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As the second largest nation in the Caribbean, the Dominican Republic occupies the eastern two-thirds of the island of Hispaniola and is roughly the size of Maryland. Columbus discovered the island in 1492 looking for a seaway to India. Europeans have been coming ever since, but with less than 20% of the tourists coming from the U.S., it remains an undiscovered “secret” for Americans. The island is larger than the Bahamas, Jamaica, Puerto Rico, all the Virgin Islands and the entire French West Indies combined and is generally regarded as very safe with crimes against tourists rarely reported.
A September 1998 issue of Forbes said, “The Dominican Republic set out in the early 1990’s to remake itself, reform its government, modernize its institutions and open its economy.” Now, a new generation of leaders has determined that the Dominican Republic can change and compete in the global economy of the 21st century. Foreign direct investment has grown from $91 million in 1993 to an estimated over $1 billion in 2005 and is still growing. The Dominican Republic has obtained the highest growth rate of all Latin America for the past decade, averaging 8% annually, while sustaining one of the lowest levels of inflation.
Yet, the lure of the Dominican Republic is not just beautiful beaches, luxurious tropical breezes, and all the other things that come to mind when you think of the Caribbean. The country’s Latin style is a sharp, yet warm, contrast to the character of many nearby islands, especially the British and French-influenced ones. Offshore investors are discovering this country and many are calling it the best investment opportunity of the new millennium. With tax-free banking, almost non-existent property taxes, and the ability to live comfortably on less than $3,000 a month, the area has a healthy economy and clear laws that stand up for freedom of speech, religion, property, and other fundamental rights. This is a country in which it is safe to visit, invest, and live.Link here.
Dominican Republic real estate questions and answers.
Certainly if you have been considering a home, apartment, ocean front villa or even rural farmland as well, it is very true that the Dominican Republic does offer some of the most attractively priced real estate in the Caribbean. Your money will go further in the DR. In addition, depending upon the value of the home you purchase, it is quite possible that your new home could be free of annual property taxes as well. However, local laws and regulations could be quite different from what they are in your existing home country. For that reason, it can be beneficial to have someone on the ground, with the experience to make sure the entire process is as hassle free as possible and, of course, conducted in such a way that the investment you make is legally protected as well. Since many clients of course have very similar questions, we have prepared a Question and Answer section below that might assist you in the decision making process regarding a real estate purchase.
The Dominican Republic offers miles of typical idyllic Caribbean beaches, but also the highest mountain range in the Caribbean as well (Pico Duarte). There is a section of the country that is called the Alps of the Caribbean, complete with cooler climate, pine trees and ferns similar to what can be found in the U.S. New England states. There are also the metropolitan areas of Santo Domingo, the capital city with a population of about 3.8 million, and the second largest city, Santiago, with a population of about 1 million). These metropolitan areas house a large number of modern stores, including some major chains that Americans and Europeans might find familiar.
A residential building lot in one of these urban areas will generally cost about $50 per square meter, or about 25,000 for a 500 square meter – about 1/8 acre – lot in a modern residential development (complete with paved road, utilities, etc.) Since 1 acre is equal to 4,000 square meters, such a sized home lot is equal to about 1/8 of an acre. It is still possible to find a brand new residential home or apartment priced anywhere from the equivalent of $65,000 to $175,000, depending upon location and size. A recent 2-story penthouse apartment with a sea view recently sold for US$120,000. There are brand new 3-bedroom, 3-bath luxury apartments going up in an upscale neighborhood of Santo Domingo, starting at $120,000. We have also found brand new apartments going up in some of the middle class areas starting at about $65,000.
Outside the cities or urban areas, you can still find property selling for $5 per square meter (apx. $20,000 per acre), and about $1,500 per acre on up for land in some rural areas as well (depending upon soil quality, etc.) With beachfront, it is still possible to find 1/4 acre beach property for about $85,000 – or less for larger parcels. Prices for homes or apartments on or near a beach community range from 90,000 for a one or two bedroom condo directly on the beach up to about $150,000 for an ocean view villa as well.Link here.
BLUES FOR NICARAGUA
In a period going back to around 1850, five or six generations of Americans have been involved with Nicaragua, a volcanic, earthquake-prone land of forests, lakes and intense blue skies, poor but often beautiful, which is the archetype of the Central American “banana republic”, originally so described because it was usually dependent on its fruit-exporting or similar trade.
During the 1980s the government there was the Sandinista National Liberation Front, led by Daniel Ortega. That government was bitterly opposed by die-hard supporters of the Somoza dynasty, which had ruled and pillaged the country for over 40 years from the mid-1930s onwards. It was also opposed by the U.S. government of Ronald Reagan (1981–1989), which saw the Sandinistas as a dangerously close spearhead of America’s large enemy of the day, international communism.
Out of that fixation came first propaganda, and then active U.S. support for the vindictive army of counter-revolutionaries known by their Spanish name, the Contras, who were coached and directed by the CIA. In its later stages the Contra war was funded, in defiance of the U.S. Congress, by the proceeds of under-the-table U.S. government sales of weaponry to Iran, and by arms-for-drugs deals supervised by those same former state officials and their associates. Some of their most ardent supporters, in the run-up to the 2006 elections, have been lining up to warn for over a year of the dire consequences which would follow if the Nicaraguan people re-elected Ortega. They usually forgot to mention that Ortega’s running-mate this time around was Jaime Morales, a former Contra, whose ample residence Ortega had commandeered for himself during the ‘80s – and held on to ever since, having recently agreed a compensation deal with its former owner.
In 1986 Nicaragua successfully sued the government of the U.S., being awarded $17 billion on six counts of damages arising out of the Reagan administration’s support for the Contras and direct U.S. military intervention, including the mining of Nicaraguan ports. The U.S. government reacted to this, after the verdict, by withdrawing its earlier declaration accepting the Court’s compulsory jurisdiction. But it was in any case a no-win situation for the Sandinista government. Its earlier efforts to reverse some of the depredations of the Somoza family by (forcibly and too hastily) redistributing the family’s ill-gotten land holdings, and to raise the abysmal levels of basic health care and education, had given way to severe curtailment of civil liberties, the imprisonment of opponents, the channeling of over 80% of government revenues to fighting the war against the Contras, and the reported presence of a raft of Cuban and East German advisers sent as proxies for the Muscovite “evil empire”.
The culmination came in the elections of 1990, in which a Unified Opposition Front came to power, strongly backed by the U.S. government and its favored instrument for such occasions, the National Endowment for Democracy. The front was led by Violetta Chamorro, the widow of the liberal newspaper editor Pedro Chamorro, assassinated in the time of the Somozas. The transition however, was messy. A legacy of outstanding property claims, and successful efforts by many Sandinistas to hold on to some of their own gains of both wealth and power, meant that the new government was not as promptly compliant as the imperial masters in Washington wished and expected. Violetta Chamorro later had to be strong-armed into withdrawing Nicaragua’s World Court claim against the U.S., on pain of losing ongoing U.S. financial backing. Her successor as president, Arnaldo Aleman, was so blatantly crooked that he was eventually convicted of embezzlement and corruption, and sentenced to 20 years in jail.
The old enemy Ortega remained. He was still the leader of the Sandinistas. He had stood unsuccessfully in every subsequent election since the 1990 debacle. Consistently, a majority of Nicaraguans said they did not want him back. By around 2002 the realization had no doubt dawned that both an image makeover and some deft manipulation of the goalposts were required. It was time to bring Ortega’s skills in political tradecraft up to date. Ortega made a constitutional pact with the corrupt Aleman, involving fundamental changes to the separation and balance of powers between president and parliament. With his image made over by his wife, who dressed him in democratic blue jeans in place of the long-discarded guerilla’s uniform, and a campaign featuring promises of a fairer future enveloped in the new, less violent colors – pink and white (no more red) – Ortega was reported as having achieved a percentage of around 38% of the vote on November 5th. Under the new rules he had himself had a part in devising, he was elected President without having to go to a second round, which he would almost certainly have lost.
International reaction to the election result has been rather muted. Some on the traditional left are hoping that an Ortega government, may yet be able genuinely to “do something” for the people. I fear such hopes will be in vain, though it would not take much to lift Nicaragua just a little bit out of the depths of its poverty. Experience tends to show that leaders of governments, whatever their campaign colors, and whether they wear flight suits to land on aircraft carriers, jeans on a donkey, or suits in the U.N. General Assembly, will never do anything much for the people other than make extravagant promises which they cannot keep.
Those on the traditional right point to new trade and investment opportunities, in the form of increased exports of primary agricultural products, particularly to the U.S. Real estate near the idyllic Pacific coast surfing beaches seems to offer good prospects – for foreign, mainly U.S., investors. Others say Nicaragua is, regrettably, emulating Fidel Castro’s Cuba, which has become a beach and sex-tourism hotspot mainly for Europeans. Perhaps there is a cynical and dispiriting acceptance that in Nicaragua as elsewhere, politics and government continues to be about power and money, and how to keep hold of them at the expense of possible rivals. And this is just one factor preventing anything truly positive and helpful from being achieved by governments.
For all these reasons, Ortega is unlikely to pick up where he left off in 1990 or earlier. Indeed, given the scale and intensity of the corruption and manipulation in recent years, it is possible that watchers and players in Nicaraguan politics have adapted to the time-honored and even more cynical threat of public humiliation, honed to a fine art in Washington. This is a tough game in which the depredations of those in power, and the ambitions of those out of power, are held in check by dirt – real or concocted – which the other side keep ready to be dished to a complicit, scandal-hungry media at a moment’s notice. No doubt also many other former Sandinistas, like Ortega, have toned down their revolutionary zeal, as they have learned that the political trough does not have to be all yours in order to become fat on it. That indeed was the mistake the Somozas made.
What about the future for Nicaragua? In 2007 and beyond, the context we will have is globalization, biotechnology and wars, both present and future, verbal and real, over natural resources and the environment. Nicaragua has coffee, fruits, forests, and seeds, all attractive to the masters of agribusiness for potential acquisition, genetic modification, and subsequent exploitation as commodifiable intellectual property. It also has coastlines both Atlantic and Pacific, which have long encouraged thoughts of a super-canal to rival Panama’s and facilitate the passage of giant container ships carrying cargoes of manufactures from China. Goodbye lakes and forests, hello oil spills and chemicals! And so, for those coming conflicts, I have a sinking feeling Nicaragua’s role as a rich exploitable resource in the global plantation has already been assigned, with hardly a thought for the still impoverished people who will be required to work it.
The problem, as always, is that revenues from agricultural exports and other projects will be allocated in the first instance to payments of interest on international indebtedness. Nicaragua, like so many poor nations, is locked into the cycle of debt repayment to the international banks. One of the primary roles of U.S. diplomatic representatives in this context becomes that of monitoring the political and economic climate, looking out for and possibly “neutralizing” any looming threats to “stability” – the stability of Wall Street and London banking profits in particular. In this role they are merely the blander and more acceptable civilian successors of the former military presence. In Nicaragua, that role would be eminently consistent with the long history of U.S. oversight and intervention in favor of Wall Street.
Even Ortega, according to an AP report a shadow of his former revolutionary self, seems to be bending over backwards to provide reassurance. “His speeches have focused on reassuring skeptics that he plans no radical changes and will embrace free trade, job creation and close US ties.”Link here.
CARICOM CHAIRMAN DEFENDS CARIBBEAN ECONOMIC INTEGRATION
Prime Minister of St. Kitts and Nevis and Chairman of CARICOM, Denzil L. Douglas has reiterated his view that regional integration is the way forward for sustainable economic development within the Caribbean. “I am of the view that the future of the Caribbean has to be grounded in its ability to effectively integrate in such a manner as to effect workable strategies that inform our foreign affairs and trade policies, and overall development strategies in an increasingly competitive world,” Douglas told the 8th Congress of the World Federation of Consuls in Jamaica last week.
Douglas noted that the issues of market size, capacity weaknesses, shortcomings in institutional structures and systems and productivity would be central in shaping the development agenda for the Caribbean community. However, competitiveness within the world economy and other geo-political trends combined, made the economic environment for the development of the Caribbean region very challenging, he observed. But, according to Douglas, the Caribbean Single Market and Economy (CSME) provides the basis for the region’s businesses to begin looking outward in a more substantial and competitive manner. He also defended the recent establishment of the Caribbean Court Of Justice (CCJ), arguing that the institution was vital for the development of the CSME.
2006 has seen substantial progress within CARICOM itself towards the creation of a unified free trade area. Barbados, Belize, Guyana, Jamaica, Suriname and Trinidad and Tobago launched the CSME in mid-year, while the OECS states, including Anguilla, Antigua and Barbuda, BVI, Dominica, Grenada, Montserrat, St. Lucia, St. Kitts and Nevis and St. Vincent and the Grenadines signaled their intention to form their own economic union, as well as committing to membership of the CSME.Link here.
THE MORAL COST OF LOOSE MONEY
The Hong Kong based financial commentator Mark Faber, as reported by the Economist, believes that high commodity prices cause wars, by funding unattractive rent-seeking governments and starving more productive economies of resources. Since it is clear that low interest rates have in the present cycle been a major cause of high commodity prices, it is worth adding this to the lengthy catalogue of costs caused to the world economy by excessively cheap money.
Cheap money is popularly supposed be an unalloyed good thing, allowing people to borrow money for home mortgages more easily, encouraging business expansion and giving Third World countries access to capital they would otherwise be denied. Like many popular superstitions, this one is largely the opposite of the truth. In moderation, liquidity is essential to the functioning of an economy. Without it, companies very quickly get into difficulties, as trade credit dries up, while investment projects are unable to be financed. Nevertheless, in a modern economy a little liquidity goes a long way.
An economy in which real interest rates are high is perfectly well able to grow, as was demonstrated by Japan in the 1960s and the U.S. in the 1980s. In such an environment asset values remain low, and savings rates remain high. Investments are undertaken only after great study, and must justify themselves from the income they operationally generate, as newly built assets can only be sold at a loss. New assets are built only sparingly and existing assets are used intensively, being redeployed when their economic usefulness has declined.
Those under 35 will barely recognize the possibility of such a world, but it is the one we all lived in until about 1985, or maybe a little earlier in Japan, with the exception of short periods in the late 1920s and the late 1960s when stock markets got ahead of themselves. Aficionados of the last-decade’s hyper-valued markets will scoff, but productivity growth during this period was as high as today, indeed somewhat higher. This has all changed. From 1996-2000 it appeared that we had simply entered another speculative stock market bubble, similar to those of the late 1920s or the late 1960s, albeit one that was of enormous size and reached valuations unthought-of in the earlier periods.
However, when the stock market bubble burst in 2000 it did not wholly deflate. Instead, interest rates remained far below normal historical levels and, we know now, were driven down still further by a Federal Reserve that was operating off false inflation data. After 2000, the bubble that had before that date been largely concentrated in the U.S. spread throughout the world through the magic of globalization, with borrowing rates for even the dodgier emerging markets falling to unprecedentedly low levels and real estate prices soaring worldwide.
The period of cheap money instituted by the Fed’s monetary slackness from 1995 and intensified by its misguided policy after 2001, has been longer and more developed than any previous such period, far more so than the credit booms of the late 1920s and the late 1960s. Consequently, it has produced a number of new pathologies, many of which have disturbing ethical or even moral implications.
Truly Fed Chairmen Alan Greenspan and Ben Bernanke have a lot to answer for. You may not think you are longing for the return of tight money, but trust me, taking cheap money’s effects overall, you should be.Link here.
IS MICROCREDIT WORTHY OF ALL ITS GLOWING REVIEWS?
Microcredit is booming in India, but the loans do not often pull people out of poverty.
Boosted by a government mandate to keep the startup funds flowing, lenders making small, or microcredit, loans are dutifully throwing cash at shantytown borrowers. And the funds are often being used not as seed money for a new enterprise, such as buying a cow to sell the milk or setting up a fruit stand, but as handouts spent on consumption. D.S.K. Rao, the Asia organizer for the Microcredit Summit Campaign, estimates that only one-fifth of Indian microcredit borrowers start a business. Mathew Titus, executive director of New Delhi-headquartered Sa-Dhan, an association of microcredit lenders, says it is one-third, counting women who barter instead of selling goods.
Alas, there has never been a rigorous study in India or elsewhere of how successful the businesses become, whether any of the borrowers eventually graduate to the middle class or how many of the loans get repaid on time. For much of its 35-year history microcredit has enjoyed glowing reviews, culminating last month when Muhammad Yunus – founder of Bangladesh’s microlending Grameen Bank – won the Nobel Peace Prize. The tiny loans appeal to both idealistic aid workers and gimlet-eyed bankers. They seem to help the poor in developing countries earn a livelihood without making them dependent on handouts. And they use market mechanisms, allowing banks to charge interest rates high enough to cover the risks of lending to people with no collateral and little credit history. In India rates average 30% a year, though some lenders charge more than 45%.
In the last decade microcredit has taken off. Today organizations from the U.S. Agency for International Development to Citigroup trumpet the idea. Much of that attention is focused on India, which is home to a quarter of the world’s poor but also one of the hottest economies. The country has seen an explosion of microfinance institutions, which are usually set up by nongovernmental organizations. The money to fund all these lenders comes mostly from India’s biggest commercial banks, such as ICICI, State Bank of India and Canara Bank. But some is put up by foreign investors and banks making social-responsibility bets, and by overseas donors such as the Bill and Melinda Gates Foundation. The rapid growth means that lenders are less likely to keep tabs on a borrower after a loan is made. The women in India could probably use more guidance, because it is so difficult to run a business ther. The country ranks 134th out of 175 that the World Bank studied this year for ease of doing business.
The result is that lenders often hand over money without taking the time to educate the borrowers, making sure they understand that they are supposed to start businesses and that there are penalties for not paying the money back. This means that microcredit’s other goal – to empower women in highly patriarchal societies – is not always achieved, either. In Tumkur, a city outside Bangalore, a group of women received $155 loans. They stood in a circle, placed their hands on the money and pledged to use their loans to launch businesses. But afterward, each handed the money to her husband, and the men started the businesses. Because the women are responsible for repaying the loan, they suffer the consequences if their husbands squander the money.
Microcredit advocates often claim impressively high repayment rates, averaging 95%, as proof that borrowers do use their loans to generate income. Otherwise they would not be able to pay them back, they argue. But in some cases women borrow from other sources to repay the loans. That often means resorting to moneylenders – or loans from friends and family – to pay back the microloan and vice versa, trapping them in a cycle of debt. More important, many who study microfinance doubt the repayment rates. There are no reliable figures on the percentage of loans delinquent for more than, say, six months. But it is telling that the vast majority of the microlenders are not “sustainable”, meaning that so few loans are repaid on time and costs are so high that lenders need to keep tapping the easily available funds from banks, donors and the government to stay in business. More than anything, the microcredit bubble is being inflated by government rules that all but force lenders to keep pumping out microloans.
“The research is skimpy, but the research we do have shows increasingly that the main hope for microcredit – that it will generate millions of tiny businesses and these businesses will grow and pull their owners over the poverty line – is false,” says Thomas Dichter, who has evaluated microcredit programs in 20 countries, including India, and who wrote the 2003 book Despite Good Intentions: Why Development Assistance to the Third World Has Failed.Link here.
EU SAYS POLAND NEEDS TO DO MORE TO CORRECT BUDGET DEFICIT
The EC announced that while it has made a significant improvement in the last few years, Poland is not yet taking sufficient action to be able to correct its budget deficit in 2007, as recommended by the Council in July 2004. The Polish draft budget for 2007 sets the deficit at 3.7%, including the costs of pension reform, but according to the Commission’s autumn forecast it may turn out slightly higher.
Joaquín Almunia, European Commissioner for Economic and Monetary Affairs suggested that, “Poland should make more ambitious efforts to consolidate its public finances given the strong economic growth that it is enjoying at the moment. This is in the interest of the Polish economy and people irrespective of the target date that is set for the adoption the euro.” Poland recently notified a deficit of 2.5% of GDP in 2005 to Eurostat and expects a deficit of 2.1% this year. The draft budget for 2007 sets the deficit at 1.7%.
However, these figures reflect a transitional arrangement accepted by Eurostat under which Poland continues to account contributions to second-pillar funded pension schemes as government revenues. At the expiry of the transition period, on 1 April 2007, higher figures will have to be used for the deficit and debt (incorporating pension reform costs). Under the new accounting the deficit figure would be 3.7% in 2007. As the next steps under the Excessive Deficit Procedure do not apply to countries not yet in the euro area, the Commission’s next step will be to recommend that the Council address a new recommendation to Poland.Link here.
SOUTH KOREA FACES RISK OF JAPAN-LIKE LOST DECADE
When it comes to Asian economies, so much can change in a year, never mind five. Look no further than comparisons between Japan and South Korea back in 2001. Then, the talk was all about what Japan, Asia’s biggest economy, could learn from Korea, the region’s 3rd-largest. Korea had risen quickly from the ashes of the Asian financial crisis, while Japan was stuck in deflation. Today, it is hard not to wonder if the two have reversed positions. Japan is on the mend, while Korea is walking in place.
It may seem an odd suggestion, given that Korea is expected to grow 5% this year and Japan is seen advancing at half that rate. Korea’s Kospi index is up 9.4% in dollar terms this year, while Japan’s Nikkei 225 Stock Average has barely gained. The won is up 8%, while the yen is unchanged.
For an economy used to growing 8% or 10%, a slowdown to 4% can seem like a recession. And for all its attractive features – an educated, hard-working labor force, a stable of globally competitive companies, a history of adapting to change – Korea is awkwardly wedged between high-tech Japan and low-cost China. It means Korea needs to work extra hard to remain relevant in Asia. The upshot is that Korea’s $793 billion economy is being squeezed and challenged as never before. North Korea’s unpredictable regime and nuclear ambitions certainly do not help.
China is booming, Japan is growing again and Korea is about to slow just as it craves a bigger role in Asia’s rise. Worse, the combination of a strong won, high oil prices and excessive property speculation may put Korea at risk for the kind of funk Japan suffered in the 1990s. Finance Minister Kwon Okyu said Korea’s housing market is not facing an asset-price “bubble”. Yet Bank of Korea Governor Lee Seong Tae said last week the recent surge in home prices is “worrisome”.
Even economists who doubt that Korea will go down the Japanese path agree its challenges are daunting. “Structurally, Korea has moved away from slipping into Japan syndrome over the past five years, but it’s still on thin ice”q says Andy Xie, an independent economist based in Hong Kong. “China is upgrading also. Korea will never have a cost advantage over China. It has to stay ahead of China’s electronics and autos constantly.”Link here.
CANADA’S MINISTER OF FINANCE ON TAX WARPATH WITH NEW OFFSHORE HAVEN CRACKDOWN
The Conservative government, having just shut down income trusts, now has offshore tax havens in its sights. “There’s some significant tax avoidance there,” Finance Minister Jim Flaherty said, after revealing to the Commons finance committee that the government is reviewing the use of offshore tax havens to avoid paying tax. Using offshore tax havens to avoid tax, just as corporations were using income trusts to do so, is not illegal but is costly to the government, he said.
Last year, Statistics Canada revealed Canadian direct investment in offshore financial centres, including “tax havens”, had soared 8-fold since 1990 to $88 billion in 2003. “Canadian enterprises invested substantial and growing amounts in countries known as ‘Offshore Financial Centres’, many of them in the Caribbean,” it said. “These centres include countries that are often referred to as ‘tax havens’, as well as those which have important financial sectors, such as Switzerland, but also Ireland.”
The largest increases went into Barbados, Bermuda, the Cayman Islands, the Bahamas and Ireland, the five countries being among the 11 nations with the most Canadian assets. Auditor General Sheila Fraser has charged that multinational companies operating in Canada have avoided “hundreds of millions” of dollars in taxes over the past decade through the use of tax havens, while one university study put the tax savings to Canadian banks alone at $10 billion over that period.
Flaherty later introduced a motion in the Commons to amend the Income Tax Act to prevent “non-resident trusts and foreign investment entities” from using offshore tax havens to avoid tax. “The motion will amend existing income tax rules to help ensure that income earned by Canadians through foreign jurisdictions, including tax havens, is subject to tax as if it had been earned in Canada,” he said in introducing the motion. The amendments mainly deal with the taxation of income earned through the use of non-resident trusts and foreign investment entities, the department said. They carry through on long-standing proposals that were first announced in the 1999 budget but whose implementation has been delayed by repeated proposals for changes.
Meanwhile, Flaherty continued to defend his decision to break an election promise not to tax income trusts, saying they were being used as a tax avoidance scheme by some corporations and that they threatened to push the government back into a deficit. However, Liberal finance critic John McCallum argued that the government could have given investors a 10-year grace period before imposing the tax as the Americans did when they shut that tax loophole, rather than the four it did. “You would have the same long-run consequences but you would have very substantially reduced the meltdown which all sorts of Canadians who invested in good faith suffered,” McCallum said. Flaherty responded that the Australians only gave investors a three-year grace period when it took such action, suggesting that is the model he followed.
Meanwhile, the Conservative government’s decision to tax income trusts faces a legal challenge from Democracy Watch. Duff Conacher head of the government accountability advocacy organization refused to reveal the grounds for the court challenge before today but it is likely related to the breaking of a written commitment in the Conservative’s election platform to not tax on trusts.Links here and here.
Flaherty dithers over capital gains tax cut, reneging on party’s campaign promise.
Canadian Finance Minister Jim Flaherty has said that the government may not include its pledge to cut capital gains tax in the forthcoming budget. Flaherty said that the government was struggling to draft a new capital gains tax system that was free from loopholes and not an administrative burden on taxpayers. On whether he will include the measure in the next budget, expected in February, Flaherty was vague.
The Conservative proposal to eliminate capital gains tax on all profits that were reinvested within six months was one of their main manifesto pledges in last winter’s general election campaign. However, since taking power, the policy has fallen down the agenda as government officials took into account the revenue cost and potential complexity of the new legislation.Link here.
DEMOCRAT FOCUS WILL BE ON MIDDLE CLASS TAX CUTS
Charles Rangel, the Democrat in line to take over the powerful House Ways and Means Committee, has hinted that tax cuts for the middle classes will take precedence over investment tax cuts in a Democrat-controlled Congress. Speaking after the dramatic reversal of the balance of power in Congress following last week’s mid-term elections, which has given the Democratic Party control over both chambers of Congress for the first time since 1994, Rangel said that issues such as reforming the Alternative Minimum Tax and renewing lapsed personal tax cuts should be a priority in the short-term. Rangel later indicated that he sees continuation of the 2003 capital gains and dividend tax cuts beyond their 2010 expiry as a low priority. Republican efforts to cut estate tax for all but the wealthiest families, which were opposed by the majority of Democrats, are also likely to be off the agenda.Links here and here.
IRS UNVEILS 2007 INFLATION ADJUSTMENTS
Personal exemptions and standard deductions will rise, tax brackets will widen and income limits for IRAs will increase in 2007, as a result of inflation adjustments announced by the IRS. The IRS explained, “By law, the dollar amounts for a variety of tax provisions must be revised each year to keep pace with inflation. As a result, more than three dozen tax benefits, affecting virtually every taxpayer, are being adjusted for 2007.” Key changes affecting 2007 returns, filed by most taxpayers in early 2008, include the following.
In 2007, for the first time, inflation adjustments will raise the income limits that apply to the retirement savings contributions credit, contributions to a Roth IRA and deductible contributions to a traditional IRA where the taxpayer or the taxpayer’s spouse is covered by a retirement plan at work.Link here.
IRS provides guidance on expense reimbursements.
The IRS last week issued guidance emphasizing the need for employers to track the amount of expense reimbursement allowances paid to employees on a per diem basis. Revenue Ruling 2006-56 explained to employers that if they routinely pay per diem allowances in excess of the federal per diem rates, but do not track the allowances and do not require the employees either to actually substantiate all the expenses or pay back the excess amounts, and do not include the excess amounts in the employee’s income and wages, then the entire amount of the expense allowances is subject to income tax and employment tax.
However, the IRS recognized that employers may need some time to adjust their systems so they can track excess allowances and account for them correctly. The tax authority therefore issued instructions to its agents not to apply the results under the revenue ruling for taxable periods ending on or before December 31, 2006, in the absence of intentional noncompliance.Link here.
IRS increases installment agreement fees.
The IRS has announced increases in user fees for installment agreements. The increases are the first since the fees were implemented in 1995, and result from increases in labor and other costs of processing the various applications. The Office of Management and Budget has directed federal agencies to charge user fees reflecting the full cost of goods or services “that convey special benefits to recipients beyond those accruing to the general public”.
Effective from January 1, 2007, the following fees will increase:
According to the IRS, in fiscal year 2006, almost 2.8 million taxpayers established installment agreements to pay their tax bills.Link here.
NON-RESIDENTS DENIED TAX BREAK BY EUROPEAN COURT OF JUSTICE
A Belgian couple’s claim for exemption on dividend taxes paid in France has been rejected by the ECJ in a ruling delivered yesterday. The judgment reinforces a series of recent ECJ verdicts requiring the taxing authorities of member states to treat companies and individuals the same regardless of their country of residence within the EU. Usually, this principle has been applied against member states who have denied non-resident investors the same tax breaks that are open to resident investors. However, in the latest case, the ECJ found in favor of the Belgian tax authorities.
The case centered on two Belgian residents who in 1995 and 1996 received dividends from a company established in France which were made subject to a levy of 15%. In their tax return they applied to take advantage of a tax benefit corresponding to the French tax at source. That application was rejected and the couple brought an action that ultimately ended up in the ECJ - who took the view that Belgian tax legislation does not make any distinction between dividends from companies established in Belgium and dividends from companies established in another Member State. “Both are taxed at an identical rate of 25% by way of income tax and therefore the law does not discriminate against companies and individuals in other member states,” the judges concluded.Link here.
BUY-TO-LET TAX AVOIDANCE SCHEME IN UK “COULD BECOME TOO POPULAR”
Lawyers have warned buy-to-let investors that if the beneficial scheme to decrease capital gains tax is used too frequently, it could be taken away by HM Revenue & Customs (HMRC). The program in question allows buy-to-let property ownership be put into a discretionary or life trust where two beneficiaries, the owner-investor and the tenant, divide the rights in a way that the investor still owns the house while the tenant pays rent. When the property is eventually sold under the program, the trustees then qualify for principle private residence relief, any or most capital gains would be tax free.
Investment advisory firm Prescient said people entering the scheme should be apprehensive about the potential risks involved. Law firms offering to set up the arrangement have said HMRC has accepted the scheme but are expected to rethink it if too many people take advantage. Solicitors Financial Management warned that HMRC do not like people who blatantly avoid tax – and to be prepared for a thorough tax investigation if they use the device. Prescient warned that it is unclear what would happen to the trust at the end of the lease. They said it was important for any potential investors into this type of scheme to look at exactly where their rights start and end.Link here.
UK TAXPAYERS TO “GOOGLE TAX POUNDS” UNDER TORY PLAN
The UK Conservative Party is drafting new legislation that would allow taxpayers to see how their taxes are being spent by government, replicating an idea recently put into effect by the U.S. government. Unveiling the “Google your tax pounds” proposal, Shadow Chancellor George Osborne explained that the law would result in every single item of expenditure above £25,000 ($47,000) – except when related to national security or personal privacy – being published on a publicly-accessible website. The Tories hope that the Government Spending Transparency Bill will be introduced in the House of Lords by Christmas, and become law by the following Easter. The government has been frequently criticised for failing to publish details of spending projects, such as the costly National Health Service computer system.Link here.
SHOP ON ITALY TREASURY’S OWN PREMISES IN DOCK FOR TAX EVASION
Italy’s economy ministry is waging an all-out battle to stop tax evasion – but even the shop on the ministry’s premises does not hand out fiscal receipts to customers. An undercover reporter for Le Iene, a popular satirical television show, went to the shop, intended to cater to ministry staff, several times to buy goods worth a total of €216. Not once was he given a receipt, a widespread practice in Italy which makes it nearly impossible for tax inspectors to check shopowners’ income. A spokesman for the program said the shop, which sells a variety of items from perfumes to jewelery, does not even have a till.
The economy ministry, which hopes to garner around €8 billion from measures against tax evasion in its belt-tightening 2007 budget, said the program’s findings showed how “common and open” some tax evasion practices were in Italy. “The ministry assures that, regarding this specific episode, checks have already been activated, and measures will be taken against those responsible for this illicit behavior,” it said in a statement. National statistics institute ISTAT estimates that at least 13% of Italian workers pay no taxes and do not officially exist, and that underground activity accounts for about 16% of the economy.Link here.
SINGAPORE TO RAISE GOODS AND SERVICES TAX TO 7%
Singapore’s prime minister, Lee Hsien Loong, told the country’s parliament that GST will be increased by 2% to 7% to finance social programs and help people with low incomes. “Our aim is to help lower-income groups and the elderly. It is not to increase their burdens,” said Lee. Full details will be included in the next budget in February, 2007. “When we implement the GST increase, it is not a GST increase, it’s a package which will fully offset the impact of GST for these groups and begin to strengthen the safety nets and tilt the balance in favor of the lower income Singaporeans.” He also trailed a possible reduction in income tax rates.
Mr. Lee also proposed to change the country’s constitution to allow the government access to capital gains on state reserves. The GST raised about S$4 billion in the fiscal year ending March 31, 2006, about 15% of total tax revenue. The Singapore GST is a tax on domestic consumption and has many similarities to a Value Added Tax. The tax is paid when money is spent on goods or services, including imports. It is a multi-stage tax which is collected at every stage of the production and distribution chain. GST is levied on goods and services supplied in Singapore by any taxable person in the course or furtherance of a business, and goods imported into Singapore by any person. GST was introduced in Singapore on April 1, 1994. The GST rate was increased from 3% to 4% in 2003 and from 4% to 5% in 2004.Link here.
CHINA TO EXPAND LUXURY TAXES
China’s State Administration of Taxation plans to raise taxes on certain luxury goods and is considering implementing new taxes on others, according a government official. Wang Li, a vice head of China’s State Administration of Taxation, told the first annual forum on China’s fiscal reform that the policy of expanding the consumption tax net, particularly on luxury goods and services, was part of the government’s overall strategy of reducing the income gap between the poor and the wealthy using the tax system. “China will continue to improve its consumption tax system and further raise tax rates on some high-end luxury goods,” he told the forum, although he did not specify the scope or timing of such a move.
In April 2006, the government increased consumption tax on several items, including yachts, golf balls and golf clubs (10%), and luxury watches (20%). Taxes on automobiles with an engine capacity above 2 litres have also increased. China has become the third largest market for luxury goods after the U.S. and Japan, reflecting the country’s growing affluence. However, studies have shown that a large percentage of the Chinese population support consumption tax increases on luxury goods as the income gap grows.Link here.
NETHERLANDS ANTILLES PARLIAMENT TO DEBATE TAX AGREEMENT WITH U.S.
Parliament has to agree to the draft law for the treaty signed recently between the Netherlands Antilles and U.S. on exchanging tax information between the two countries to go into effect. Approving the draft law will open more possibilities for trade with USA, State Secretary of Finance Alex Rosaria stated in a press release. He said the treaty would fortify the Netherlands Antilles’ position as a high-quality international financial center. Exchanging tax information with the U.S. will prevent fraud and tax evasion, and is an instrument to combat financing of terrorism.
Besides exchanging tax information, the treaty also makes it possible for U.S. companies that want to organize business seminars in the Netherlands Antilles to receive tax deductions. “This means diversification for our tourist sector,” said Rosaria. In addition, if Parliament approves the treaty, it will mean that the Netherlands Antilles will meet all conditions set to receive preferential treatment based on the Caribbean Basin Trade Partnership Act (CBTPA). “Countries that qualify for the CBTPA programme can export to the USA without paying import duties,” said Rosaria.Link here.
INDIAN CITY’S TAX DODGERS BEING SHAMED IN AN INNOVATIVE MANNER
In India’s largely informal cash economy the job of tax collection has always been a struggle. Just 4% of the 1.1 billion population contribute to the public purse and many a government campaign to increase tax receipts has failed. But the city of Patna, in the country’s poorest state of Bihar, has devised a formula that may just work – public humiliation. Frustrated with not being able to meet its annual target of revenue collection, city authorities have employed the incomparably colorful services of eunuchs to embarrass habitual defaulters into coughing up.
The castrated men, hermaphrodites and transsexuals, caked in cheap make-up and wearing garish saris, are being paid to stand outside the homes and shops of repeat offenders and loudly sing ditties that translate to “Your reputation will be tarnished, fame would be malice, if you do not pay your tax your house would be auctioned.” Accompanied by drummers and policemen, the persuasive eunuchs – conditioned to demanding money through a lifetime of begging – are proving quite adept at their new job. In one day this week their takings topped 400,000 rupees (£4,710), for which they received a 4% cut. Ram Sagar Singh, 60, a shopkeeper surrounded by a mob chanting “Pay up the tax, pay the tax,” in front of his family and neighbors, immediately promised to cover his dues of 100,000 rupees within a week.
“Most civilised defaulters are ashamed to find eunuchs at their doorstep with drums and other musical instruments to collect tax,” an officer for the Patna Municipal Corporation said. “Since they are conspicuous by their appearance and body language, it becomes embarrassing. To get rid of these eunuchs, who have the habit to hang around until paid money, we expect the defaulters to pay up.” Eunuchs, or hijras, historically attendants to the royal harem, are ostracized by modern society. Numbering about 1 million, they are forced to hustle for money by begging or offering sexual favors.Link here.
PRIVATE ANNUITY TRUSTS – THE NUMBERS DO NOT SUPPORT THE HYPE
The private annuity trust (PAT) is a tax deferral transaction offered to taxpayers seeking to dispose of appreciated assets, often real estate. The private annuity trust is an old transaction but appears to be more popular than ever. Several websites actively and proudly promote the strategy. There is a National Association for Private Annuity Trusts (“NAPAT”), The National Private Annuity Trust (“NPAT”) and the National Association for Financial and Estate Planning (“NAFEP”), which offers the private annuity trust as its “Premier VI” plan.
Despite its apparent popularity, the PAT is a questionable strategy from a tax perspective. It is far from clear that the transaction works in the manner in which its promoters claim. Even more problematic is that assuming the PAT does in fact offer the tax benefits that it purports to offer, in the typical case (possible beneficial uses of the private annuity trust are discussed below), it is an economically bad transaction from an income tax standpoint. Economic analysis of the private annuity trust reveals that not only is it worse than perhaps most every other tax minimization strategy that would be available to a taxpayer, but the PAT also leaves the taxpayer in a worse economic position than the taxpayer would be in by merely selling the asset and paying the tax.
After a brief description of the transaction, an overview of a few technical problems of the PAT is provided. Then, a few of the claims of promoters are dispelled. Finally, a summary of an economic analysis of the private annuity trust is given.
Despite the degree to which the private annuity trust is presently being marketed, it is simply not a very good strategy. Paradoxically, it represents both an income tax risk if it fails and an income tax detriment if it succeeds. From an estate tax perspective, the benefits of the transaction depend largely upon the seller’s life expectancy. For a seller with a shortened life expectancy, private annuities (without involving a trust) are certainly sometimes appropriate strategies for estate tax reduction. However, private annuities can be done without the income tax bite.Link here.
IS THE U.S. THE WORLD’S BIGGEST TAX HAVEN?
Senator Carl Levin (D-Michigan) told a Senate committee on this week that if the United States is serious about cracking down on money laundering, terror financing and tax evasion, it could do worse than look to its own backyard, as states compete with each other to set up companies with greater anonymity for the company owners.
In testimony at the Permanent Subcommittee on Investigations Hearing: “Failure to Identify Company Owners Impedes Law Enforcement”, Levin, the senior Democrat on the committee, said that while the vast majority of U.S. companies are set up for legitimate purposes, there are a small percentage that function instead as “conduits for organized crime, money laundering, securities fraud, tax evasion, and other misconduct.” However, the task of assessing to what extent this illegal activity is taking place within the U.S. is hampered by the fact that states “have no idea who is behind the companies they have incorporated.” According to Levin, a person who wants to set up a U.S. company typically provides less information than is required to open a bank account or get a driver’s license – a process that has become easier, quicker and faster as states seek to outdo one another. The median fee for company formation is now said to be less than $100, while Delaware and Nevada allow applicants to set up a company in less than an hour for an extra $1,000.
Levin went on to cite one firm in the business of forming shell companies as promoting the state of Delaware as “An Offshore Tax Haven for Non U.S. Residents”. Said Levin, “That type of anonymity is exactly what we’ve been criticizing offshore tax havens for offering to their clients. ... In fact, our last Subcommittee hearing lambasted offshore jurisdictions for setting up offshore corporations with secret U.S. owners engaged in transactions designed to evade U.S. taxes, leaving honest taxpayers to pick up the slack.”
Levin went on to tell how Immigration and Customs Enforcement officials reported that a Nevada-based corporation received more than 3,700 suspicious wire transfers totaling $81 million over 2 years. However, the case was not pursued because the agency was unable to identify the corporation’s owners. Meanwhile, the FBI recently told the Government Accountability Office that anonymously-held U.S. shell companies are being used to launder as much as $36 billion from the former Soviet Union. The FBI also reported that they have 103 open cases investigating stock market manipulation, most of which involve anonymously-held U.S. shell companies. FinCEN and the Department of Justice have also reported more than $4 billion worth of suspicious transactions.
Ironically, Levin pointed out, the U.S. was actually rebuked by the FATF for its disclosure laws in a 2006 report, while offshore secrecy jurisdictions such as the Cayman Islands, Bahamas, Jersey, and Isle of Man are now largely praised by the FATF for complying with its recommendation to identify the owners of the companies they establish. The U.S. was one of the driving forces behind the formation of the FATF.
Levin said that possible solutions could involve new regulations requiring company formation agents to establish risk-based anti-money laundering programs, which would require careful evaluations of requests for new companies made by high-risk persons. These are currently being considered by FinCEN. Another approach would be for Congress to set minimum standards, so that no state would be placed at a competitive disadvantage when asking for the name of a company’s true owners, ensuring U.S. compliance with international anti-money laundering standards. However, Levin said that these solutions will be possible “only if we are first willing to admit there is a problem.”Link here.
BRITISH VIRGIN ISLANDS TO INTRODUCE NEW LAWS ON PRIVATE TRUST COMPANIES
The BVI will have new laws on private trust companies starting January 1, 2007, Robert Mathavious, Managing Director and Chief Executive Officer of the BVI Financial Services Commission, has announced. According to Mathavious, the legislation will enable certain categories of companies to apply, on a fast-track basis, for exemptions from the licensing requirements and other provisions of the BVI’s Banks and Trust Companies Act. It is anticipated that most unremunerated private trust companies which do not offer (and which are not perceived as offering) their services to the general public will be able to apply for the new exemption from the provisions of the Banks and Trust Companies Act.
It is also expected that unremunerated BVI companies which merely hold assets as nominees or “bare trustees” and which do not offer their services to the general public will be automatically exempted from the requirements of the Act. It is likely that those exemptions will, once granted, take retroactive effect.
The proposed changes have been applauded by the UK’s Society of Trust and Estate Practitioners (STEP), which has said that the introduction of the measures will make the BVI a highly attractive jurisdiction to use for the incorporation of private trust companies. The proposed new legislation is the latest in a series of financial services–related statutes which have been enacted by the BVI Government over the past few years as it seeks to boost the jurisdiction’s standing as a major offshore financial center.Link here.
THE MARSHALL ISLANDS SERIES LLC COULD BE USEFUL FOR ASSET PROTECTION
The Republic of the Marshall Islands (RMI) has closely modeled their corporate laws after the top corporate haven in the world, the State of Delaware. The RMI is a former U.S. dependency in the Pacific Ocean which is now entirely independent. One of the most innovative and useful business entities provided for in RMI Law is the Series Limited Liability Company (LLC).
The RMI LLC Act provides for the creation of a “series” of segregated asset containers within a Series LLC whose debts and other liabilities are enforceable against that asset container alone. The Act also provides that classes or groups of members can be established. This allows each asset container to be treated as if it were a separate company. Thus, the RMI LLC Act allows for the creation of separate sub-companies within one umbrella limited liability company without the need to create separate entities. The concept is similar to the protected cell companies used by many insurance companies within the U.S. and elsewhere. Unlike every offshore protected cell company law of which we are aware, there are no special limitations on the creation of an RMI LLC, so it could be used for any purpose except for banking, trust or insurance services.
The Act allows a Series LLC agreement to provide for separate members, managers, interests, business purposes, rights and/or duties with respect to the property or obligations held within each asset container. An asset container can be terminated without affecting the other asset containers within the Series LLC. An asset container can make distributions to its own members without regard to the financial condition of the other asset containers or the umbrella LLC. Most importantly, the Act provides that debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular asset container are enforceable against that asset container only, and not against the assets of the Series LLC generally or any other asset container within the LLC.
An obvious potential use for the series LLC is to hold multiple properties, businesses or other investments. Forming and maintaining ten separate LLCs would cost several thousand dollars in the year of formation and several thousand dollars each subsequent year. Instead, a series LLC can be used and each property, business or investment can be transferred to a separate series. This would achieve the goal of segregating the properties for asset protection purposes while saving substantial startup costs and ongoing administrative costs. But, if it became appropriate any Series within the Series LLC could be “spun off” as a separate new LLC.Link here.
56 YEAR OLD BANK ALTERNATIVE FROM URUGUAY COMING TO AN END IN 45 DAYS
After 56 years of existence, no new Uruguayan SAFI (Sociedad Anonima Financiera de Inversion) can be created after the end of December. To those not in the know, this may be a big yawn, but real players will be less than happy about losing this key tool. The good news is that the SAFI will not actually be abolished, yet. No new SAFIs will be formed, but Uruguay will allow all existing SAFIs to continue their operations for 10 years, after which they will become regular Uruguayan Companies. 10 years is a long time in the offshore world, so consider getting this tool while you can.
What good is a SAFI? It takes 2 or 3 months to form and is relatively expensive by offshore company standards. It even still uses early 20th century bound corporate “books” printed in purple ink. A Uruguay SAFI, working in conjunction with a friendly commercial bank can serve as bank alternative for its affiliates as a capital management company, payment company or treasury company that can be more useful than an offshore bank license for many payment operations. In today’s world of ever greater restrictions on any kind of financial company, note the following:
The bottom line is that a Uruguayan SAFI can do everything claimed by the much better known Panamanian Capital Management Company, but without the licensing or regulatory burden.Link here.
EXPERTS PREDICT WAVE OF CORPORATE BANKRUPTCIES
Most professionals involved in bankruptcy restructuring expect a rise in bankruptcies within the next 12 to 18 months, according to a survey. Over 70% of 90 restructuring pros in a survey by the American Bankruptcy Institute and Daily Bankruptcy Review expect that U.S. corporate restructurings will increase.
The survey participants differ on the most likely trigger for the next wave of bankruptcies. But 48% predict that it will be interest rates. Home prices were cited as the most likely trigger by 15%. Others think that a decline in consumer spending and unfunded pension plans will be possible triggers. Respondents also listed the industries they expect will be the most affected by corporate bankruptcies. “The sectors [that are] close to the default line are those that deal specifically with the consumer,” said Anders Maxwell, managing director of financial advisory firm Peter J. Solomon Co. “The American consumer is arguably the weakest link in the credit chain.” Maxwell added that the creditworthiness of the average American corporation is weaker than it was 15 to 20 years ago. “That is masked today by staggering liquidity.”Link here.
LOOKING INTO LAPTOPS
It was bad enough for international travelers earlier this year when security officials barred laptop computers from carry-on luggage. Now that the ban has been lifted, a new worry has replaced it – the prospect of U.S. customs agents snooping through your laptop – and even seizing it. It does not happen often – only about 1% of executives surveyed recently said their laptops had been confiscated – but it is enough to set off alarm bells. If your laptop holds critical banking data or operational information, the association warns, you are better off e-mailing a copy to yourself before heading to the airport. And if you have truly sensitive items, you had better not put them on your laptop in the first place.
Officials at the DHS recite the familiar mantra – legitimate business travelers have nothing to fear [yadda yadda]. Immigration and Customs Enforcement agents, they say, first conduct a routine check of whether a person should be admitted to the country. If that leads them to suspect the traveler is involved in a crime, they will search any laptop. The only time a computer is seized, the department said in a statement, is “if the laptop contains information with possible ties to terrorism, narcotics smuggling, child pornography or other criminal activity.”
But as the department’s records point out, even “legitimate business travelers” may wind up having their laptops rifled if a person fits a suspicious profile (in one case, men between the ages of 30 to 60s traveling alone from Asia), or if an individual is unlucky enough to be chosen for a random inspection. Because the Supreme Court has ruled that agents at international points of entry can perform “routine” searches without a warrant or even reasonable suspicion, some courts have interpreted that to mean all travelers are subject to inspections of their privileged and personal information at any border crossing.
U.S. District Judge Dean D. Pregerson in Los Angeles recently ruled against a laptop search because agents did not have a reasonable basis to suspect a U.S. traveler of having committed a crime. In Pregerson’s view, searching a laptop is not “routine”, and the 4th Amendment’s protection against unreasonable searches and seizures applies on the border. The government appealed the ruling to the U.S. 9th Circuit Court of Appeals.Link here.
ONLY 10 PEOPLE CREATE 80% CENT OF ALL SPAM
Ten well aimed silver bullets would take care of 80% of the world’s spam, according to the anti-spam organization Spamhause, which thinks that there are only 10 people that are responsible for most of the spam in the world.
The worst is a “multi-aliased spammer” known variously as Alex or Alexey who lives in the Ukraine. Alex is alleged to work with Russian spam bandits called Pavka/Artofit, which use spam bots to churn out junk. Leo Kuvayev, #2 on the list, who also worked with Pavka/Artofit, has been in hiding after a Massachusetts court handed down $37 million in fines in October 2005 against him for his operations in the U.S. Other names include Michael Lindsay of iMedia Networks who Spamhaus says runs a “full-fledged spam-hosting operation” and Jeffrey Peters who runs a fake Russian ISP for spam operations. 4 of the top 10 spammers are from Russia, and one from the Ukraine works. Two are from the U.S., with the others from Israel, Hong Kong, and Canada.Link here.
COURTS OF THE STATE – AND THE STATE OF JUSTICE
The attempt to recall Duke non-rape prosecutor Michael Nifong has passed unsuccessfully, and while more people voted against him than for him, he had enough votes to win office, which clears the way for him to continue his unholy march to destroy the lives of three young men on false charges. As I have previously pointed out, he has plenty of enablers, both from the leftist faculty members at Duke and “leaders” of the black community in Durham. Almost all of the criticism directed toward Nifong and this prosecution has been aimed either at the prosecutor, police, or those enablers in the community. That is not surprising, as we have witnessed some outrageous conduct, even by the very low standards that are seen in the pursuit of “law” these days. But while we concentrate upon the picture of Nifong and Durham and the Duke faculty, there is a much larger issue that dwarfs everything else, and that is the government court system itself.
If one definition of insanity is performing the same activity over time and somehow expecting different results, then the institution of government courts truly marks the height of insanity. We come to the courts expecting – no, demanding – just outcomes and then wonder why the results almost always are bitterly disappointing. There is a reason for this phenomenon, and it is not Michael Nifong, the Durham leadership, or the Duke faculty. The reason is much more basic than the influx of dishonest people. In fact, the system itself encourages dishonesty. It should be ironic (and quite telling) that the government’s system of justice, which claims to be an entity formed on behalf of finding truth, is greased by outright lies and cannot function without dishonesty.
As I examine the institution that comprises government courts, I do so from the viewpoint of an economist, which is someone who understands that incentives matter. Government entities almost always operate in the arena of perverse incentives, so we hardly should be shocked when government courts work in ways that are contrary to what the supposed goals of courts are to be.
For the most part judges are former prosecutors who never really leave the “prosecution team”. Most judges run on some form of “hanging judge” platform. I cannot recall a state judicial campaign in which the judge said that he was running in order to stand up for the rights of defendants. And for good reason. The public long ago decided that they preferred courts that more closely mirror the Stalinist courts of the U.S.S.R. than anything that we inherited from William Blackstone’s Rights of Englishmen. To put it another way, state employees watch out for one another. Over time, the system of “justice” is not about “justice”. It is about those who are employed in the official state system of “justice”. The incentives are there to convict, not to find the truth. The incentives exist to help exact revenge, not serve an abstract notion of justice.
The Duke hoax hardly is the first time the North Carolina “justice” system has been taken in by a set of bogus charges – and transparently bogus charges, at that. More than a decade ago, the State of North Carolina spent millions of dollars prosecuting and wrongfully convicting a number of people in Edenton for alleged child molestation, the “Little Rascals” case. As journalists and other investigators pointed out, the charges were manufactured, part of a wave of witch-hunt child molestation prosecutions that began in the early 1980s and ended with the massive hoax perpetrated in Wenatchee, Washington, in the late 1990s.
The convictions ultimately were overturned by the North Carolina Supreme Court, but only after people served time in prison. In other words, the system stepped in and put an end to the freak show only after the state’s actors had been on stage, done their act, ruined countless lives, cost the taxpayers (and private individuals) millions of dollars, destroyed marriages and families, devastated reputations, and generally caused massive havoc – all for a hoax. Of course, none of the perpetrators of the fraud, from the social workers to the prosecutors faced even the slightest inconvenience from the state authorities. Like the Duke hoax, there was no legal reason for this. However, the political benefits for the participants were enormous. Like the Duke hoax, there was no legal reason for this. However, the political benefits for the participants were enormous.
Multiply this across the country and you get a sense of why government justice systems are subject to hoaxes. There are no personal costs to pursuing false charges, and because the courts and legislatures have given immunity to prosecutors, they pay no price for lying, cheating, covering the truth, and destroying trust. While there exist anti-Nifong websites, Nifong knows that no one in the system even will slap his wrist. He is immune, and the state wants it that way. Promotion of the hoax not only got him elected, thus saving him from having to earn a living by representing real clients, as opposed to the government, which sets all the rules of the game, but it also permits him to openly remind all of us that he is untouchable.
Hoaxes of the judicial system always exist to exploit fear – as well as greed and revenge. There always exists some segment of the populace that is going to succumb to the fear “flavor of the month”. Likewise, there always is part of the population whose members believe themselves to be mistreated and look to use the state as an entity through which to mistreat others in the spirit of revenge and anger. Until we understand that government courts and their vast network of workers both are perpetrators and beneficiaries of hoaxes, we will continue to see people cast into the maw of death and dishonor, all so that some state employees will have the privilege of receiving power, praise, and, of course, a paycheck. Since we are not going to be rid of this monster, we can do the next best thing, and that is not to trust it, nor give it any praise that it does not deserve, anyway.Link here.
U.S. JUSTICE DEPARTMENT SETTLES WITH BETONSPORTS
DoJ agrees not to seize [read “steal”] bettors’ funds.
The agreement between the DoJ and Antigua-based gaming firm Betonsports settling civil litigation against the company was approved by U.S. District Judge Carol Jackson in the St. Louis federal court last week. The agreement bans Betonsports from operating in the U.S. “The defendant has no legally recognizable right to operate in the United States,” Jackson wrote in the court order. The agreement permits the company to refund stakes placed by U.S. players. Originally the DoJ had wanted to seize those funds.
The company and 12 individuals still face criminal charges including racketeering, mail fraud and facilitation of gambling across state and national boundaries. Trading of Betonsports stock in London was suspended on July 18th at the company’s request. The company ran its U.S. Internet business from Costa Rica and Antigua.
Founder Gary Kaplan and British CEO David Carruthers are among those indicted. Carruthers, 48, was arrested in July as he changed planes in Dallas. Carruthers plead not guilty in August to the charges of fraud and racketeering. Under the terms of a bail agreement negotiated between defense lawyers and prosecutors, Carruthers was bailed under a $1 million bond and is under house arrest in the vicinity of St Louis. An arrest warrant has been issued for Gary Kaplan. The indictments seek forfeiture of $4.5 billion from Kaplan and the other defendants.Link here.
It could not have happened to a nicer bunch of guys. I am, of course, referring to the 2006 election blow-out which saw the Democrats gain control of both houses of Congress. In some ways this was an absolutely critical election. History demanded that the perpetrators of our reckless foreign policy be brought before the bar of public opinion. What would future generations, those suffering in the aftermath of these policies, have thought of us had we not acted? What precedent would have been set for future administrations? Despotism, without political or legal consequence, would have become the order of the day. One shudders at the thought.
So, in that sense, we can all rejoice that a measure of justice has been done. Conservative radio hosts are claiming that the Republicans’ defeat was the result of their abandonment of conservative ideals. The talking heads claim the Republicans were seduced by power and that they detoured into the realm of profligate spending and cronyism. While there is much truth to that assertion, it is also worth considering just how much the Republicans’ performance was not a betrayal of their true selves, but rather an unmasking of it. When one looks at the history of the Republican Party, it has always been the party of state capitalism (or, more specifically, state corporatism). It was founded for the express purpose of seizing the levers of power for the Northeastern banking and industrial establishments. Why, then, should we consider their behavior these past years to be a “betrayal”? Could it not, more accurately, be called an “actualization”?
While keeping these thoughts in mind – and without trying to sound too paradoxical – this election was also completely irrelevant. It was irrelevant in the sense that our new congressional Democratic overlords will not address either of the two major crises which imperil our collective future. The first danger is our nation’s rapidly eroding financial situation. We are, simply put, sliding into bankruptcy. For how long can we expect to live beyond our means to a ridiculous extent? I am not sure, but my guess is not for very long.
Will the Democrats act to reverse this trend? I expect not. The Democratic Party is, above all, the party of wealth redistribution. They are watered-down European social democrats. Seeking government solutions to any and all social problems is the religion of our liberal elites (the only religion they possess). While the Republicans showed themselves to be experts in pork-barrel spending and dirty dealings, can we expect the Democrats to do much better? No. The beneficiaries of the Democrats’ redistribution and corruption schemes may be somewhat different from those of the Republicans, but my hunch is that the overall mathematics will remain the same.
The second danger confronting us is our chaotic, interventionist foreign policy and the consequences of this imperial overreach. Where do the Democrats stand on this issue? Last summer, I attended the first week of the annual Chautauqua Institution. The topic was “Russia”. The seminars were organized by the Brookings Institution, a prominent liberal Democratic think-tank. By the end of the week, it was quite clear that the idea of respecting Russian sovereignty, or of America minding its own business, was thought to be puerile and absurd. This sums up the general opinion of our entire bipartisan political establishment.
Those who believe that this election will somehow end our imperial foreign policy are in for a deep and nasty surprise. America spends more on defense than almost every other nation combined. We have troops stationed in over a hundred foreign countries. We are bogged down in two no-win wars. There is absolutely nothing in the history or ideology of the Democratic Party that leads me to believe it will reverse these policies.
So where does that leave us? It leaves us sinking toward bankruptcy and trapped in a policy of perpetual war for perpetual peace. And, rather than offering solutions, the Democrats will prove themselves to be a substantial part of the problem.Link here.
Will this Democrat majority turn the tide of history? Why would it?
If the Democrats do anything short of repealing the Patriot Act and the Military Commissions Act of 2006, it will be a betrayal. If they do not conduct new investigations into 9-11 and the alleged intelligence “failures” leading to the Iraq war, and if they do not hold the neocons accountable for all the death and diminishment that they have caused, they will prove, once again, how they are effectively no different than the Republicans.
Instead, the Democrats will demonstrate another completely unsurprising natural law: That the establishment protects its own. Instead of honoring the mandate – and it is impossible to characterize the results any other way than as a mandate – instead of finishing the job, of utilizing the steam that powered their rise – Nancy Pelosi, Howard Dean, and John Conyers have instead each assured the American public, preemptively, that impeachment of George W. Bush is off the table.
Suddenly Democrats are interested in national unity, just days after declaring that Bush the unitary decider was destroying the universe? For the Democrats to impeach Bush at this point – even though it is likely that whatever charges that might stick to him would clearly be heaped twofold on Cheney, thereby leapfrogging whomever the Ds choose for their Speaker to the fore – would threaten to topple the entire statist house of cards. But Democrats have no problem with cards.
Exactly like the so-called “Republican Revolution” of 1994, this latest uprising will prove short-lived, too, little more than a steam valve to distract the masses – a means of hijacking outrage and diverting the destructive energy safely away from themselves when they become inevitably implicated. There is no hope for political revolution by working inside the establishment, not when the people continue to expect nothing more than a false choice, a rigged political paradigm.
Back to the conventional perspective for a moment: If Republicans have anyone to blame for their losses it is themselves. For selling their souls and going along with the police state, for not contesting the illegitimate and intellectually insulting premise of never-ending war, and for buying the BS defining “free trade” as wholesale government manipulation of markets, these Republicans deserve whatever they got. The characteristics of modern Republicanism, that of moral ambiguity and flexible principles, make it seem very much like a party not worth saving. It is so bad, so depraved, so fallen, that it almost takes the fun out of me now saying to them, “I told you so. Repeatedly.” (Of course I will continue to say it anyway.)
Now the Democrats will accomplish what Bush, the flaming globalist, the big-government liberal, has desired all along – but failed to pass through the few political conservatives who obstructed in the House: amnesty for illegal aliens, expanded and legitimized welfare subsidies for their families, and the eventual merger of the U.S. with Canada and Mexico into a “North American Union”. Those goals will be first priority for the incoming Democrat congress. The only remaining objectives of the Democrats for these next two years will be to raise taxes and to marginalize and ignore any within their ranks who are so crass as to demand investigations into Bush’s last five years of unconstitutional high crimes and misdemeanors.
So for you Democrats out there, I will say this preemptively. Congratulations. This is what opting for the “lesser of two evils” buys you – evil. I hope you prove me wrong. But because we know that will not happen, let me go ahead and relish this now, while I have your attention: I told you so.Link here.
We The People: An Open Letter to Congress
Dear Members of the 110th Congress:
May I offer my congratulations to those of you who are newly elected. To those of you who were re-elected or whose seat was not contested in this election, my best wishes.
Herewith, let me serve notice on behalf of the American people ...Link here.
WHY INTELLECTUALS STILL SUPPORT SOCIALISM
Intellectuals, particularly academic intellectuals, tend to favor socialism and interventionism. How was the American university transformed from a center of higher learning to an outpost for socialist-inspired culture and politics? As recently as the early 1950s, the typical American university professor held social and political views quite similar to those of the general population. Today ... well, you have all heard the jokes that circulated after the collapse of central planning in Eastern Europe and the former USSR, how the only place in the world where Marxists were still thriving was the Harvard political science department.
More generally, U.S. higher education often looks like a clear case of the inmates running the asylum. The students who were radicalized in the 1960s have now risen to positions of influence within colleges and universities. One needs only to observe the aggressive pursuit of “diversity” in admissions and hiring, the abandonment of the traditional curriculum in favor of highly politicized “studies” based on group identity, the mandatory workshops on sensitivity training, and so on. A 1989 study for the Carnegie Foundation for the Advancement of Teaching used the categories “liberal” and “conservative”. It found that 70% of the professors in the major liberal arts colleges and research universities considered themselves liberal or moderately liberal, with less than 20% identifying themselves as conservative or moderately conservative. (Of course, the term “liberal” here means left-liberal or socialist, not classical liberal.)
A recent examination of academics’ political affiliations using voter-registration records for tenure-track faculty at 11 California universities found an average Democrat:Republican ratio of 5:1, ranging from 9:1 at Berkeley to 1:1 at Pepperdine. The humanities average 10:1, while business schools are at only 1.3:1. (Even at the heartless, dog-eat-dog, sycophant-of-the-bourgeoisie business schools the ratio does not dip below 1:1.) While today’s Republicans are hardly anti-socialist – particularly on foreign policy – these figures are consistent with a widespread perception that university faculties are increasingly unrepresentative of the communities they supposedly serve.
Even in economics 63% of the faculty in the study identified themselves as liberal. A survey of American Economic Association members finds that most economists support safety regulations, gun control, redistribution, public schooling, and anti-discrimination laws. Why do so many university professors – and intellectuals more generally – favor socialism and interventionism? F. A. Hayek offered a partial explanation in his 1949 essay “The Intellectuals and Socialism”. Hayek argues that exceptionally intelligent people who favor the market tend to find opportunities for professional and financial success outside the Academy (i.e., in the business or professional world). Those who are highly intelligent but ill-disposed toward the market are more likely to choose an academic career. For this reason, the universities come to be filled with those intellectuals who were favorably disposed toward socialism from the beginning. This also leads to the phenomenon that academics do not know much about how markets work, since they have so little experience with them, living as they do in their subsidized ivory towers and protected by academic tenure.
But why have academics become more and more interventionist throughout the 20th century? First realize that academics receive many direct benefits from the welfare state, and that these benefits have increased over time. Excluding student financial aid, public universities receive about 50% of their funding from federal and state governments, dwarfing the 18% they receive from tuition and fees. Even “private” universities like Stanford or Harvard receive around 20% of their budgets from federal grants and contracts. If you include student financial aid, that figure rises to almost 50%. The most dramatic example of “corporate welfare” in the U.S. is the GI Bill, which subsidized the academic sector, bloating it far beyond the level the market would have provided.
Consider for a moment what academics would do in a purely free society. The fact is that most academics simply are not that important. In a free society, there would be far fewer of them than there are today. Their public visibility would no doubt be quite low. Most would be poorly paid. Though some would be engaged in scholarly research, the vast majority would be teachers. Their job would be to pass the collective wisdom of the ages along to the next generation. In all likelihood, there would also be far fewer students. Some students would attend traditional colleges and universities, but many more students would attend technical and vocational schools, where their instructors would be men and women with practical knowledge.
Today, many professors at major research universities do little teaching. Their primary activity is research, though much of that is questionable as real scholarship. One needs only to browse through the latest specialty journals to see what passes for scholarly research in most disciplines. In the humanities and social sciences, it is likely to be postmodern gobbledygook, in the professional schools, vocationally-oriented technical reports. Much of this research is funded in the U.S. by government agencies, such as the National Science Foundation. Beyond university life, academics also compete for prestigious posts within government agencies. The U.S. federal government employs at least 3,000 economists – about 15% of all members of the AEA. The Federal Reserve System itself employs several hundred.
These benefits are not simply financial. They are also psychological. As Dwight Lee puts it, “Like every other group, academics like to exert influence and feel important. Few scholars in the social sciences and humanities are content just to observe, describe, and explain society; most want to improve society and are naive enough to believe that they could do so if only they had sufficient influence. The existence of a huge government offers academics the real possibility of living out their reformist fantasies.”
It is clear, then, that there are many benefits, for academics, to living in a highly interventionist society. It should be no wonder, then, that academics tend to support those interventions. Economists, in particular, play active roles as government advisers, creating and sustaining the welfare state that now surrounds us. Naturally, when government funds their research, economists in applied fields such as agricultural economics and monetary economics are unlikely to call for serious regulatory reform in their specialty areas.
The current crises in higher education and the media are probably good things, in the long run, if they force a rethinking of educational and intellectual goals and objectives, and take power away from the establishment institutions. Then, and only then, we may see a rebirth of genuine scholarship, communication, and education.Link here.
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