the people!” Such rhetoric, too overheated for American tastes, was quite obviously an exaggeration. America in the 1960s was no more “fascistic” than miniskirts, Hula Hoops, and the rhyming demagoguery of Spiro T. Agnew. Furthermore, we were not even close to fascism, as the downfall of Richard M. Nixon made all too clear to whatever incipient authoritarians were nurtured at the breast of the GOP.
Back in those halcyon days, America was, in effect, practically immune from the fascist virus that had wreaked such havoc in Europe and Asia in previous decades. There was a kind of innocence, back then, that acted as a vaccine against this dreaded affliction. Fascism – the demonic offspring of war – was practically a stranger to American soil. After all, it had been a century since America had been a battleground, and the sense of invulnerability that is the hallmark of youth permeated our politics and culture. Nothing could hurt us ... we were forever young. But as we moved into the new millennium, Americans acquired a sense of their own mortality, an acute awareness that we could be hurt, and badly. That is the legacy of 9/11.
During the Civil War, Lincoln, the “Great Emancipator”, nearly emancipated the U.S. government from the chains of the Constitution by shutting down newspapers, jailing his political opponents, and cutting a swathe of destruction through the South, which was occupied and treated like a conquered province years after Lee surrendered. He was the closest to a dictator that any American president has come – but George W. Bush may well surpass him, given the possibilities that now present themselves. From the moment the twin towers were hit, the fascist seed began to germinate, to take root and grow. As the first shots of what the neocons call “World War IV” rang out, piercing the post-Cold War calm like a shriek straight out of Hell, the political and cultural climate underwent a huge shift: the country became, for the first time in the modern era, a hothouse conducive to the growth of a genuinely totalitarian tendency in American politics.
It is difficult to imagine any scenario, after another 9/11, that would not lead to what we might call fascism. A bomb placed in a mall or on the Golden Gate Bridge, or a biological attack of some kind, could sweep away the Constitution, the Bill of Rights, and two centuries of legal, political, and cultural traditions – all of it wiped out in a single instant, by means of a single act that would tip the balance and push us into the abyss of post-Constitutional history. The trap is readied, baited, and waiting to be sprung. Whether the American people will fall into it when the time comes – that is the nightmare that haunts the dreams of patriots.Link here.
THE GRAVE NEW WORLD OF OFFSHORE PRIVACY
Naturally, privacy advocates are drawn to the remaining offshore financial services centers which still offer confidentiality. In Miami Latin American clients find a friendly and familiar environment in which their instinctive desire for privacy heightened by their concerns over security (wealthy Colombians, for example, fearing kidnapping) can be met. The city is a financial hub and a large number of corporations doing business in Latin America have established their regional headquarters there. It follows that this financial services prominence leads to interaction with offshore financial services centers.
Many of the opulent homes in Miami in areas such as Key Biscayne, according to public records, are registered in the names of offshore companies. Foreign property buyers from all over the world often use offshore companies in order to buy their Florida homes so that they can legitimately shelter assets from estate duties. The use of such companies is sometimes frowned upon because the actual owners can remain unknown and this can be of concern, for example, to the Financial Crimes Enforcement Network, an agency of the U.S. Treasury. The associate director for regulatory policy of FinCEN has said that although there are legitimate uses for such companies, “there is an opportunity for abuse when you can’t get to the real owners”. That may be true, but there is also an opportunity for abuse when you can get to the real owners. Ask those who have suffered from frivolous and groundless lawsuits.
The head of the Miami-based Washington Economics Group, Tony Villamil, has said that Miami is, basically, a Latin American city that happens to be in the U.S. But before you go comparing, say, Panama’s or Liechtenstein’s financial services with those offered in Miami, ask yourself why some locals and not just some foreigners have their Miami properties registered in the names of offshore companies. It is because Miami, although it could be described as a Latin American city, is, as Tony Villamil has said, still in the U.S. where the government’s mood since 2001 has made many people uneasy and its actions to thwart terrorism have caused some to remember the words of Edmund Burke: “True danger is when liberty is nibbled away for expedience and by parts”. I would say that Miami is not the center of the New World, but it is certainly a gateway both to the Americas and the New World. This New World, however, bears no resemblance to the one European seafarers discovered in centuries past. This world might, in fact, be described (with apologies to Aldous Huxley) as a Grave New World. Henry Kissinger’s words are an uncomfortable reminder: “The illegal we do immediately. The unconstitutional takes a little longer.
International bankers with many years of experience of financial crime issues argue that a lot of the rules introduced since 2001 to prevent terrorists using the mainstream financial system will not achieve their objective. They see customers having to pay more for services due to the cost of mandatory new extensive checks. When the FBI tried to design a profile of how a bank might be used by terrorists it only came up with one main characteristic: large deposits with withdrawals of cash in a series of small amounts. According to the head of anti-money-laundering at one large American bank, such a profile matches a quarter of the customers of most banks. No wonder some fear that their bank accounts run the risk of becoming frozen, if not literally. Lord Bowen may have been giving his definition of philosophy, but for me his words have most resonance when applied to the plight of inexperienced regulators coming to grips with the subject of offshore services: “A blind man in a dark room – looking for a black hat which isn’t there.” Meanwhile, back in Florida with its strategically-located elevators, several banks have recently felt the tightening of the regulatory screws and more are expected to receive visits from regulators. Gateway to the New World, indeed.Link here.
BERMUDA: INDEPENDENCE OR NOT?
Should Bermuda – a small island, British Overseas Territory (BOT) – proceed to independence or not, and, what should be the process by which such a decision is made? These are two elements of a question that is being explored by members of the Bermuda Independence Commission (BIC), established by the government of the ruling Progressive Labour Party (PLP) led by Premier W. Alexander Scott. A poll conducted last month in Bermuda revealed that 65% of those polled are against independence and only 35% are for it. The views expressed in the poll are based largely on very politically charged arguments made by both the ruling PLP and the main opposition, the United Bermuda Party (UBP). The decision about independence is far too important to be made only on the basis of political rhetoric.
Bermuda is Britain’s oldest colony. Since February 2002, it has been designated as a BOT and is self-governing with a very high degree of control over its own affairs. Bermudans are entitled to be both Bermudan and British citizens with the right to live and work in the European Community as a whole. The island is often linked to the Caribbean, although it is approximately 1,000 miles away from the region. Its links to the Caribbean are recent and few. Its population of 65,000, comprising white and black people, enjoys one of the highest per capita incomes in the world, equivalent to that of the U.S.A. Its unemployment level is low at about 5% (2002 figures), and it has enjoyed an average growth of its economy of about 2% over the last six years. This is really quite remarkable since Bermuda has virtually no natural resources and virtually no industry.
Why should Bermuda want independence from Britain? Of the BOTs, it enjoys more self-government than any other, and it does not have to bear the cost of its external relations and defence. Indeed, as one of its former Premiers, Sir John Swan, famously put it in 1982, “With the Americans to feed us and the British to defend us, who needs independence?” The answer to this question is complex. In part, it relates to the racial divide in the country. For the most part the white population opposes independence while a significant number of the black population (though not an overwhelming majority) support it. The PLP obviously feels that there is some political mileage to be derived from an independence platform.
If years of experience has taught Caribbean Community (CARICOM) countries that “going it alone” is not a viable option in today’s global community, Bermudans should be given the right of a referendum to choose their path. And, they should be fully informed of all the benefits and pitfalls that surround the question of independence on which they are asked to decide.Link here.
THE END OF THE RIGHT TO COUNSEL?
What if the government arrested you on terrorism charges? What if your lawyer was afraid to zealously defend you (as required by the Model Rules)? What if your lawyer was so afraid, he would not even tell you that he was not able to zealously defend you? This is the direction American criminal law is taking, according to defense attorney and civil rights activist Elaine Cassel, author of The War on Civil Liberties: How Bush and Ashcroft Have Dismantled the Bill of Rights.
Last month, a jury convicted Lynn Stewart, the lawyer for terrorist Omar Abdel Rahman, of five counts of “defrauding the government, conspiracy, and providing support for terrorism.” Elaine’s articles about the Stewart case are here and here. According to the U.S. government, she “conspired” to deliver a message to Reuters and she talked loudly about nothing while her client talked with the paralegal. She faces up to 30 years in prison. Stewart’s translator and paralegal are in deep trouble too.
According to the jury, Stewart violated her agreement with the government by talking loudly while her client was talking to someone else so the cops could not eavesdrop. Stewart’s violation of the agreement is also the basis for the fraud charges. The fact that this case ever got past the first preliminary hearing ought to be shocking to all Americans. How are lawyers supposed to represent clients if they cannot talk to them in private? According to Ms. Cassel, this conviction could lead to a chilling new reality for lawyers in “terrorism cases” from now on – assuming, that is, that prosecutors do not just turn suspects over to the military because they do not have a case at all.Link here. Due process of law goes back to 1215 – link.
ID CARDS ARE A WASTE, SAYS SECURITY GURU
The UK’s plans for biometric identity cards are a waste of money, one of the world’s leading experts on computer security said this week. In an interview with Computer Weekly, Bruce Schneier, security author and chief technology officer of internet security group Counterpane, said the programme could do more harm than good. “ID cards are a waste of money. The amount of good they will do is not nearly worth the cost. They will not reduce crime, fraud or illegal immigration,” he said. The adoption of ID cards would encourage criminals to attempt forgeries, he said, potentially exacerbating crime rather than reducing it.
“Every credential has been forged. As you make a credential more valuable, there is more impetus to forge it. The reason identity theft is so nasty now is that your identity is so much more valuable than it used to be. By putting in the infrastructure, we have made the crime more common. That’s scary.” He said the UK government, like other governments around the world, was investing in the technology as a form of control but marketing it as better security.
Schneier said that the U.S. plans to spend £10 billion on a program to build checkpoints at airports to prevent terrorists boarding planes are a similar waste of money. “If you had a list of people that were so dangerous you would never let them on an aircraft and £10 billion, would you build a series of checkpoints at airports just in case they happened to walk through them, or hire FBI agents to investigate those people?” he said. “We are building a security system that only works if the terrorist happens to choose the tactic of going on an aircraft, yet we are affecting the privacy of every airline passenger.”
Schneier said ID theft will only be solved when banks are given responsibility to prevent it. “As soon as it becomes the banks’ problem, it will be solved. The entity that is responsible for the risk will mitigate the risk.” Credit card fraud in the U.S. fell dramatically after the banks become responsible for refunding customers with losses of more than £25 caused by fraud, he said.Link here.
DEATH OF THE DOLLAR? ELEVEN WAYS TO PROTECT YOURSELF AND PROFIT
For many reasons, the dollar will almost certainly fall rapidly during the next few years and could even crash suddenly – with little or no warning – at any time. That will have severe consequences for stocks, real estate, pensions, gold, and even U.S. foreign policy, which runs on dollars. Thousands of companies and millions of families could even be financially wiped out. The recession that followed the dot.com and telecom crash and 9/11, was just a warm-up. The crash following a dollar collapse, would be much more severe, and could cause stock and real estate prices to fall by 50% to 80%.
At the same time, everything we import – from oil to computers to fruit – would go up in price two- to five-fold. That means the 32” TV you can now buy for $500, would cost $1,000 to $2,500; and a gallon of gasoline would cost $5 to $10 a gallon. We will cover how we got in the situation where a dollar crash (fast or slow) now seems inevitable, and what that crash will mean for your investments, savings, and real estate. Most important: We will also show you how to protect yourself from a dollar crash and even turn it into a personal financial windfall.Link here.
OFFSHORE CENTERS GOING STRAIGHT ... STRAIGHTER THAN THEIR CRITICS
Offshore financial centers have faced heavy criticism over their confidentiality practices from the EU, OECD and U.S. But according to offshore lawyers, the compliance systems those jurisdictions have introduced have now put them ahead of their “onshor” competitors. By year end, the OECD will issue its widely anticipated Global Forum report. This will include a review of whether OECD members are on a level regulatory playing field with international (or “offshore”) finance centers (IFCs).
In its controversial report, Harmful Tax Competition: an Emerging Global Issue, the OECD has put very public pressure on various IFCs to reform their money laundering and “know your client” regulations. The 1998 report suggested that IFCs were using secrecy laws to assist OECD citizens with tax evasion. It imposed pressure on the larger IFCs to provide further information to OECD countries in order to assist with increased tax enforcement. In the economic reality of political negotiation, some say the IFCs have had little option but to comply with the all-powerful OECD demands.
Lawyers within and outside the IFCs both say the increase in regulations is beneficial to IFC countries. But lawyers within the more established IFCs say that their own day-to-day experiences reveal that they are now playing on anything but a level pitch. In a March 2004 report, the IMF found compliance levels in the IFCs were, on average, more favorable than in other jurisdictions. One lawyer says that when she recently set up an account in the U.S. for a client, “the almost complete lack of information we had to provide was astonishing. Had we been setting [the account] up in Jersey, we would have had to provide a lot more information.” And lawyers say the U.S. is far from being the only culprit in requiring less beneficial ownership information than the IFCs. “The OECD and [EU] have failed to tackle the culture of banking secrecy among European banks,” another says. “This is where there is a serious risk of money laundering.”Link here.
DEATH BY TAX DIRECTIVE
Like the movie vampire that never quite dies, the EU’s “Savings Tax Directive” appears to have come back to life, and is apparently due to come into force on July 1, 2005. Although it is still not yet final and should be possible to avoid in its current state, it may well be pushed through and later extended. The OECD’s process has been slowed down by the concerted insistence by non-members on a level playing-field. Non-members must insist on the whole package being taken forward together and resist the current OECD moves to drive through information exchange on its own while effectively dropping those parts that would harm its own members. A change in government in the USA could also give new force to the OECD. The process was started under the Clinton government and lost speed when the Bush administration signaled a lack of enthusiasm.
Overall, there needs to be continued co-operation between low-tax jurisdictions like the Turks & Caicos Islands and their friends and supporters in Europe and the USA. It is important for all of us that the European governments do not win this fight, not just to preserve the sovereignty of small nations but also for the sake of investment and the global economy. [Good outline of the Directive’s history constitutes the main body of the article.]Link here.
U.S. AIMS TO RETURN ILL-GOTTEN GAINS TO VICTIMIZED COUNTRIES
The luxury Key Biscayne condominium owned by a corrupt Nicaraguan official had everything: a wine room, beachfront access and breathtaking views of the ocean. It was a perfect hideaway for someone accused of helping steal more than $100 million from his own country. But instead of serving as a getaway, the condo was seized by U.S. officials and sold – and the $2.7 million in proceeds were set aside to build four modern public schools in Nicaragua for about 2,100 students by the end of 2005. The case brought by U.S. Immigration and Customs Enforcement against Byron Jerez, the former Nicaraguan tax chief, is one of about two dozen ongoing investigations involving eight Latin American countries in which Miami-based agents are trying to track and seize real estate, bank accounts and other assets bought with money stolen by corrupt officials.
The stepped-up law enforcement initiative coincides with a broader effort by banks and investment houses to prevent people known in the trade as PEPs – for “politically exposed persons” – from using U.S. accounts to launder or hide ill-gotten gains from foreign countries. For decades, many banks allowed corrupt officials to open and use such accounts with no questions asked. In one sign of the increased scrutiny, the number of “suspicious activity reports” filed by banks and other financial institutions with the government rose by 25% over the first half of 2004 compared with the same period the year before.
The prevalence of corrupt foreign money in the U.S. gained renewed attention earlier this year when Riggs Bank, a venerable Washington institution that once held dozens of accounts for foreign embassies and individuals, agreed to pay $41 million in fines after pleading guilty to failing to report suspicious transactions involving former Chilean dictator Augusto Pinochet. Miami has long been a gateway for smugglers, embezzlers and drug dealers to launder their ill-gotten gains, particularly those from Central and South America. Some officials steal money from their own governments and relocate to South Florida, snapping up luxury homes, buying expensive cars and aircraft and living in high style.Link here.
DRIVING THE BAD GUYS CRAZY
Now that just about four months have passed since the release of The Politically Incorrect Guide to American History and much of the frenzy surrounding it has begun to die down, I have had a few moments of leisure to consider the response to it, and what it all means. The favorable responses have been gratifying, and come from such sources as Congressman Ron Paul, Liberty magazine, the Mackinac Center for Public Policy, Gary Bauer (who called it one of the top five books of 2004), Pat Buchanan, Ralph Raico, Paul Gottfried, The American Conservative, Human Events, the Mises Review, the California Literary Review, and the Weekly Standard (that is not a misprint – their print edition published a favorable review). The Times of London ran a favorable piece about me, and Brazil’s Folha de S. Paolo kindly published a verbatim interview. The Washington Times and the Pittsburgh Tribune also ran sympathetic interviews.
The New York Times editorial page, on the other hand, solemnly warned Americans about my dangerous views, as did Reason magazine contributing editor Cathy Young in the Boston Globe. (Two weeks later, though, the New York Times proved that miracles are possible by publishing a very favorable profile of me: “Revisionist History? A Professor Hopes So.”) The Claremont Institute did not care for it (surprise). Neither did the Council on Foreign Relations’ Max Boot or, more recently, Communist-turned-neoconservative Ronald Radosh.
One thing Beltway libertarians share in common with neoconservatives is that both go berserk whenever the South is treated with anything other than contempt. Even though a genuine libertarian would be hard pressed to find anything else in the book with which he might disagree, major Beltway libertarians have condemned me because my Civil War chapter was not sufficiently anti-Southern, and because I committed the unpardonable offense of suggesting that there might be something of value in the Southern tradition. In the old days, conservatives and libertarians freely debated the Lincoln legacy and similarly controversial questions in the pages of National Review. Today, positions that were defended with skill and precision by distinguished scholars of the past are enough to get you smeared in the pages of the very magazines for which those scholars used to write.
The left’s response to the book was predictable enough: smears, incredulity that I dared to criticize their favorite presidents, and outright lies about the book’s contents (it was obvious that most of them had not read it, since much of the time they attributed positions to me that were exactly the opposite of those in the book). The fact that some leftist bloggers actually linked to Max Boot’s critique of my book speaks volumes. In spite of the smears, the book, now in its eighth printing, spent three months on the New York Times bestseller list. Murray Rothbard was right – it sure is fun driving the bad guys crazy.Links here and here.
JOHN GILMORE CANNOT TRAVEL BECAUSE HE WILL NOT PRESENT A GOVERNMENT–APPROVED ID
John Gilmore’s splendid isolation began July 4, 2002, when, with defiance aforethought, he strolled to the Southwest Airlines counter at Oakland Airport and presented his ticket. The gate agent asked for his ID. Gilmore asked her why. It is the law, she said. Gilmore asked to see the law. Nobody could produce a copy. To date, nobody has. The regulation that mandates ID at airports is “Sensitive Security Information”. The law, as it turns out, is unavailable for inspection. What started out as a weekend trip to Washington became a crawl through the courts in search of an answer to Gilmore’s question: Why?
In post 9/11 America, asking “Why?” when someone from an airline asks for identification can start some interesting arguments. Gilmore, who learned to argue on the debate team in his hometown of Bradford, McKean County, has started an argument that, should it reach its intended target, the U.S. Supreme Court, would turn the rules of national security on end, reach deep into the tug-of-war between private rights and public safety, and play havoc with the Department of Homeland Security. At the heart of Gilmore’s stubbornness is the worry about the thin line between safety and tyranny.
“Are they just basically saying we just can’t travel without identity papers? If that’s true, then I’d rather see us go through a real debate that says we want to introduce required identity papers in our society rather than trying to legislate it through the back door through regulations that say there’s not any other way to get around,” Gilmore said. “Basically what they want is a show of obedience.” As happens to the disobedient, Gilmore is grounded. He is rich – he estimates his net worth at $30 million – and cannot fly inside the U.S. Nor can he ride Amtrak, rent a room at most major hotels, or easily clear security in the courthouses where his case, Gilmore v. Ashcroft, is to be heard.
Gilmore will show ID for an international flight because he does not expect to set the rules for other nations. “I will show a passport to travel internationally. I’m not willing to show a passport to travel in my own country,” Gilmore said. “I used to laugh at countries that had internal passports. And it’s happened here and people don’t even seem to know about it.”Link here.
WEALTHY U.S. CITIZENS MAY CHECK OUT AT ANY TIME, BUT THEY CAN NEVER LEAVE
For more than a decade Congress has obsessed over the fact that a handful of rich folks were able to escape U.S. income and estate taxes by renouncing their citizenship. So in October, as part of a big corporate tax act, the politicians took yet another shot at fleeing turncoats. They tightened up a 1996 law that is supposed to extract 10 years of taxes from tax-motivated expatriates as they head for the airport. The new, tougher version will cause pain for some moderately well-off expatriates. But the truly rich and tax averse will still be able to plan around it.
Under the old law expatriates could apply to the IRS for a ruling confirming they had left the U.S. for nontax reasons and were therefore exempt from the 10-year levy. That was a loophole through which you could sail a 100-foot yacht. The ruling loophole is now closed. Under the new law, which is retroactive to June 4, 2004, anyone who expatriates and has assets of more than $2 million or paid more than $620,000 in federal income taxes over the five years before leaving is presumed to have left for tax reasons. Expatriates who do not fit one of the narrow exceptions will owe U.S. income tax on a wide range of U.S. source income and estate and gift taxes on U.S. assets for 10 years. If they spend more than 30 days in the U.S. during any one of those 10 years, they will be taxed that year just like U.S. citizens, on all their income from any source. Warning to ailing expatriates: Do not come here for medical treatment. If an expat dies in a year where he has spent 30 days or more here, his entire estate is subject to U.S. estate tax. The new law also requires post-June 3, 2004 expats to file extensive disclosures – worldwide income, days in the U.S., etc. – with the IRS, annually, for 10 years.
The good news, if you are contemplating leaving for tax reasons, is that the new law is not the feared “exit tax” that was passed by the Senate. And it still leaves holes that the rich and well-advised can use to avoid paying U.S. tax. E.g., he can minimize his estate’s potential bill by using some of the same techniques wealthy U.S. citizens use, such as family limited partnerships.Link here.
COMING TO TERMS WITH CHINA
In our media lives, Asia plays a remarkably small and fragmented role, given its growing importance in the world. In our press, coverage of Asia is a strange jumble of alarums, fears, and trends: the North Korean bomb, avian flu and SARS, the tsunami, the Taiwan “war bill”, the growth of the Chinese Navy, anime (and remilitarization) in Japan, the U.S. military in Indonesia, the possibility that the central banks of East Asia may dump dollars for euros triggering an economic cataclysm, and the normal run of monks, exotica, and strange customs – all adding up to conceptual chaos. Seldom do you find a piece that tries to put East Asia together, to lay out for us, in particular, the explosive nature of the U.S.-Japan-China triangular relationship, which in various combinations has in the past plunged us all into bloody war.
Below, Chalmers Johnson does just that and in monumental fashion. It is rare for us to take time out of busy lives to consider how exactly the dots might be connected, how the world actually works. I urge all of you to consider doing just that in the case of Johnson’s long essay. It will repay your time many times over. And while you are at it, any of you who have not laid your hands on the first two volumes of Johnson’s Blowback Trilogy on imperial America and the loss of our republic (the third of which is being written at this moment), should do so immediately. Both Blowback: The Costs and Consequences of American Empire, and The Sorrows of Empire: Militarism, Secrecy, and the End of the Republic are now available in paperback and are must reads. The first is a prophetic account, published in 2000, that lays out the background to the attacks of 9/11. The second focuses, as no one else has, on the dramatic story of the endless growth of our military and its bases abroad.Link here.
THE CONSERVATIVE WELFARE STATE
The Social Security Administration has a Web page dedicated to the creator of modern government retirement programs, Otto von Bismarck, the late 19th century militarist chancellor of Prussia. The page explains, “Despite his impeccable right-wing credentials, Bismarck would be called a socialist for introducing these programs, as would President Roosevelt 70 years later.” Now, one might paraphrase about the current situation and say, “Despite his impeccable right-wing credentials, President Bush could be called a socialist for introducing his welfare programs, as was President Roosevelt 70 years earlier.” But considering the rich history of right-wing nationalist rulers from Bismarck to Bush, and their affinity to a certain type of socialism, perhaps “despite” would not be the most appropriate preposition to use in discussing Bismarck’s or Bush’s conservative welfare state.
In many ways, Bismarck is the inspiration behind America’s greatest socialist experiments: Social Security, Medicare, and nationalized public schooling. The German tyrant saw the people he ruled as a collective social organism, to be molded, conditioned and regimented toward the furtherance of Prussian nationalism and the consolidated state he envisioned. The central state would control people from cradle grave, take charge of the education and development of young people’s minds, consume a sizable portion of the private economy for its military conquests and promise to take care of the old when they retired. The nation-state ruled supreme; the people, mere cogs in the machine.
Bush’s expansion of Medicare, his housing subsidies, his federal subsidies for families and churches, and his desire to “save Social Security” are not leftist diversions from conservatism, nor are they reactionary diversions from Progressive welfare statism; Bush is simply the most passionate and consistent spokesman for the conservative welfare state that has occupied the White House in recent years. Republicans have always done a lot of meddling in the American economy. The regulatory neo-mercantilism of the Republican Party, especially as it ties in to the warfare state, has been a core feature of its program since the 1860s. Before that, it was the conservative Hamiltonians who desired a national bank and government funding for national infrastructure. In recent administrations, Republicans have been famous for agricultural welfare, corporate subsidies, and other giveaways to certain friends of theirs.
The purer welfare-state proposals, however, have not appeared as much on the foreground until recently. Bush’s talk about giving money to Africa, to religious charities, to single Americans on the condition that they marry – none of this sounds particularly Republican, even to many libertarians well versed in the historic evils of the party. It is too socialistic, too interested in social engineering rather than simply giving cushy contracts and pork to cronies. It is too idealistic, much like Bush’s war to make the world safe for American foreign policy, rather than more realistic but brutal, like Reagan’s funding of death squads in Latin America to contain Communism. And unlike his father, who, for example, raised unemployment benefits, Bush seems to believe truly in his own Great Society, as opposed to simply advancing the welfare state out of political pragmatism. If any of this seems confusing, it should not. Like Bismarck, Bush is a true believer in the right-wing welfare state. The welfare state is a right-wing invention, developed first and most characteristically by imperialist rulers as a method of shaping and controlling the masses. The Marxist dreams of abolishing markets, hierarchy and private property have little in common with the social engineering of the conservative welfare state, the one that we have here in America. Bush, like many conservative nationalists, sees the state as a foolproof instrument for managing and improving upon society, and he has acted upon that principle like no other president in recent history.Link here.
OFFSHORE ACCOUNTS: NO LONGER AN EASY OPTION
I have spent a lot of time in Switzerland over the years, including two semesters of college. But not much in recent times, when most of my travel and living has been in less developed countries. I did, however, log a few days in Zurich before Christmas to renew some old acquaintances. Some readers may remember when, during the monetary crises of the ‘70s and early ‘80s especially, Switzerland was viewed as a logical, even the premier, refuge for Americans. Numerous privacy and investment seminars were sponsored here for Americans. Swiss insurance annuities had substantial tax benefits (which they have subsequently lost). Swiss bank accounts were the sine qua non of financial privacy. And second homes in Switzerland were sought after. You do not hear much about any of these things now.
I think having a bank relationship in Switzerland still makes a lot of sense, though, because the Swiss live up to their reputations for stability, competence and reliability. Americans should only consider banks that have no assets in the U.S. – although, for reasons I will discuss below, that distinction is not as important as it once was. Unlike U.S. banks, which will promiscuously disclose absolutely everything they know about their clients to the most casual inquirer (forget about a government agent), and then sell the customer’s name to a mailing-list operation for good measure, Swiss banks really do maintain confidentiality. Accounts actually are private, unless proof is presented of an offense that is a crime in Switzerland. And tax evasion is a civil, not a criminal, matter here. Unlike the U.S., the burden of proof rests on the state.
I do not talk about things like “bank secrecy”, the more benign-sounding “financial privacy” or even completely legal “tax avoidance” in my newsletter or anywhere else these days. One reason is because even mentioning these things can draw official attention. And someone who talks about them in a favorable light can easily be accused of abetting “money laundering” or any number of other artificial crimes. Anyway, why bother discussing purely academic concepts? In today’s world, secrecy and privacy really only exist in people’s imaginations. And Boobus Americanus is suspicious of anyone who would have it otherwise.
Perversely, though, the more inconvenient and potentially dangerous it becomes to have a financial presence offshore, the more important it is. As outlandish as it may sound now, after the world has been financially and economically liberalizing in most regards over the last 20-some years, I expect the U.S. to come up with a regime of foreign exchange controls at some point in the fairly near future. One stable datum that you can plan your life around is that government will never control itself when it can get what it wants by controlling its subjects. That is why when the current dollar crisis really gets out of hand, and it almost certainly will, you can expect controls on sending money out of the country without strict approval. At that point, if you do not already have a crib abroad, as well as fully stocked bank and brokerage accounts, you can forget about them.Link here.
BERMUDA: SUN MAY FINALLY SET ON THE OLDEST PART OF THE BRITISH EMPIRE
It has been almost exactly 400 years since Admiral Sir George Somers and his crew, shipwrecked en route to Virginia, were fortuitous enough to be washed up on the shores of Bermuda. In the ensuing centuries Britain’s oldest remaining colony, named after the Spanish captain Juan de Bermúdez, who first sighted the uninhabited islands, has developed as a hub of international business and tourism – equally famous for its offshore banking as for its miles of beaches. Part Atlantic and part British outpost, visitors are as likely to be confronted by bright red Victorian post boxes as they are by a policeman wearing the obligatory Bermuda shorts and long white socks.
But change may be on its way. Having long benefited financially from its close links to Britain and its geographic proximity to the U.S., there are some on the island who think Bermuda would be a lot better off by completely cutting its ties to the Crown and standing by itself. This demand for independence is being led by no one less than the island’s leading politician – Premier Alex Scott.
While there has been talk of a free Bermuda since the 1960s, when Britain was granting independence to many of its colonial possessions, Mr. Scott, leader of the Progressive Labour Party (PLP), took the issue to a new level in December when he announced the establishment of an independent commission to investigate the possibility of independence and to report back. The motivation for Mr. Scott’s call for independence appears to be a mix of black nationalism and anti-colonialism, closely linked to the racial divide of the island, which is 60% black. One of the largest hurdles to Mr. Scott’s dream of independence appears to be public opinion. Recent polls suggest more than 60% of people are opposed to independence while estimates as to the number of people who favour such a move range from 20 to 30%.Link here.
BOOMING BROKER FINANCE AND MARKET TOPS
Four of the major Wall Street securities firms just reported blockbuster earnings. Not only are all the securities firms doing exceptionally well, virtually all businesses of each of the brokers are doing exceptionally. This is true by product type as much as it is by region globally. I would argue that there are today no better indicators of broad-based liquidity excess and credit availability than those provided by the operating success of Wall Street. It is worth digging a little deeper.
The degree of recent Wall Street ballooning is demonstrated more clearly by comparing combined first quarter 2005 results back two years to comparable 2003. Combined gross revenues were up 54%, while total combined net revenues were up 44% over two years. How much have positions mushroomed over the past two years to generate such incredible growth? Combining the most recent data available from Bear Stearns, Lehman Brothers, Goldman Sachs, Morgan Stanley, and Merrill Lynch, I come up with combined total assets of approximately $2.60 trillion. This is up 24% from comparable year-ago total assets, with a two-year gain of 44%.
Listening to the Wall Street earnings conference calls, I clearly sensed a newfound degree of confidence – the type that develops over time after making more money than one could ever have imagined; making it in so many ways in so many diverse markets; and after overcoming myriad setbacks and a few near panics. After all, if things go wrong in one market, there are all these other hot markets. Today’s exuberance is rational but misguided. These diverse markets could not all falter concurrently, could they?
I do think we have reached the “pinnacle”. Inflationary forces – most powerfully manifesting in global asset and commodities markets – are reaching the point that risks a significant rise in market yields. The wheels of global credit are spinning much too fast. And this dynamic appears poised to risk havoc upon the highly leveraged and those exposed to interest rate derivatives. Sophisticated models, used in exuberant excess, were not developed to anticipate the historic credit bubble blow-off they have worked to incite. The unfolding environment will surely provide the utmost challenge for our analytical capacities.Link here (scroll down to bottom-most subsection of article).
NEW U.S. BANKRUPTCY LAW KEEPS SOME ASSET HIDING PLACES
For ordinary Americans, bankruptcy may be a chance to start over, but it generally means starting over from scratch, with little more than a few personal possessions and – if they are lucky, some home equity. But for the“qwell-heeled and well-advised”, as one lawyer called them, bankruptcy can mean millions of dollars stashed, safe from creditors, in one of several different shelters available under current law. And even though the bankruptcy bill passed by the Senate 10 days ago contains provisions designed to restrict these strategies, experts say it appears several of them will remain viable if the bill is signed into law. These experts point to three provisions of current law that give high-rolling bankrupts benefits that do not help the poor and middle class very much.
First, and best known, is the homestead exemption. Although a federal law, bankruptcy defers to the states in many ways, particularly regarding what assets an individual filing for bankruptcy may shield from creditors. Most states allow some protection for a residence, but generally it is fairly limited. However, filers who reside in a handful of states, notably Florida and Texas, can keep multimillion-dollar houses because in those states homesteads are defined by acreage, not value.
Second are “asset protection” trusts. These are legal entities that can be established in five states and a number of foreign countries, to shield from creditors assets of the person who established the trust. Third is a provision of law that bars filers who owe more than about $1.2 million from filing under Chapter 13 of the bankruptcy law, but allows them into Chapter 11, which is meant for businesses. Since Chapter 11 is designed to keep a business going, it allows the debtor to retain income earned after the bankruptcy filing while using only assets the he had at the time of filing to pay past debts.
Continuing to allow U.S.-based asset protection trusts to shield assets from creditors in bankruptcy is “an ugly loophole that protects millionaires,” Sen. Charles E. Schumer (D-N.Y.) said in a floor statement. Its sponsor, Sen. James M. Talent (R-Missouri), said it allows the court to “break open the trust” to get at money and other assets placed there to escape creditors. George Mason University law professor Todd Zywicki said the fact that concern over these trusts has surfaced only recently, though the bill has been under consideration for eight years, suggests the trusts do not pose a crisis. “Judges have tools, such as denying discharge” of debts, for dealing with cases where they think assets are being hidden, he said.
Many states have long permitted individuals to place assets in trust for another person, typically a spouse or child, to shield those assets from that person’s creditors through what has been dubbed a “spendthrift clause”. However, until 1997, states uniformly forbade “self-settled” trusts – those in which the person providing the assets and the beneficiary are the same – from enjoying the same kind of protection from creditors. But that year Delaware and Alaska eased that prohibition, and others have since followed suit. Now, Delaware, Alaska and the others allow individuals to place assets in trust for themselves with extensive creditor protection as long as the trust meets various anti-fraud and procedural requirements.Links here and here.
HOW THE WAR AGAINST DRUGS IS DESTROYING AMERICA
The self-proclaimed toughest cop in America, Sheriff Joe Arpaio of Maricopa County, Arizona, brandishes a badge and a gun, and drives a custom-painted U.S. Army tank. “We are proud to have the ultimate weapon in the war on drugs in our arsenal,” Arpaio says of the self-propelled “howitzer”, which the sheriff proudly parades before local citizens to “educate our children of the dangers of drug abuse.” (The lesson apparently being, “If you use drugs, we will blow you up.”) The troubling reality that local law enforcement now enjoys access to some of the same military weaponry as do America’s armed forces is just one of the insidious outgrowths of the drug war profiled in Bad Trip: How the War against Drugs Is Destroying America, by World Net Daily senior editor Joel Miller.
Miller writes, “By its intervention in the drug market, the State sets in motion an economic and political domino-collapse that exacerbates crime and corruption, gnaws away at privacy and property rights, endangers people’s well being, jails them, and sometimes takes their lives. In Martin Luther’s parlance, it’s a case of stepping on the dish while fetching the spoon, creating a big problem while trying to solve a small one.”
The “big problem” Miller speaks of includes more than just the growing militarization of law enforcement, as exemplified by General – ahem – Sheriff Arpaio’s private “howie”. It is the exponential growth of government power to seize control over Americans’ liberties, property, and even lives – all in the name of fighting the war on drugs. “Far from a simple attempt to rid the nation of crime and drugs, our policy against narcotics – like any public policy – comes with strings attached,” the author writes. “And increasingly these strings are constricting around the necks of Americans’ lives and liberties.” So what is Miller’s solution to “pull ourselves out of this mess”? Simply put, “As prohibition is the root of all these problems, the fix lies in repeal.”Link here.
GERRY SPENCE SAYS AMERICANS BEING LIED TO ABOUT LAWSUIT CRISIS
Americans are being lied to about the civil justice system. That is the message veteran trial attorney Gerry Spence brought to Washington, D.C. this week. Spence, who last year led a successful fight to defeat a medical malpractice cap initiative in his home state of Wyoming, came to the National Press Club in Washington, D.C. as part of an effort to beat back a similar proposal being pushed by President Bush in Congress. The national drive to cap injury awards is being led by the insurance industry, doctors, and the Bush administration. They claim that the country is being overrun by “frivolous” medical malpractice lawsuits that are driving up insurance rates for doctors.
But Senate Majority Leader Bill Frist (R-Tennessee) admits that he lacks the votes to pass legislation through the Senate this year. Spence spent the better part of an hour ripping the insurance industry, the national media, negligent doctors and the Chamber of Commerce. “In my 53 years of practice, I have never seen a frivolous medical malpractice case that has made it to trial,” Spence said. “It costs $250,000 to $300,000 to bring a case to trial,” Spence said. “You just can’t get into the courtroom for less money than that. And that money comes straight out of the lawyer’s pocket.”
“[Y]ou ask me what does the doctor (in an egregious case described) want? He wants immunity from lawsuit. He doesn’t want lower rates. If he wanted lower rates, he would be attacking the insurance industry. He wants immunity from lawsuits and a cap that makes it impossible for children who don’t work, for mothers who don’t work, for retired people who don’t work, for any human being who has no economic loss, to recover for their injuries. And that gives the doctor practical total immunity.”
Spence said the insurance industry and doctors are pushing for caps on non-economic damages. “What are we talking about when we talk about caps on non-economic damages?” Spence asked. “The cap says that you can’t recover anything more than $250,000 for non-economic damages. If you are a mom and staying at home, and somebody runs over you and leaves you crippled in a wheel chair for life, you haven’t lost any economic damages. Because you don’t work. So guess what you get? What do you get? You get nothing.” Spence said that caps are not necessary because “every judge in the country has the power to throw out every lawsuit before it gets to a jury. ... I have never seen a frivolous lawsuit in a malpractice action in 53 years. And there isn’t a single bit of evidence that there is any frivolity going on – it is a lie.”Link here.
THE DO-NOTHING CONSPIRACY
If you want an image that captures what American politics will be like over the next few decades, imagine two waves crashing down upon us simultaneously, each magnifying the damage caused by the other. The first wave is the exploding cost of the entitlement programs. The second wave is the ever-increasing polarization of the political class. The polarization will make it impossible to reach an agreement on how to fix the entitlements problem. Meanwhile the vicious choices forced on us by entitlement costs will make the polarization even worse.
The realities of the first wave are pretty well known. According to the Congressional Budget Office, Social Security, Medicare and Medicaid will consume 14% of national output in 2030 and 21% in 2075 – up from about 8% today. Partly as a result, the federal government will have to come up with an extra $50 trillion just to pay for the promises it has made as of today. To cover these costs, federal officials will have several options. If they acted immediately, according to the economists Kent Smetters and Jagadeesh Gokhale, they could increase federal income taxes by 78%, they could double payroll taxes, they could cut Social Security and Medicare in half, or they could do some combination. Tax increases on that scale would decimate the economy. Benefit cuts would cause pain. Doing nothing would lead to enormous deficits, an immobilized government and stratospheric interest rates. It would mean the end of the U.S. as a great economic power.
The realities of the second are also widely recognized. They can be measured by the increase in party-line voting in Congress, the bitter political atmosphere in Washington, the political segmentation of media outlets and the emergence of rigid donor and activist bases in each party that use their power to inflict Stalinist party-line orthodoxy on potentially independent leaders. We are seeing polarization in action in the Social Security debate. We see polarization in action in the looming fight over judges, which is producing talk about nuclear options and threats to shut down the Senate. But as the situation gets worse, the prospects of change get better, because Americans will not slide noiselessly into oblivion. The party alignments have been pretty stable over the past few generations, but there is no reason to think they will be in the future.Link here. The Coming Generational Storm: What You Need to Know About America’s Economic Future – book review.
“THESE ARE THE TIMES THAT TRY MEN’S SOULS.”
This simple quotation from Thomas Paine’s The Crisis not only describes the beginnings of the American Revolution, but also the life of Paine himself. Throughout most of his life, he was a failure, living off the gratitude and generosity of others, but his writings helped inspire a nation. He communicated the ideas of the Revolution to common farmers as easily as to intellectuals, creating prose that stirred the hearts of the fledgling United States. He had a grand vision for society: he was staunchly anti-slavery, and he was one of the first to advocate a world peace organization and social security for the poor and elderly.
In 1776, he published Common Sense, a strong defense of American Independence from England. He joined the Continental Army and was not a success as a soldier, but he produced The Crisis (1776-83), which helped inspire the Army. This pamphlet was so popular that as a percentage of the population, it was read by more people than today watch the Superbowl. But, instead of continuing to help the Revolutionary cause, he returned to Europe and pursued other ventures, including working on a smokeless candle and an iron bridge. In 1791-92, he wrote The Rights of Man in response to criticism of the French Revolution. This work caused Paine to be labeled an outlaw in England for his anti-monarchist views. He would have been arrested, but he fled for France to join the National Convention.
By 1793, he was imprisoned in France for not endorsing the execution of Louis XVI. During his imprisonment, he wrote and distributed the first part of what was to become his most famous work at the time, the deist-atheist text, The Age of Reason (1794-96). He was freed in 1794 (narrowly escaping execution) thanks to the efforts of James Monroe, then U.S. Minister to France. Paine remained in France until 1802 when he returned to America on an invitation from Thomas Jefferson. Paine discovered that his contributions to the American Revolution had been all but eradicated due to his religious views. Derided by the public and abandoned by his friends, he died on June 8, 1809 at the age of 72 in New York City.Link here. Text of The Crisis available here.
OF GODS AND STATES
Perhaps it is not at all coincidental that at the time the ancient world was being informed of the alleged death of the Greek god Pan – meaning “all” and who gave us the words “panic” and “pandemonium”, that Christianity was taking root and changing the way people thought. After all, this new way of thinking was not given to panic nor was it subject to the primitive delights offered either by the state or the adoration of the state; at least not for the first two and one half centuries after Nero. Rather, Christianity, which Pliny called a “contagious superstition”, fostered those adherents who, in the words Étienne de La Boétie, felt that “…obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement.”
I am fully aware that most people are not use to thinking of the Roman Empire as a savage or barbaric society. However, one does not have to spend much time studying Roman history to find the absolute barbarism inherent in the nature of the empire or the Roman culture. The fact is that when a people are subjugated to a collective mentality and function as a herd, they are by definition a group of savages and this is irrespective of cultural advancements or material wealth. Thus, Christianity demoted the god Pan to the status of chief among demons; and took the battle over the Roman Emperor’s right to the unnatural, pretentious, and slavish love of being honored as both god and man, to the very halls of power. In return the Roman Empire marshaled it barbaric attitude, armed, and brutally fought to maintain its long-standing supremacy as the sole representative, and the highest expression, of either god or man.
It should have been no contest. Rome logically should have been able to fully and completely suppress the enemy roaming the empire, and certainly would have but for the zeal and tenacious ethic that the Christians brought with them. William Marina in his June 1975 article expresses the successful tactic of the early Christians as being “a superior ethic based upon natural law and a superior voluntary social organization which, in true interstices fashion, simply bypassed the inefficient State. The viability of that institutional structure was a reflection of the legitimacy with which its value system came to be regarded.”
When Constantine sought, in 316 AD, to co-opt Christianity into the power structure of the state, the Roman state had lost the battle but not the war. The only way Constantine could possibly begin to unify the Western empire was by elevating the status of the Christians within the empire. So, Constantine worked to change the face of western history by converting the old Roman Empire to Christianity. This one ruler and his lust for power had made it possible for imperial Rome to survive and rule for another 1000 plus years and in so doing forced Christianity into loosing the war.
Christianity had been seduced by the gentle melody of the syrinx, as the god Pan played his song of unfulfilled and unrequited love. The lure and lust of power, with the trapping of state, had turned the heads of those whose obstinate love for the ethos of natural law had helped bring one of the most brutal empires of the ancient world to it knees. Now the church had taken to itself the role of the preponderate power behind the thrones of all the western nations. The modern Messianic state, supported and bolstered by the legitimacy of the Christian church, had arrived. Unfurled were the ensigns of the savagery which were ultimately to be the continuing legacy of the western “Christian” state: the cross, the instrument of torture and terror; and the sword, the terrible crushing force of state.
The new mantra of the great Messianic state became peace through war. Thus, state sponsored terror spread panic and pandemonium throughout the world until every land was soaked with the blood of the unfaithful. So it continues today, death, destruction, wars and rumors of war and to what avail? If war is the health of the state then it cannot be denied that peace through war is the gospel of the Messianic state. As we approach the day set aside to honor a risen savior, I will leave it to the reader to decide which god is most venerated for having come back from the dead.Link here.
NICKING IDENTITIES IS EASY, SAYS RESEARCHER
Snoops in the employ of Infosecurity Europe, an exhibition company, wandered around London streets with clipboards and managed to extract enough information out of gullible shoppers to enable them to perpetrate identity theft on over 90% of those they questioned. The company said the intention of the stunt was to “raise awareness of the need to be very careful about the information people give to complete strangers.”
The researchers admitted to a certain amount of subterfuge in extracting information such mothers’ maiden names, or first schools attended from the 200 folk interviewed. Pretending to be looking into Londoners’ theater-going habits, the researchers told pedestrians that if they took part in the survey they would be entered into a draw for theater ticket vouchers worth £20. Using this tactic they managed to get the names and address of all those questioned. 99% coughed up their address and postcode and 92% their home phone number.
Interviewees were told actors often combined their pets name and mother’s maiden name to come up with their stage name and were asked what they thought their stage name would be. 94% of respondents were thus duped into giving up their mother’s maiden name and their pet’s name. Infosecurity said the 3-minute questionnaire gave researchers sufficient information to open bank accounts, credit cards, or even to start stealing their victim’s identity. The researchers did not offer any verification of their identity, their only tool was a clipboard and the offer of the chance to win the vouchers.Link here.
Gary M. Kornman, A Dallas Lawyer, Insurance agent, estate planner and self-styled tax “educator”, called two top sidekicks on a Sunday afternoon in October 2000. He asked them to fly with him that night on his private JetStar II to a meeting in the Hamptons with a Connecticut prospect with perhaps a billion in capital gains to shelter. It was a long-shot sales call, but it paid off. By mid-2001 the Connecticut client had paid Kornman’s company, Heritage Organization LLC, $29 million for what could be the largest individual tax shelter ever sold. He had also agreed to fork over another $15 million if the three-year period during which the IRS could challenge the shelter passed without trouble. It is unlikely he paid that $15 million – the IRS considers the “Heritage Strategy” a variant of the banned “Son of Boss” shelter and is demanding back taxes and penalties from users. The client is in good company on the creditors list, which includes billionaires and centimillionaires from Hawaii to Rhode Island.
Sheltering is a big business in this tax-obsessed country. Shelter vendors span a huge range, from white-shoe law and accounting firms selling very complex investments that might hold up in court, all the way down to seedy one-man outfits promoting secret offshore bank accounts that are clearly illegal. The IRS is currently investigating in the neighborhood of 1,000 shelter promoters. Son of Boss was used by thousands of taxpayers to escape $6 billion plus in tax, the IRS says.
Senate hearings, IRS enforcement actions and client lawsuits have exposed the role prominent accounting and law firms played in promoting borderline tax shelters. But the secretive 61- year-old Kornman has remained in the shadows. His contracts – crafted to head off all suits – stated Heritage was not offering legal or accounting services or even advice clients could rely on. Promoters like Kornman thrived before the large firms got involved and are likely, as a group, to outlast them, feeding off tax code complexity and clients’ willingness to suspend skepticism to save tax. Without well-known law and accounting firm names to protect, they can shut down one tarnished business and move on to the next. Often more is questionable about their operations than just their tax advice. In August Kornman’s home was raided by the FBI, suggesting a criminal investigation is under way.
Indeed, Kornman might even be considered typical of the smaller operators were it not for the size of his fees and the wealth of his clientele. What is extraordinary is how Kornman, the son of a Florence, Alabama jewelry store owner, got through so many gilded doors. Say this for Kornman: He chugged his own tax Kool-Aid – by the gallon. For 1999 Kornman family entities reported $103 million of losses generated, the IRS alleges, by the same Son of Boss method he promoted.Link here. The IRS has collected more than $3.2 billion from “Son of Boss” tax shelter participants – link.
You do not want to go to jail or pay penalties, but you also do not want to pay more tax than you have to – it’s not the American way. And your sister-in-law, your golf buddy or your business partner is touting a “your CPA probably does not know this, but” way to pay less. How can you tell a legal tax dodge from an iffy or bad one? The pat answer – if it sounds too good to be true, it probably is – is not bad advice, but is not always enough. Some things that sound too good to be true are allowed because Congress uses the tax code as an ersatz spending program; for example, if you invest in certain rental housing for low income folks, you can claim a special credit that is not subject to the limitations imposed on losses from other passive activities. Other improbable-sounding ploys work because the courts have blessed some taxpayer- friendly interpretation of a complicated code. Provided you do it right, you can chop your family’s gift and estate taxes using family limited partnerships and grantor-retained annuity trusts.
For most taxpayers the best shelters are still the mundane ones: homes, retirement accounts and stocks. Interest on up to $1 million in mortgage debt is deductible, and the first $500,000 in capital gains per couple from the sale of a primary home is tax free. For 2005 a worker can divert up to $14,000 ($18,000 for those 50 or older) into a tax-deferred 401(k). The gift-tax exclusion – $11,000 a year to each of as many different relatives and friends as you want – still works. Want to get fancier? Here are some pointers to keep you safe.Link here.
OVERHAUL OF ANTIQUATED CANADIAN TAX SYSTEM NEEDED TO LURE CAPITAL INVESTMENT
A new report that $88 billion has flowed out of Canada into tax havens has, predictably, renewed demands that Ottawa shut them down and force companies to pay their “fair” share of taxes. But that misses the point. There is nothing “fair” about the Candian tax system. Corporate Canada pours investment into offshore financial centers, some of which are tax havens, mainly because Canadian taxes are too high. The federal budget tabled in February failed to come to grips with this crucial issue.
To clear up a misconception, Canada has not been deprived of $88 billion in investment. What has happened is that Canadian assets in offshore financial centers have grown from $11 billion in 1990 to $88 billion in 2003. That represents about one-fifth of all Canadian investment abroad. These assets are equity and debt held abroad by Canadian enterprises and their value fluctuates not just with investment flows but with exchange rates, corporate reorganizations, changes in ownership and shifts to other forms of investment. The IMF identifies 42 jurisdictions as offshore financial centers. Canadian companies hold assets in 25 of them. They share these characteristics: They have a large number of financial institutions, most transactions are initiated abroad, most institutions are controlled by non-residents, and assets and liabilities are out of proportion to their domestic economies.
The majority of offshore financial centers are working with the OECD to battle money laundering, improve transparency and eliminate harmful taxation policies. Canada has tax treaties with more than 80 countries. Canadian enterprises do not have investments in tax havens the OECD labels “uncooperative”, including Andorra, Liechtenstein, Monaco and the Marshall Islands. Among offshore financial centers, the largest growth in Canadian investment was in Barbados, Bermuda, the Cayman Islands, the Bahamas and – here is the surprise – Ireland. How did Ireland end up on the list of top recipients for Canadian investment? Simple. It introduced tax policies that acted as a magnet for foreign investment.
Unlike Caribbean countries that rely on financial services to support their economies, Ireland is a goods-and-services economy just like Canada. Ireland has revitalized itself with a competitive tax regime. There is no reason Canada cannot do the same. Canada has one of the highest corporate income tax rates in the industrialized world. The February budget promised to cut the rate from 21% to 19% by 2010, starting with a half-point drop in 2008. That is too little, too late. A more accurate measure of the tax load on Canadian business is the marginal effective tax rate, which is the amount of income and other capital-related taxes as a percentage of pre-tax profit. By this account, Canada ranks third highest, at 31.3%, of 20 countries studied by the C.D. Howe Institute. Ireland is among the lowest at 11.5%.Link here.
IT TAKES MORE THAN A LIVING WILL
A theme running through coverage of the tragic case of Terri Schiavo is that if she had only had a living will, the long-running controversy over whether to preserve her life in what court-appointed doctors have called a “persistent vegetative state” could have been avoided. But living wills, while desirable, are only part of the package of documents that Americans today should have in order to resolve not only end-of-life issues but also broader questions that arise from serious medical conditions. Experts recommend that the medical and end-of-life documents be part of a broad estate plan, one that includes a regular will and perhaps trusts and other legal instructions that will result in an orderly disposition of a person’s property and affairs in ways that minimize family strife, taxes and other costs.
The key items to have for medical issues are: 1.) A paper that appoints someone as your agent and authorizes him to make medical decisions for you if and when you cannot. Terminology differs, but this paper is typically referred to as a medical power of attorney, power of attorney for health care, health care proxy or something similar. 2.) A paper that provides a set of instructions, governing what treatment you do and/or do not want in the case of apparently terminal illness. This document is generally called a living will. Taken together, these two documents constitute an “advance medical directive”, and this is the package that everyone should have. Indeed, many states now offer forms combining them. Other items can be added.Link here.
REAL ESTATE OPPORTUNITIES ABROAD
Romania – Investing in a Land of Unexpected Opportunity
Romania presents the investor with an exceptional opportunity to benefit from the ascension of an eastern block country to the European Community. The timetime line this opportunity, however, is limited. Romania is one of the last European countries in ascension talks with the EU and it is projected to enter in either 2007 or 2008. The expectation around this hallmark event has resulted in much needed economic and government reform, making conditions more suitable for foreign investment.
The pre-ascension excitement has also given way to a dramatic increase in real estate prices in recent years, especially in major cities and tourist areas. For example, a friend of ours bought a 2-bedroom apartment in central Bucharest in early 2002 for $25,000. Today his apartment is valued at €75,000 ($100,000) and the amount of interested buyers is more then sufficient. So much so, that potential buyers have actually posted advertisements on the entry door to his apartment building stating that they are eagerly looking to buy an apartment in the building or a nearby one. Until he sells, he could continue to rent out the apartment at €700 ($890) a month or get in on the burgeoning short-term rental market which offers an alternative to the over-priced hotel room rates in the city, and with a pretty good occupancy rate, rent the apartment on a daily or weekly basis at €50 per night.Link here.
Offshore Real Estate & Investment Quarterly, Q1 2005 Table of Contents here.
BEAUTY AND TAX BREAKS LURE BUYERS TO PANAMA
When Larry and Honey Dodge of Jackson, Wyoming, first visited Panama two years ago, they were thinking about retiring abroad and decided to take a vacation here to check it out. They had read about Panama’s diverse climate of tropical beaches and mountain cloud forests, as well as its recent efforts to lure foreigners with residential visas for anyone with just $500 a month in personal income and generous breaks on property and income taxes. Committed libertarians, Mrs. Dodge, 58, and Mr. Dodge, 63, both retired, also liked the country’s laissez-faire stance on private property rights and entrepreneurship. Best of all, land prices as low as a few thousand dollars an acre and building costs starting around $40 a square foot meant the two could afford to sell their house, build a new one in Panama and still have plenty of money left over to cover their living expenses.
Their trip was a success. Before they returned home, they put down $27,000 for a small plot of land in Altos Del Maria, a mountainside real estate development an hour and a half drive from Panama City. “Almost from the minute we got there, we were, like, ‘This is the place,’” Mrs. Dodge said of the creek-side building site with a view of the surrounding mountains. “It was perfect.” Little wonder that Panama is increasingly lighting up the radar screens of those searching for an affordable alternative to more traditional south-of-the-border retreats in Mexico, Costa Rica and the Caribbean, where escalating prices increasingly rival those along Americ’qs own beachfronts. Touted as the “next Costa Rica” by travel magazines and newsletters like International Living, Panama is undergoing a land rush as its Tocumen Airport fills with planeloads of eager foreigners with cash in hand.
Since 2001, once sleepy rural towns like Boquete, which AARP’s Modern Maturity magazine named one of the world’s best places to retire, have seen real estate prices rise as much as fivefold as developers transform farmland into high-end developments like Valle Escondido, a gated golf-course community where half-acre lots now sell for $100,000 and more. Prices in coastal areas like Bocas Del Toro, on the Caribbean Sea, have also skyrocketed, and a restoration under way in Panama City’s historic Casco Viejo neighborhood has drawn foreigners eager to get a piece of its 330-year-old history.
Yet despite the price increases, property there remains a fraction of what one would pay for similar real estate in the U.S. And with enticements like a 20-year suspension of property taxes to those who build houses or renovate in a historic district, and an income tax hiatus for those starting some small businesses, the opportunities are appealing not only for those seeking a place to retire but also for entrepreneurs.Link here.
U.S. PASSPORT CHIP CRITICISM GROWS
Business travel groups, security experts and privacy advocates are looking to derail a government plan to insert remotely readable chips in American passports, calling the chips homing devices for high-tech muggers, identity thieves and even terrorists. But the U.S. State Department, which plans to start issuing the new passports to citizens later this year, says its critics are overstating the risks. Officials say that the chips will cut down on passport forgery, improve security and speed up border crossings. The State Department is also adding technical features to prevent the radio-frequency identification devices, or RFID chips, in new passports from being “skimmed” by unauthorized readers, according to Frank Moss, the deputy assistant secretary for passport services at the State Department.
The 64-KB chips will include the information from the photo page of the passport, including name, date of birth and a digitized form of the passport picture. The chips include enough space so that fingerprints or iris prints can be added later. Border agents, using special readers, will be able to call up all the passport information included on the chips on a computer screen. They will also use facial-identification software and a digital camera to verify that the person presenting the passport is the person who was issued the passport. But Bill Scannell, a publicist and freelance civil liberties provocateur, thinks the risk is far greater than the State Department is admitting. This week, Scannell launched an internet campaign called RFID Kills to stop the government’s plans.
The site accuses the State Department of putting Americans abroad at risk, saying the chips “turn tourists into targets, and American business travelers will transmit their identities to kidnappers wherever they go.” Scannell and some security experts suggest that the government should use other technology to make passports more secure, such as bar codes or chips that require physical contact to read and cannot be scanned from afar. Scannell has a track record of delaying or derailing government efforts he considers invasive. A recent government report revealed that the 500 mostly negative comments on a government airline-screening proposal – a large majority of which came through Scannell’s UnSecureFlight.com website – led to a substantial delay in the system’s development.
Two business travel groups – the Business Travel Coalition and the Association of Corporate Travel Executives – also announced their opposition to the chips. “The thought that your travel documents could be broadcasting your nationality to those with an interest in harming U.S. citizens is bad enough,” said ACTE President Greeley Koch in a written statement. “But it could also be pinpointing likely targets for pickpockets, thieves, and even providing information to steal.” Security expert Jon Callas, the chief technical officer for PGP, a leading encryption vendor, thinks it is more likely that common criminals, rather than terrorists, will be the ones trying to read chips surreptitiously to pick out targets. For Callas, opposing the proposal is also about preserving the ability to maintain a low profile while traveling.Link here.
ISABEL PATERSON AND THE IDEA OF AMERICA
Some readers of Stephen Cox’s recently published biography, Isabel Paterson and the Idea of America: The Woman and the Dynamo, may succumb to the same temptation I did. I immediately scanned the index for references to Ayn Rand and then I turned directly to those pages. This reflected my main purpose in reading Paterson’s biography: to see what light it shed on that other and (to me) more important figure with whom Paterson had associated. After a few minutes, I shut the book and began reading from the acknowledgements page onward.
The reason: if the entire book was as well written as the pages I had just read and Paterson as consistently captivating, then both the book and the woman deserved undivided attention. And I deserved the pleasure of meeting the amazing person of whom Cox states, “No one in the 1930s defended individualism more vigorously and consistently than Paterson.” What a woman! Cox’s masterful portrayal of Paterson builds from the statement with which he concludes the introductory chapter 1, “Who she was and what she did has something important to say about the risks and possibilities of life in America.” This understatement is corrected by the book’s subtitle (and subsequent text), which accurately identifies Paterson as an embodiment of the very idea, the very spirit of America, the ideal America of freedom, individualism, and realized human potential.
For me, this was a discovery. Like most libertarians, I knew of Paterson primarily through her classic book, The God of the Machine (1943), in which she explores the societal principles that make productivity possible. Paterson eloquently argues that productivity, as well as freedom, sprang from the Western world’s embrace of a “society of contract” as opposed to the “society of status” which had defined feudalism.
The visceral power of Paterson’s presentation in The God of the Machine – and elsewhere – resides largely in her vivid imagery and exquisite turn of phrase. For example, the book’s most frequently quoted chapter is entitled “The Humanitarian with the Guillotine”. Paterson unpacks the logic leading to this remarkable image: “Most of the harm in the world is done by good people. ... It is the result of their deliberate actions, long persevered in, which they hold to be motivated by high ideals toward virtuous ends. ... Something is terribly wrong in the procedure, somewhere. What is it?” She answers: “The means is the power of the collective; and the premise is that ‘good’ is collective.” Thus, “The humanitarian in theory is the terrorist in action.”
The God of the Machine assures Paterson a slot in libertarian anthologies and history. But those who settle for that one book instead of the incredible Paterson package are cheating themselves. The Woman and the Dynamo presents that package by developing both Paterson and the progress of the American ideal in tandem, so that America’s intellectual history becomes an integral part of understanding the woman herself. Buy this book. Not just because Paterson has waited decades for her place in history but because you deserve the pleasure of meeting her.Link here.
WHISTLEBLOWER DANIEL ELLSBERG ON THE BUSH ADMINISTRATION, CIVIL DISOBEDIENCE AND HELL
Pentagon insider-turned-peace activist Daniel Ellsberg has wit cut sharp as a razor and insight that has not faded with age. At 73 he is out of the limelight but still trying to shake up our nation. Ellsberg recently finished a U.S. “Truth-Telling” tour, spoke in Israel and will soon be traveling to Hiroshima. And after publishing his first memoir Secrets: A Memoir of Vietnam and the Pentagon Papers, he is polishing off his second book about America’s fatal attraction to nuclear threats.
Ellsberg publicized the Pentagon Papers 30 years ago, helping tip public opinion against our last major attempt at imperial democracy. And on this day in 1973, the last American combat troops left Vietnam, ending the direct involvement of the U.S. in the Vietnam War. Now Ellsberg is talking again. Shouldn’t we be listening?Link here.
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