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HISTORY HOLDS LESSONS FOR CHINA AND ITS PARTNERS
A rising Asian power has emerged as an export powerhouse and enjoys rapid, export-led growth fueled by extraordinarily high savings and investment rates. Its technological capacity is upgraded at prodigious rates and its businesses threaten an ever greater swathe of industry in Europe and the U.S. Its high level of central bank reserves and burgeoning current account surplus lead to claims that its exchange rate is being unfairly manipulated or, at a minimum, should be guided upwards. Its financial system is bank-centric, heavily regulated in ways that favor domestic institutions and has close ties to government and industry. Rapid productivity growth holds down product prices but asset price inflation is rampant.
U.S. congressional leaders demand radical action to contain the economic threat. Delegations of senior US economic officials engage in “dialogue” with their counterparts about the many aspects of the country’s economic policies that promote imbalances, warning of the congressional demons who stand ready to act if “results” are not achieved quickly. All of this describes what is happening in and with China today. It also describes the Japanese economy in the late 1980s and early 1990s before its lost decade of deflation and considerable deterioration in its international relations. While there are obvious differences, notably China’s much lower level of development, the similarities are striking enough to invite an effort to draw some lessons for China and its partners from the earlier Japanese experience.
The definitive history of Japan’s dismal decade has yet to be written. But in retrospect, Japanese officials made several important policy errors. In order to avoid further yen appreciation after the 1987 Louvre agreement, they followed easy monetary and financial policies that gave rise to huge asset price bubbles and expansions in credit that set the stage for the subsequent downturn. They failed, at a moment when consumers were enjoying record increases in wealth, to encourage a shift to domestic demand-led growth. They also allowed problems in the banking system to fester rather than confront them directly. The result of these mistakes was that Japan did less than it could have done to prevent the serious problems of the 1990s and was not well positioned to address them when they arose.
This suggests that if China is to sustain rapid growth and not run into the kinds of problems that Japan encountered, now, when the sun is shining, is the time to fix the policy roof. Allowing the inevitable currency appreciation and spurring domestic demand by encouraging consumption is much easier now, when the economy is at the edge of overheating, than it is likely to be in the future when it cools off. Also, there will not be a better moment to address issues in the banking system.
An additional lesson is the need for modesty regarding economic policy dialogues that seek to create pressure for change. Events and national and political decisions, not international communiqués, shape economic outcomes. The impact of events beyond the control of governments – the collapse of Japan’s asset markets, information technology’s spur to U.S. productivity growth, the Asian financial crisis – dwarfed the issues debated in economic dialogues. Even where government policies might have significant impact, there is no evidence that Japan in the 1980s and 1990s made any changes in domestically sensitive structural policy areas in response to the U.S. initiatives. Policy in areas of this kind is shaped by domestic politics. If heavy-handed pressure makes it easier for special interests to invoke nationalism as they resist change, high-profile dialogues can be counter-productive. In a world where goodwill is scarce, heavy-handed dialogues engender resentments that spill over into other spheres.
It was a cliché in U.S.-Japan relations during the late 1980s and early 1990s that the link was the world’s most important bilateral relationship. Given China’s greater scale, more rapid growth and the greater level of imbalances in today’s global economy, Chinese economic policy and its international economic relations are even more important. By learning from a rather unfortunate history, policymakers on both sides of the Pacific can avoid repeating its mistakes.Link here.
ANGER MOUNTS IN ZIMBABWE AS CRISIS NEARS
Zimbabwe is reaching the end game, witnessing the last, desperate throes of a regime that has destroyed one of Africa’s few successful economies, plunged millions of people into grinding poverty and led to the deaths of tens of thousands from malnutrition and lack of medical care.
It may not happen Saturday, when President Robert Mugabe celebrates his 83rd birthday with cake and champagne at a $1.2 million party while hundreds of thousands of Zimbabweans struggle to survive on bread and water. And it probably will not happen in the weeks leading up to April 18, the 27th anniversary of an end to racist white rule and Mugabe’s ascension to power. But years of abuse and neglect are culminating in untenable crises. “People’s anger is mounting,” said Zimbabwean political scientist John Makumbe. “They are no longer afraid to go into the streets and I think the government is growing very afraid of what may happen.”
The world’s worst hyperinflation is spiraling out of control, bringing shortages of food, fuel, medication and electricity. Police have banned demonstrations in opposition strongholds in the capital, Harare, for three months. And criticism is mounting within Mugabe’s ruling party, which is divided over who will succeed him and when. Mugabe blames sanctions, drought and former colonizer Britain for the collapse of an economy based on exports of a wealth of agricultural and mineral products.
Others blame land grabs over the past several years in which Mugabe encouraged blacks to violently force out most of the 5,000 white commercial farmers who owned 40% of all agricultural land and produced 75% of agricultural output. White farmers had employed the country’s largest work force and their ejection led to the displacement of 300,000 families. The farms, most given to Mugabe relatives, allies and cronies, lie fallow today and Zimbabwe does not have the foreign currency to import food. The World Bank estimates it would take more than 20 years for Zimbabwe’s economy to return to levels in 1980, when the country was considered the breadbasket of the region.
The rate of hyperinflation – running at near 1,600% – has the country in revolt. The number of Zimbabwe dollars that bought a three-bedroom house with a swimming pool and tennis court in 1990 will buy a brick today. A lifetime public worker’s monthly pension cannot buy a loaf of bread. Charities have reported depression, suicide and malnutrition among retirees – including a type of vitamin deficiency affecting gums, bones and hair loss. A hairdresser paid the minimum monthly wage of $30,000 Zimbabwe dollars said her bus fare to work cost more than her salary but she went anyway to get the tips from clients that keep her and her daughter alive.
The list of deserters on the walls of army barracks grows ever longer despite a 300% pay raise in January, which fell short of the military’s demand of a 1,000% increase. The police chief in Harare has said in a confidential memo that he fears his constables will riot. Doctors and nurses have been on strike since December and the rest of the civil service is threatening to join them. Makumbe, the political scientist, said an estimated 70,000 people have died this year because there are no drugs in hospitals and medical equipment like dialysis machines does not work any more.
Bread disappeared off the shelves this week after the government increased the price of grain sold to millers by 10,000% but did not raise the controlled price for bread. Water shortages have caused a cholera epidemic that has killed dozens since November, medical officials said. The government has tried to control inflation by printing money and setting the exchange rate. The official exchange rate is set at 250 Zimbabwe dollars to one U.S. dollar, but the real trading rate is 5,000 to one. Some Zimbabweans are getting rich off the misery. Party and government officials with access to foreign currency buy it at the official rate and then resell it at the real rate, making a huge profit.Link here.
CARICOM PUSHES FREE TRADE WITH CENTRAL AMERICA
Ministers of Trade of the governments of the Republics of El Salvador, Guatemala, Honduras, Nicaragua and Panama – and the countries of the Caribbean Community (CARICOM) – recently met in Belize City to discuss bilateral trade relations among their countries and their experiences in international trade negotiations, including in the multilateral trade forum. The ministers reiterated their commitment to deepen relations in an effort to generate new trade and development opportunities among their countries, and agreed to initiate negotiations to formalize trade relations among their countries during 2007.
To facilitate this process, agreement was reached to use as a basis the current CARICOM-Costa Rica Free Trade Agreement, which provides for accession by other countries of the two sub-regions and is seen as the most appropriate tool for achieving the early realization of enhanced trade relations among the participating countries.Link here.
IRS BACKS DOWN ON U.S. VIRGIN ISLANDS TAX RETURNS
The IRS has responded to criticism over its continuing attack on residents of the USVI, after it required them to file tax returns directly, rather than just through the local tax agency, suspending the 3-year Statute of Limitations that would normally apply. Representative Charles Rangel (D-New York) Chairman of the House Ways and Means Committee had written to Treasury Secretary Henry Paulson, in January, saying, “Situations have been brought to my attention that involve individuals who, in good faith, filed the return with the Virgin Islands and fully paid their liability. The IRS has taken the position that those individuals should have filed their returns with the United States. As a result, the IRS is now asserting deficiencies for the full liability even though many have already paid their share – although perhaps to the wrong government.”
Last week, however, the IRS said it would set a 3-year limit on audits of island residents with worldwide income exceeding $75,000 who immediately provide federal tax returns for the past 20 years. The cause of the problem is an IRS program for the USVI, instituted in 1986 and extended in 2001, which allows certain types of business with investment of at least $100,000 and at least 10, mostly local employees, a 90% income tax deduction. 49 hedge funds took advantage of the program.
In 2004, the IRS and Congress clamped down on abuse of the program by U.S. citizens falsely claiming to be resident in the USVI in order to claim the tax break on income received from local businesses, or on income attributed to them because of their ownership of such companies. Under the new rules, a person has to be resident for at least six months of the year in order to claim the tax break. The IRS’s clamp-down has claimed some possibly unintended scalps as nearly half of the locally-registered hedge funds have jumped ship. 23 hedge funds have left the USVI since 2004.
The Treasury Department and IRS issued a comprehensive package of proposed and temporary regulations in April of 2005. Final regulations were issued in September incorporating many of the comments received on the proposed and temporary regulations, including a number of revisions intended to better reflect the realities of life in the U.S. possessions. Confusingly, Bloomberg reported that the USVI is trying to encourage investment in high-tech companies after the Treasury extended the Islands’ 90% tax break to businesses dealing in intellectual property in September.Links here and here.
THE U.S. ALREADY HAS A FLAT TAX, AND ITS RATE IS 40%
The U.S. has a national flat tax, albeit one with bumps and potholes. Both parties have a vested interest in the theatrical possibilities created by the idea of graduated tax rates. This “idea” should not be confused with reality.
Democrats argue that taxes on the rich should be raised because others need the money. This wins votes from the legions of voters who are not rich. Republicans argue, with great piety, that high taxes crush incentives and should be reduced, and that only then will the American way see a new dawn. Politicians talk this way because they generally talk about only the federal income tax, which offers graduated rates from 10% to 35%. Politicians rarely talk about what real people experience – the true maze of taxes and government benefits. If someone put them all together, we could see what the actual tax burden was. Well, two researchers did it. In a study for the National Bureau of Economic Research, Boston University economists Laurence J. Kotlikoff and David Rapson have found that the all-in marginal tax rate is 40%, give or take a bit.
Most workers will pay about that much on each dollar of income when all taxes – federal and state income taxes, sales taxes, taxes for benefit programs, and others – are considered. As a consequence, a 30-year-old couple earning only $20,000 a year has a marginal tax rate of 42.5%, while a 45-year-old couple earning $500,000 pays at 43.2%. There are some exceptions. A 30-year-old couple earning $50,000 a year, for instance, pays 24.4%, and a 60-year-old couple making $150,000 a year faces a tax rate of 47.7%. The average marginal tax rate on incomes between $20,000 and $500,000 is 40.3%, the median tax rate is 41.8%, and the standard deviation of all of those rates is 5.3 percentage points. Basically, most of us pay about 40%, plus or minus 5.3 percentage points.Link here.
IRS URGED TO GO AFTER ONLINE AUCTION ENTREPENEURS
When it comes to paying income taxes, eBay’s legions of small-time entrepreneurs are on an honor system in which they are supposed to declare their profits to the IRS. Many users, however, ignore the law or are unaware of their obligation. Now a growing chorus of tax experts is hoping to crack down on the cheating by requiring eBay – and other online auctions, such as those on Yahoo, Ubid.com and Amazon – to track users and report their gross sales to the federal government. Armed with such information, the IRS could better seek any taxes owed, potentially reaping millions of dollars in extra revenue for the U.S. Treasury.
But requiring eBay to out its sellers to tax collectors could send a shockwave across its vast online bazaar. Paying Uncle Sam could significantly reduce their profits or even make their businesses money-losers. The latest call for more aggressive tax collection was heard last week at a congressional committee hearing focused on closing the tax gap, the hundreds of billions of dollars in taxes that go unpaid each year. Nina Olson, the national taxpayer advocate [sic] for the IRS, spoke of the heavy burden put on the nation by the shortfall and then cited undeclared online sales – particularly on eBay, given its size – as part of the problem. “The IRS must have the tools needed to address under-reporting of this income,” said Olson, whose job is to voice taxpayer concerns to the federal government.
eBay has 97 million U.S. users, who, in 2006 sold $25.2 billion in merchandise, exceeding the GNP of many countries. More than 720,000 Americans make their primary or secondary income from the Web site, according to a 2005 study. How many eBay users pay the taxes they owe on their online earnings is unknown. But experts suspect the percentage is low.
Virtually all tax filers – 96% – pay what is owed on income that is reported to the IRS by a third party, such as when a bank reports interest earned on a savings account, according to the IRS. However, when a third party does not tip off the government, compliance drops dramatically, to below 50%. The remedy, according to many federal officials, is to expand reporting requirements. The question is, which businesses and what kind of income should fall under the rules?
As part of his proposed federal budget for 2008, President Bush made what many believe is the first step to more vigorously collect taxes on online sales. Although vaguely worded, the proposal would require “brokers”, or middlemen, to collect taxpayer identification numbers from clients and report their sales of personal property to the IRS on a 1099 form if sales surpass 100 transactions or more than $5,000 annually. eBay and other auction sites are not currently considered brokers. But definitions can be changed.
In November, a citizen advisory group for the IRS recommended as much. Expanding the definition to include online auctions, the group said, would open the door to reporting and increased tax compliance. Paul Heller, chairman of the citizen advisory group, made up of accountants and tax preparers, applauded the president’s proposal, but called it so nebulous that it is unclear what kind of businesses he is targeting. Heller, a vice president for JPMorgan Chase, suspects that the provisions are at least partly aimed at Internet sales. “I have no idea who it would be referring to,” Heller said of the proposal, “if not online auctions.”
Jennifer Zuccarelli, a spokeswoman for the Treasury Department, declined to name any companies the Bush proposal applies to. All she would say is that the provisions would affect both online and offline commerce, without discrimination as to the medium. Other than Internet sales, tax experts said that art galleries and consignment stores could be potential targets of the Bush proposal. Hani Durzy, a spokesman for eBay, insisted that his company would be unaffected if Bush’s ideas are enacted as written. eBay does not meet the definition of a broker, he said, because it never takes possession of the merchandise its users sell. In any case, Durzy said eBay does not even know whether any given transaction is completed and therefore cannot report authoritatively about a user’s sales to the IRS.
David Yaskulka, marketing chairman for the Professional eBay Sellers Alliance, an industry group of more than 500 big eBay sellers, said it would not bother him if eBay reported sales information about its users to the IRS. In his experience, big sellers already pay their fair share. His concern is that legislation will unfairly target eBay. All sales venues, online or off, should be treated the same, he said.Link here.
IRS APPOINTS “SEASONED PROSECUTOR” TO HEAD CRIMINAL DIVISION
Eileen Mayer, currently head of the IRS’s Office of Fraud/Bank Secrecy Act and a “seasoned prosecutor” in the words of IRS chief Mark Everson, has been named as head of the agency’s Criminal Investigation Division. “Eileen is a seasoned prosecutor and knows the criminal justice system inside and out,” commented Everson. “She will play a key role in IRS efforts to halt tax fraud. I look forward to her joining the leadership team.”
Mayer came to the IRS in January 2006 after 19 years at the U.S. Attorney’s Office in Washington, D.C. She was deputy chief of the criminal division, supervising the prosecution of federal criminal offenses in the D.C. area. Her tenure included a 2-year detail as an Associate Deputy Attorney General with the Department of Justice and a 3-year detail as special assistant to the Director of the Financial Crimes Enforcement Network (FinCEN). FinCEN is a branch of the Treasury. Her duties at FinCEN included coordinating the implementation of the original Bank Secrecy Act regulations for non-bank financial institutions. The act is the main federal law used to combat money laundering.Link here.
TAX: EUROPE’S NEW BATTLEFIELD
By most standards, Switzerland is surely one of the world’s most inoffensive nations. Resolutely neutral, this small landlocked country is often associated with gentle pastimes such as clock-making, skiing, and Alpine scenery. Many will be therefore surprised to learn that Switzerland has become the target of angry protests by EU officials and sundry European politicians. Judging from their tone, one would imagine Switzerland had engaged in gross human-rights violations.
But instead the EU’s ire is directed against Switzerland’s tax-rates. The war of words was ignited by the French rock star Johnny Hallyday’s decision in late 2006 to move to Gstaad, Switzerland, because he was tired of France’s exorbitant tax-rates. Mr. Hallyday joins an exodus of individuals and companies from France, Germany, Italy, and Austria taking advantage of Switzerland’s 21% overall tax-rate and considerably lower corporate tax-rates. Liechtenstein, Switzerland’s tiny neighbor, maintains even lower tax-rates and has benefited from a similar flight.
For corporate tax-exiles in Switzerland, the situation is especially advantageous. Each canton sets its own corporate tax-rates. This has triggered intense competition between cantons anxious to attract new businesses. In January 2006, for example, the central Swiss canton of Obwalden reduced its corporate tax-rate to 6.6%. Over 11 months, it attracted 376 new companies. No wonder large corporations such as Google and IBM have located their European headquarters in Zurich.
Outside Switzerland, the response has been extraordinary. Some French socialists have accused Switzerland of “looting” its neighbors. This is somewhat strange, given that no-one is forcing these individuals and companies to move to Switzerland. Some would suggest that the real “looters” are French governments of left and right who have raised taxes over the past 40 years to such levels that even many relatively modestly well-off French citizens have left or invested their capital in off-shore tax-havens.
The EU’s new ambassador to Switzerland has charged the Swiss with effectively offering an unfair subsidy that allegedly violates the European Free Trade Agreement. Such statements seem rather self-serving given the EU’s routine subsidization of millions of European farmers to the detriment of farmers in Africa and Latin America. In response, the Swiss government has stated that Switzerland has no agreement for tax-harmonization with the EU and is acting quite within its sovereign rights and according to its federalist principles. “Tax-harmonization” in the EU, incidentally, never means lowering tax-rates. It invariably involves raising taxes to the same high level.
Missing from this debate, not surprisingly, is any reflection about how to think about taxation in a morally-coherent manner. Even low-tax inclined economists almost always consider taxation in terms of how governments can maintain their income while diminishing the effects on economic prosperity. Their focus tends to be on efficiency-issues. But efficiency is not the same as morality. In much of the world, discussion of the morality of taxes has been reduced to the mantra of equalizing incomes as far as possible. Factors such as merit and risk are given short-shrift, especially in Europe.
Indeed, we need to return to 16th century Spain to find anything like a rigorous discussion of the morality of tax-rates. Spanish theologians such as Pedro de Navarra insisted that it was not enough for governments to legislate a tax for it to be considered just. Was there a genuine need for a new tax? Were the proposed taxes proportionate and equitable? Were they moderate or excessive? The same scholars claimed that imposing taxes to support wasteful government expenditures was immoral, even tyrannical. In some cases, they added, people could rightly refuse to pay, especially when taxes were taking nations to the edge of financial ruin.
Instead of using morally-charged language to declaim Swiss tax-policies, perhaps some EU member-states might consider applying these criteria to their own tax-regimes. It is hard to imagine that their high tax-rates would survive such scrutiny. The irony is that the surest way for EU members to discourage potential tax-exiles from leaving is to reduce their tax-rates. There thus seems in this instance to be a happy symmetry between sound moral analysis and fiscal responsibility.Link here.
HM REVENUE AND CUSTOMS URGES EMPLOYEES TO RAT OUT THEIR BOSSES
HMRC last week launched a new radio campaign urging workers who suspect their employer is not paying tax and National Insurance to ring the Tax Evasion Hotline and report them. HMRC’s Director of Risk and Intelligence, Stuart Hartlib explained that, “Employees can tell us about rogue employers who do not correctly apply and account for Pay As You Earn and National Insurance contributions. They are being cheated by their employer. If National Insurance contributions are not paid employees could lose out not only on their State Pension but also other workers’ benefits such as incapacity benefit and contribution-based Jobseekers Allowance.”
Mr. Hartlib added, “If you work for an employer who pays you cash in hand or you think your tax and National Insurance is not being paid, call the Tax Evasion hotline and we will do something about it. You do not need to leave your name and address. Remember, by paying National Insurance you are entitled to benefits – by allowing your employer to get away with it, you’re being cheated.”Link here.
NEW FIGURES CONFIRM ALARMING GROWTH OF UK INHERITANCE TAX TAKE
The number of UK postcode districts in which the average house price is above the inheritance tax (IHT) threshold has more than doubled in the past five years, according to a new report. The Halifax has calculated that the average house price in 236 (11%) postcode districts in England and Wales is now above the IHT threshold, compared to 117 (6%) postcode districts five years ago in 2001.
The IHT threshold is set to rise to £300,000 in 2007-8, up from £242,000 in 2001-2, but this increase has been surpassed by the rate of house price inflation over the same period. Sales above the IHT threshold accounted for at least 25% of property sales in 423 (20%) postcode districts across England and Wales in 2006, compared with 230 (11%) districts in 2001, the report stated. They include 54% of London postcode districts, and 40% of postcode districts in the South East. All regions of England and Wales have postcode districts with more than 25% of home sales above the IHT threshold.
There are postcode districts with average house prices above the IHT threshold in all English regions, apart from Yorkshire and the Humber. 36% of postcode districts in London have an average house price above the inheritance tax threshold of £300,000, while 25% of postcode districts in the South East are priced above the IHT threshold. Since 1995-96 house prices across the UK have almost tripled, more than double the increase in the IHT threshold, which is up 95%. If the threshold had increased in line with house price inflation, it would be now be at a level of £460,000.
Over the five years to 2007-8, Halifax calculates that total cumulative IHT revenue will be £16.4 billion, up more than 50% from the previous five years. Commenting on the findings detailed in the report, Tim Crawford, Group Economist at Halifax stated, “The potential reach of inheritance tax is extending year by year across the country. ... House prices continue to increase more quickly than the inheritance tax threshold. ... We call on the government to raise the inheritance tax threshold to £460,000. That would account for the significant rise in house prices over the past eleven years. We also call on the government to commit to increase the inheritance tax threshold in line with house price inflation in the future.”Link here.
U.K. expats In Spain should beware inheritance tax.
Many British expatriates who have moved to Spain believe that, upon their death, their assets would pass automatically to their spouse tax-free, or be disposed of in accordance with their wishes as outlined in their will. Another assumption many people make is that they will automatically avoid the issue of inheritance tax if they are living overseas. However, this is not the case.
Confusingly, Spanish law dictates that, with regards to British property owners, British law should be applied in the event of death. However, British law states that if you are UK domiciled you are subject to inheritance tax on your worldwide assets. As a general rule, says the Bank, if a person is living overseas, the key factor behind inheritance tax is domicile, rather than residence. Someone’s country of domicile is determined by where they were born and where their father was born. The only way that a person can lose UK domicile is to severe all ties with the UK and dispose of all of UK assets. A person cannot, however, lose UK domicile until they have lived away from the UK for at least three years, and even then they need to convince HMRC that they have acquired a new domicile with no intention of returning home.
Once domiciled in Spain, a person will be subject to Spanish inheritance tax on all of assets. The important factor to note is that where there is both UK and Spanish liability to inheritance tax, one can be offset against the other. It is however, advisable to have a working structure and adequate financial arrangements in place. Consequently, many solicitors advise British expatriates to write a will under Spanish law, stating that they wish to have their assets disposed of according to Spanish national law.Link here.
JERSEY AIMS TO SLASH TAXES FOR BUSINESSES AND RAISE THEM FOR INDIVIDUALS
Competition from other offshore centers and pressure from EU forcing the issue.
Jersey has launched radical tax reforms aimed at slashing taxes for businesses and raising them for individuals, sparking vocal opposition among less well-off locals. The tax haven has proposed the plan in response to competition from other offshore centers and pressure from the EU and other bodies to scrap levies that “discriminate” in favor of foreign investors.
As the British dependency, which is independent of the UK parliament, grapples to satisfy the regulators’ demands without leaving a huge hole in its public finances, it is acting as an exemplar of the social fall-out from reforms across the world’s tax havens. The starting point is a proposal under which corporate tax rates for the finance sector will be halved to 10% and other companies will pay nothing. Jersey’s parliament backed the reforms last month.
The Jersey government says the overhaul is both a response to the EU’s initiative on savings taxes and an acknowledgement of the need to keep pace with centers such as Cayman, Singapore, Guernsey, the Isle of Man and Ireland. At issue are the measures the government proposes to fill a resultant hole in the public finances of between £80 million ($157 million) and £100 million. These would include introducing a sales tax of 3%, lowering tax allowances for people on higher incomes and requiring shareholders resident in Jersey to pay an income tax on their companies’ profits.
While many people support the plan and even more accept the need for change, there is anxiety over its effects, particularly on people with no or low incomes. The Channel island is home to more lower-income people than outsiders might imagine. Locals say the cost of living is high, in part due to a combination of transport costs, harbor duties and lack of competition between shops. A pint of milk costs 55p on average, compared with 34p in Britain. Income levels also vary sharply. Average weekly earnings range from more than £700 a week in the finance sector to £300 in hotels, restaurants and bars. The service industries are staffed in significant part by immigrants from outside Britain and Ireland, who account for more than 10% of the population.
The controversy over tax breaks for business and the rich may be far from unique to Jersey, but the island’s size and dependence on the finance industry make it a particularly vivid illustration of the forces shaping fiscal systems worldwide.Link here.
NEW HEAD OF RUSSIAN TAX SERVICE “NOT A SECURITY OFFICIAL”
Mikhail Mokretsov, former deputy chief of the federal tax service, has been appointed to head the tax collection department following a cabinet reshuffle by President Vladimir Putin. Mokretsov, deputy chief of the tax service for the last three years, replaces its former head Anatoly Serdyukov, who has been chosen by Putin to stamp his authority on the defence ministry. Introducing Mokretsov to the press last week, Finance Minister Alexei Kudrin stated that the new tax service chief is “not a security official” and described him as “a competent administrator,” raising the possibility of a less heavy-handed approach to tax compliance by the tax service.
The actions of the tax service under Serdyukov have tended to dent business confidence in Russia over the last three years, with several major companies becoming the target of ongoing tax investigations, the most notable of which involved the now bankrupt oil firm Yukos. Other companies in the energy sector, including BP-TNK, the joint Russo-British venture, have also fallen foul of the tax inspectorate. Prior to his new role, Mokretsov had supervised several departments, including income and indirect tax administration, an analysis and planning department, and the Siberian regional tax authority.Link here.
MAURITIUS OVERHAULS DOUBLE TAXATION AVOIDANCE AGREEMENT
India Inc. may soon lose the freedom of saving on tax by investing through special purpose vehicles (SPVs) registered in Mauritius. The Indian Ocean nation is all set to tighten its laws to prevent abuse of the tax treaty with India and check “round tripping”. Resisting Indian moves to review the DTAA between the two countries, Mauritius has offered to overhaul licensing conditions for Indian companies to prevent reinvestment of Indian funds through Mauritius.
The Mauritius government has also proposed to set up a joint monitoring mechanism with New Delhi to keep an eye on investments flows into India. These moves could check “treaty shopping” by Indian companies which opt for the Mauritius route to save tax. The measures proposed by Port Louis would be reviewed regularly to oversee their implementation and study their impact over the next three years.
Mauritius’s response comes in wake of India seeking a review of the DTAA. Mauritius has proposed a slew of measures like amendment to certain laws by the Financial Services Commission (FSC), the market regulator of the Indian Ocean nation, to prevent treaty abuse. The FSC will amend its laws to make sure that no “Indian sourced fund” is reinvested in India through Mauritius to take advantage of tax breaks. Under the India-Mauritius DTAA, there is exemption from capital gains tax. The FSC will also tighten the existing licensing conditions applicable to companies promoted by Indian residents which will prevent round tripping. The commission had, in 2006, amended the procedures for obtaining a tax residency certificate which allows an investor to get sops under the DTAA.Link here.
HONG KONG OFFERS GENEROUS TAX CONCESSIONS IN BUDGET AMID HUGE SURPLUS
Hong Kong’s Financial Secretary Henry Tang announced several tax relief measures and concessions in his budget speech this week amid a huge surplus in government finances and weeks ahead of the territory’s leadership election. Analysts said the “people’s budget” will help the administration win the support of the general public, but noted that it failed to address some of the business community’s concerns such as a reduction in profits tax and broadening Hong Kong’s tax base via adoption of a goods services tax (GST). Tang said that while the government remains wary of volatility in the global financial markets, the government is in a fairly comfortable position to give away an array of tax benefits to different segments of society.
Tang said the government expects to generate a budget surplus of HK$55.1 billion (1 US$ = 7.8 HK$) in the fiscal year ending March 2007 as the economy expanded 6.8% in calendar 2006. Economic growth in Q4 of last year was at a higher-than-expected 7.0%. The projected budget surplus vastly exceeded the government’s original estimate, which was for a surplus of just HK$5.6 billion. Tang asserted that the government’s ability to ease the public’s tax burden was tempered by a recognition to “avoid narrowing our tax base further and adhere to the principle of affordability.”
Chief Executive Donald Tsang, who is widely expected to secure a fresh term of office in the March 25 elections, has described as proactive and pragmatic the budget’s initiatives to improve employment, the economy and people’s livelihood. “It (budget) fulfils the government’s pledge to place wealth in the hands of the people,” Tsang said.
Among the prominent measures outlined in the budget is a proposal to widen personal income tax bands to the 2002-2003 levels. Under this scheme, the lower end of the taxable salaries band width will be increased to HK$35,000 from HK$30,000, which would involve imposing a 2% tax on the first HK$35,000 of an employee’s annual salary. Under the same proposal, the two highest marginal tax rates will be reduced to 12% and 17% from 13% and 19%. Tang also said a one-time tax relief will be offered to taxpayers, including a waiver of 50% of salaries tax assessed for the year to March 2007, subject to a ceiling of HK$15,000.
Other tax relief measures include an increase in child allowance to HK$50,000 from HK$40,000 for each child and an additional one-time child allowance of HK$50,000 for each child in the year of birth. To encourage the development of a knowledge-based economy, the government proposed an increase in the maximum amount of deduction for self-education expenses to HK$60,000 from HK$40,000.
Meanwhile, in a tax concession to property owners, the government proposed to waive taxes on apartments for the first two quarters of the next fiscal year which begins on April 1. The waiver will be subject to a ceiling of HK$5,000 per quarter for each apartment. Tang said he expects that 99% of domestic properties and 86% of non-domestic properties to be spared from such taxes during the period.
Agnes Chan, partner at accountancy firm Ernst and Young, said the government was more generous this time compared to the previous years in handing out an array of tax relief measures to different sectors, including the middle class. “Unlike in the past when disgruntled segments spoke out for being left out of tax concessions, I believe this year’s budget will win wide support in the community because there is something for nearly everyone, except the business community,” she said. She noted that Tang’s failure to address the long-term structural problem of the need to broaden Hong Kong’s tax base through the introduction of a goods services tax (GST) is bound to disappoint the business community, including overseas institutions like the IMF. “I believe officials deliberately set this aside because of the elections this year and because of the widespread opposition to this tax measure,” she said.
Paul Chow, tax partner at Grant Thornton Hong Kong, said Tang’s failure to address the proposed GST is a big letdown to the business community. “I’m sure overseas business institutions, including the IMF, will be upset and disappointed that the government has not done anything to advance its long-term objective of broadening Hong Kong’s tax base,” he said. “Developed countries did not have huge problems introducing some form of a goods services tax and they now have the benefit of having a stable revenue source. In this regard, the (Hong Kong) government does not have ample political will,” he said. Chow added that the local business community is disappointed that the government did not see fit to reduce the corporate profits tax rate, currently at 17.5%, even by 50 basis points. “There will be noises over this issue, but I don’t expect strong protests either,” he said.
Chow said that Tang’s budget this year is more populist than anything else because most of the tax measures that he proposed to implement were largely aimed at meeting the general public’s clamor for some form of “wealth sharing” in a bumper year when the surplus far exceeded the original estimate.Link here.
WHERE IS THE BEST PLACE TO HIDE MONEY? A BURGLAR TELLS
I had quite the interesting conversation with a person who happened to be a former burglar. I figured that if you wanted to know the best place to hide your money from a burglar, a former burglar was the person to ask. I started off simply and was not surprised by the answer to the question “where is the best place to hide your money?”
“At the bank,” he said with a sly grin When I rephrased and asked where the best place to hide money and valuables in the house would be if you had such items there, I was taken a bit by surprise by his answer. “It does not matter how clever you think you are or where you hide it in your house, if I have enough time, I would be able to find where you stash your valuables,” he said bluntly. He then explained that what was much more important than the actual place where you hide your valuables is that you understand a burglar’s motivations. Basically, he has two:
When you begin to think of it from this perspective, how you should hide your money changes a bit. Obviously, you do not want to leave all your money in the places where the burglar will first look, like dresser drawers, drawers by phones, desks, closets, a safe (if not bolted down), boxes, jewelry boxes, purse, etc.). That being said, you also do not want to hide all of your money too well for the following reason: “If I cannot find money and valuables in the normal places I usually find them, I would continue to tear the house apart until I found something. Remember, the first rule is to to steal money and valuables. We will keep looking until we find something.”
Your best strategy, then, is to actually leave some money in obvious places for the burglar to quickly find (the same applies if you keep all your money in the bank). This can not only save your other stash of money, but may actually keep the burglar from destroying your place as he looks for where you have hidden your money. If they believe they may have found the cash that you have in the house, they are much less likely to keep looking. In the end, if you hide all your money well, you may win a moral victory, but you will likely have much more damage done to your place that will end up costing you more in the long run. The next obvious question was, “How much money should you leave for the burglar to find?”
“It depends on the area where you live. If you are in a upscale community and only leave $100, I would assume there is more and keep looking. In a different part of town $100 would convince me I found all the money that was there and leave.” When it comes to hiding valuables, his suggestion is to mark an envelope in an easily accessible drawer or with files by your computer with “Bank Safe Deposit Box” on the outside and a list of items on the inside. This will tip off the burglar that your most valuable items are stored at the bank and will discourage him from tearing up your house looking for them.
So where is the best places to hide money? His number one recommendation for money was in toys in a young child’s room. As he explained, young children do not have money, they have an abundance of toys and most parents do not trust a child around money. Therefore, parents will rarely hide money there. In addition, when money is hidden, it is usually hidden away neatly and securely – a child’s room is rarely a neat place making it an unlikely place for money to be hidden. Plus with all the stuff in a child’s room, it is not someplace that a burglar can search quickly and get out.
If you have a safe, it should be professionally bolted down so it cannot easily be removed. If you leave some token money for the burglar to find in the places they normally look for money, then anyplace you would not normally consider a place to hide valuables will usually keep those valuables safe. The underside of trash cans, inside laundry detergent, inside false packaging (But only if the packaging appears real and is in the appropriate place. “When you find a Campbell’s soup can in the bedroom, you have a pretty good idea there is money inside”) were some examples he gave.
You also need to be smart. He related one time a person had left wads of money inside the empty battery areas of electronics around the house. The problem was that although he had not found the hidden money at first, the electronics themselves were worth money and he took those to sell. Only when he got home and was checking that everything worked did he find the hidden cash.
One last tip. Make sure that your significant other (or someone close) knows where your hiding places are. If something unfortunate happens to you and nobody knows where your hidden stash is, it is unlikely that they will be able to find it if a burglar is not. Worse, it could end up being accidentally thrown away.Link here.
BACKERS OF THE ULTIMATE GIFT HOPE IT WILL MAKE YOU HIRE A FINANCIAL PLANNER
Coming soon to a cinema near you: The Ultimate Gift, a motion picture about intergenerational wealth transfer. Pass the popcorn? No. Pass the assets. Having had an advance screening, we can tell you authoritatively that you have never seen a picture like it. Take It’s a Wonderful Life, add The Heiress, put in a pinch of The Millionaire (a 1931 goodie with George Arliss) and you are starting to get warm. Starring James Garner, it is a witty, winning explication of how – as today’s financial planners like to say – you can “leave your legacy” successfully.
The movie is the latest brand extension of what started as a little book (154 pages) on wealth transfer and has now turned into almost a cult for certain financial advisers. The Ultimate Gift was originally a novel dictated in five days by Jim Stovall, a blind author, TV producer and motivational speaker. It was published in 1999 for a book club, then again in 2000, for retail distribution. Sales were slim. Then one day Stovall got a call from Amazon.com asking what he was doing to cause bulk buys of 200 or 300 copies at a time. “I had no idea,” he says. But he investigated and found the book had become a huge hit with trust officers, estate planners, wealth coaches and other financial advisers. They were buying it for clients.
To date the book has sold 4 million copies, with no promotion or advertising. Not a financial advice book filled with tips and techniques, it is instead a fable that teaches that the right way to hand down money is first to hand down one’s values.
Stovall says two studios optioned the novel for a movie, but he did not like the scripts. He was later contacted by Rick Eldridge, owner of a movie production company in Charlotte, N.C., who agreed to Stovall’s treatment. Eldridge eventually rounded up financing of $14 million from the Stanford Financial Group, a wealth management firm in Houston. The firm liked the movie’s message, as well as its potential for use as a marketing tool. Stanford has been showing the movie to prospective clients at private screenings, in advance of the movie’s March 9 general release.
The movie is about Red Stevens, a fabulously rich oil and cattle baron played by Garner, who is nearing death. He regrets that instead of bequeathing his values and his philosophy of life to his heirs, he gave them only money. His pampered kids are a squabbling bunch of good-for-nothings. To whom, then, can he entrust his $3 billion estate? His best bet looks to be his grandson, Jason. This young man is screwed up, too, but not so badly that he cannot be straightened out. But how? One hint: Red, premortem, makes a set of videos intended to inoculate the young man against the corrupting influence of money. Not to leave a potential profit center untapped, Stovall and his partners may allow legacy-leavers to record videos for heirs from the very same set used by James Garner in the movie.Link here.
FINACIAL GURU SUZE ORMAN WISHES SHE COULD WED SAME-SEX PARTNER
(Apparently the guru has never heard of trusts.)
Financial guru and best-selling author Suze Orman says she wishes she could marry her partner Kathy Travis, partly because it would save them both a lot of money. “Both of us have millions of dollars in our name,” she told The New York Times Magazine. “It’s killing me that upon death, K.T. is going to lose 50 percent of everything I have to estate taxes. Or vice versa.”
With a liquid net worth of about $25 million and real estate holdings of $7 million, Orman said she enjoys spending money and playing the stock market. She said she has about a million dollars in the market, “because if I lose a million dollars, I don’t personally care.” Orman said, “women don’t understand money. They will go into debt to pay for this and that.”
Orman honed her financial skills as a vice president of investments at Prudential Bache Securities and as an account executive at Merrill Lynch. She has written five New York Times bestsellers including The Money Book for the Young, Fabulous & Broke and The Courage to Be Rich, according to her bio on CNBC. Her latest book, Women & Money, is due out in March.Link here.
LAW FIRM EXPECTS RECORD-BREAKING YEAR FOR BVI BUSINESS THANKS TO COMPANIES ACT
On 1 January 2007 the British Virgin Islands Business Companies Act 2004 (the BVI BC Act) became the sole Business Companies Act in the jurisdiction, creating positive changes for financial institutions and corporations undertaking a wide range of structured asset and project finance transactions in the BVI, according to Walkers, the global offshore law firm. Walkers expects 2007 to be a record-breaking year in the jurisdiction, especially as regulatory changes enhance the business environment for both financial institutions and corporations.
“The full adoption of the BVI BC Act has been highly anticipated by both BVI institutions and global organizations and legal counsel,” Christopher Lloyd, a Senior Partner in Walkers’ BVI office, said. “The new regulations allow corporations much more flexibility in structuring their particular transactions in ways that are most advantageous to their business goals. At the same time, the rules incorporate sophisticated creditor protections. That careful balance of the interests of corporations and financial institutions has proven extremely popular, as evidenced by a surge of new business activity in the BVI flowing out of the new act.”
The BVI BC Act replaces the International Business Companies (IBC) Act, which was enacted in 1984 and was credited with bringing more than 690,000 registered companies to the BVI. Companies could register under that BVI BC Act as early as 2005 and Q1 2006 saw a 13% increase with nearly 18,000 BVI BCs incorporating, compared to company incorporations in Q1 2005. It is expected that this upward trend will continue as more corporations embrace the new regulations. “Many of the features of the BVI BC Act will be very attractive to financial institutions and corporations looking to undertake structured asset and project finance transactions,” observed Jack Boldarin, who joins the BVI corporate finance team as a partner from Walkers’ Cayman office.
Another advancement for the jurisdiction is the introduction of a new Internet-based information system – Virtual Integrated Registry and Regulatory General Information Network (VIRRGIN). The Financial Services Commission of the BVI launched the first phase of the system in December 2006, allowing documents to be filed electronically, around-the-clock, with the Registry of Corporate Affairs. Once the VIRRGIN system is fully implemented its features will include the ability for public searches of company records online, electronic filing of all documents, electronically signed certificates, and electronically stamped and returned memoranda and articles of association.Link here.
EUROPEAN COMMISSION PUBLISHES GUIDANCE ON TRANSFER PRICING
The EC announced that it has adopted a Communication based on the work carried out by the EU Joint Transfer Pricing Forum. Transfer pricing rules aim to ensure that in cross-border situations, related companies allocate the correct tax base to the countries in which they trade. The EC and Forum consider that Advance Pricing Agreements (APAs) are an appropriate tool to increase legal certainty and to lessen transfer pricing burdens on taxpayers. Therefore the Commission has drafted guidelines for APAs which will make it easier for companies to avoid some of the problems caused by different transfer pricing rules in Member States.
APAs are agreements between the tax administrations of EU Member States concerned, defining how and where future transactions between related taxpayers established in two or more Member States will be taxed. They can be an effective tool for avoiding disputes between taxpayers and tax administrations, since tax administrations, with the agreement of the companies involved, have agreed in advance a mechanism for calculating how the profits of the companies will be split.Link here.
ISLE OF MAN WARNS OVER FAKE BANK
The Isle of Man’s Financial Supervision Commission has issued a warning with regard to Oceania Bank PLC, which claims to be located in the jurisdiction. The bank’s address is given as “The Admiran House, 19-21 Loch Promenade, Douglas, Isle of Man, IM1 2LX”. However, research by the Commission has established that the entity has no association whatsoever with this address.
According to the FSC, “The above entity is not a company incorporated within the jurisdiction of the Isle of Man. ... The above entity is not licensed by the Financial Supervision Commission to undertake banking business or any other regulated activity.” The Commission went on to add that it has established no association between this entity and any genuine Isle of Man companies, and that it has established no genuine links between this entity and the Isle of Man. “Under the circumstances, the Commission would strongly urge persons considering dealing with this entity to exercise the greatest possible caution before proceeding, bearing in mind the contents of this public notice.”Link here.
YOU ROBOT: WELCOME TO THE MACHINE, PART II
What happens to life when one is under 24-hour surveillance?
“Welcome my son,
Welcome to the machine.
Where have you been?
It’s all right – we know where you’ve been ...”
– Pink Floyd, Welcome to the Machine (1975)
There is this friend of mine ... He works in the financial industry, lives in a well-appointed, relatively new home in an idyllic suburb of a booming city, is married to a lovely, charming woman, and has an adorable year-old son. He is from a fine, relatively soap-opera-free family, in which everyone is educated and more or less gainfully employed. He works out several times a week, drives a Lexus, and plays golf or goes clay-bird shooting when he gets a chance. Like most people, he is saving too little and juggling his fair share of debt. Bottom line: I consider this friend of mine reasonable, sane, and well adjusted – and very likely quite representative of the typical middle-class American professional ...
And judging by a surprising amount of the reader mail we got in response to Part 1 of this series, my friend is VERY typical in the sense that he does not mind if everything he does and everywhere he goes is recorded and scrutinized by the eyes of law enforcement. He is not the least bit worried about living his life on camera. “I have nothing to hide, so what do I have to fear from being on camera?” Again, this friend of mine is reasonable, and his thinking is reasonable ... given one very UNreasonable (yet seemingly universal) supposition: That our safety is the only aim of our government’s omni-prying eyes.
An absurd number of laws that govern every aspect of our lives. There are literally tens of thousands of pages of legislation that we do not know we are violating until we are caught running afoul of it. The vast majority of laws are typically punishable by fines, not incarceration. It is part of a vast revenue and control machine, the bottom line of which is that everyone is guilty of something. We just do not know it until after the fact. Or more accurately, until we get the bill. There are literally so many laws that one cannot help but break a bunch of them. I have even seen cases of laws that contradict each other. No matter what you do, you are a criminal.
But because in the eyes of the court ignorance of the law is no excuse for breaking it (if you ask me, it is the ONLY valid excuse), all it takes for the revenue machine to grind onward is for an appropriate agent of authority who knows which laws we are breaking to see/catch/detect us in the act, and we are slapped with a fine that goes directly into Big Brother’s pocket. The only thing currently protecting us from being nickel-and-dimed to death with fines for our inadvertent lawlessness is the fact that there are not enough cops, IRS auditors, ATF agents, etc. that actually know all the laws who are in a position to catch us every time we accidentally break one of them.
Seriously, very few people in positions of authority really know much about the law. The average cop on the street, for instance, has a very poor grasp of it. So citizens’ ignorance of the law is NOT an excuse for breaking it, yet enforcers’ ignorance of the law is the very thing that keeps many of us from routinely being caught breaking it! Right now, only two things give us a safety net against an unwitting career in crime, or a bankruptcy at the hands of petty fines: (1) The fact that the mere mortals that enforce laws cannot keep track of the hundreds of thousands of them that govern us. (2) The eyes of authority are not on us frequently enough to catch us breaking the million or so laws we do not know about.
So how will this dynamic change once the detection of unlawful behavior is no longer the job of humans – but officially delegated to omnipresent, camera-eyed, software-brained, mega-memoried robots that CAN keep track of thousands of laws simultaneously? Think we will not all of a sudden find out just how inadvertently criminal we really are, even those of us who “have nothing to hide”? Think we will not find out very quickly just how many ways our elected officials have legislatively transformed us from upstanding citizens into petty outlaws? This is already happening. Cameras on highways and at stoplights are handling the enforcement of moving violations now, instead of flesh-and-blood cops. Do you really believe this is about safer roads? Soon robots will be calling in the cavalry on us – or simply mailing us fines and citations – for all kinds of stuff we had never have known or imagined we were doing wrong ... And we will be lucky if it does not bankrupt or ruin every one of us.
One of the more disturbing aspects of this coming quagmire is something I touched on in Part 1 of this essay. That is the likelihood that soon, robots (camera-equipped computers) will be making the determination of what constitutes suspicious behavior. Basically, they will decide what warrants the scrutiny/investigation of a law enforcement officer under the “probable cause” standard. This seems to me to be uncharted legal waters. Increasingly, the line demarcating “generalized” surveillance is creeping toward “omnipresent” surveillance – especially with the approaching implementation of HAA (High Altitude Airship) technology. Once the monitoring duties are transferred to robots, are the legal limitations on when and where we can be peeped on still valid?
If heartless, soulless, emotionless machines, instead of real people, are watching us, complete with their fantasies and agendas and corrupt urges and senses of humor, does this constitute any unconstitutional breach of privacy rights? Can MACHINES invade a person's privacy, especially if they are programmed to block all external access to their images and call in the cavalry only if they detect crimes being planned or committed? I am betting that the feds would argue no.
By virtue of their lack of humanity, I am betting it will one day be determined that robots could watch us in every room of our houses, every moment of the day, and never invade our privacy in the eyes of the law – as long as we do not do anything illegal. However, if we did do something that met some cyber-definition of “probable cause” for illegality, the cops these robots summon would have every right to invade our privacy based on that determination. But what if, upon a court’s review, a surveillance machine were found to have misinterpreted innocent actions and wrongfully determined probable cause, yet the cops that busted in the door found evidence of law-breaking anyway?
Are these crimes “fruits of the poison tree” since the robot made the wrong call on probable cause? Or are they still prosecutable under the “plain sight” standard? How do you think your state’s courts would rule on this, given the fact that a lot of money in fines hangs in the balance? I am telling you, what is coming is yet another legal and financial quagmire for ordinary people and a bonanza of cash for governments.
But that is not even the worst wrinkle in the coming “eye, robot” reality. What I am most afraid of, should (when) omnipresent robotic surveillance become a reality is not getting caught and fined to death for laws I unknowingly break. Nor is it being filmed in embarrassing or compromising positions and having these images somehow reach the Internet or some government database. What I am really worried about is that, if we accept or rationalize the necessity that everything we do is being watched and scrutinized, we will inevitability stop doing the right thing simply for its own sake. We will only do it out of fear of being seen doing the wrong thing. It is easy to do what is right when someone is watching. What is hard, and what leads to character, honor, and all the other things good people (and good leaders) should be made of, is doing the right thing when NOBODY is looking. And if we are on camera every minute, we will no longer have a need for such inner integrity. Doing what is right will be simply an exercise in hassle-free living, not an impulse that comes from within.
The most laughable and terrifying irony of all is that when this happens, we will have become the robots, and the robots us! We will have literally switched places. The robots will have become pseudo-citizens in the sense that they will be making more and more of society’s most crucial decisions (like determining probable cause for arrest). And citizens will have become robot-like, in that they are no longer directed from within by their hearts, consciences, and sensibilities – but from without by the need to integrate themselves with the dictates and perceptions of a cyber-system.
In this world, we will not wrestle and tickle and roughhouse with our kids anymore, for fear of drawing child abuse charges ... We will make love “by the book”, lest our rambunctious role-playing be construed as domestic violence ... We will only make one pass over that engagement ring in the store window, for fear of being seen as casing the place ... We will not leave that box of clothes and blankets on the street corner where the homeless guys congregate every night, for fear our “abandoned parcel” would trigger a bomb alert ...
In other words, we will be programmed (literally) not to do anything spontaneous or nutty or risky or gutsy or sexy or romantic or valiant or compassionate or humorous or creative or HUMAN anymore, for fear that the machines will see it as criminal in their literal ones-and-zeros minds. That is a reality I will risk any terrorist plot, any drunk driver, any hazardous neighborhood, any crazed mall gunman, any sexual predator, any crime of passion, or any serial killer to avoid living in ... Because if my life is not discernibly human, what is the point of protecting it?Link here.
CONGRESSIONAL COMMITTEE PROBES TSA WEBSITE GAFFE
A powerful congressional committee is investigating a Transportation Security Administration website that promised to help air travelers caught up in terrorist watch lists, after a Wired News blog revealed that the site was potentially exposing user’s personal information to eavesdroppers. The House Committee on Oversight and Government Reform asked the TSA on Friday to turn over documents related to the Traveler Verification Identity Program website to determine how the site was designed, and whether government security and privacy regulations were violated.
That site was intended to allow domestic airline travelers whose names are similar to entries on the government’s No Fly List and other watchlists to submit a complaint online, instead of calling TSA and requesting a form be sent to them by mail. However, the site was full of misspellings and nonsensical directions, and asked travelers to provide sensitive personal information on an unencrypted page. Travelers in an airport using a wireless connection would be at risk of having their personal information stolen and used to commit identity fraud. Additionally, the site, which was entered from a link on the TSA’s main website, was hosted on the website of Desyne.com, a web design company that has a P.O. Box as its contact information – adding to the impression it was not a legitimate government site.
Committee chairman Rep. Henry Waxman (D-California) told TSA that the “overall appearance of the site was so poor that Web experts first assumed it was a so-called ‘phishing’ site, a site internet hackers had created to look like a TSA website page.” Waxman also asked the agency to turn over by March 9 documents regarding Desyne, communications about security with that company, and the period of time that the site was running without encryption.
The Traveler Verification Identity Program site was taken down last and replaced by a completely different webpage offering the same service, but now called the Travel Redress Inquiry Program, or TRIP. The TRIP site is also aimed at helping innocent travelers prone to being snared by government watchlists, which have swelled to more than 100,000 names. The watchlists’ size and lack of details have led to repeated hassles for people with common names, including senators, government employees with security clearances, and at least one nun. Homeland Security officials hope the new system will reduce travel delays for those travelers by creating a “white list” of cleared individuals that will accompany the watchlists distributed to airlines and border security employees.
The new TRIP site, however, is not without privacy issues. It places a tracking cookie labeled “Forsee Loyalty” in browsers of people using an Apple computer. Government websites are not supposed to use such cookies unless there is a good reason, and the head of the agency signs off on their use.Link here.
POWERFUL X-RAY MACHINE DEBUTS IN PHOENIX
“Backscatter” visually strips off clothing, to be used on voluntary basis (for now, anyway).
An X-ray security scanner that can see through clothing has been put into its first operational use at Sky Harbor International Airport and could be rolled out to two other major airports by year’s end. The so-called “backscatter” technology has been controversial, with critics saying the high-resolution images are too invasive. But the TSA adjusted the machine’s images so the normally graphic pictures can be blurred in certain areas while still being effective at detecting concealed weapons or other threats.
Passengers selected for secondary screening by the device are asked to stand in set spots in front of the closet-sized X-ray unit with hands palms out, then turn around for a second screening from the back. The entire operation takes about a minute. The machine will be tested for up to 90 days at a single checkpoint at Sky Harbor’s largest terminal. The technology could be left in place after the trial period, and the agency hopes to also roll out the technology at Los Angeles International Airport and New York’s John F. Kennedy International Airport by year’s end. During the pilot program, the machine will be used only as a secondary screening measure. Passengers who fail the standard screening process will be able to choose between the new device or a typical pat-down search.
The TSA said that the security officer who works with the passenger going through the screening will never see the image the machine produces. The images will be viewed by another officer who will be about 50 feet away and will not see the passenger. The machine cannot store the image or transmit them.Link here.
POLICE STATE, GERMANY
Hilter-era law invoked against home schooler.
German authorities who sent 15 uniformed police officers to take custody of a 15-year-old girl who committed the crime of being homeschooled now have suggested a solution that, in their minds, would “resolve” the situation. The parents should give up custody of their other five children. Melissa Busekros had fallen behind in math and Latin, and was being tutored at home. When school officials in Germany, where homeschooling has been illegal since Adolph Hitler decided he wanted to control the educating of all children, discovered that fact, she was expelled. School officials then took her to court, obtaining a court order requiring she be committed to a psychiatric ward because of her “school phobia”.
She later was moved to a different hospital without her parents’ knowledge, and then put in foster care. She was permitted to make a telephone call to her parents, although she was not allowed to let them know where she was. Then the court decided while none of those restrictions would be lifted, she would be allowed to meet for one hour a week with her parents, as long as the meeting took place in a government building. Now the Home School Legal Defense Association, the nation’s largest homeschool organization with more than 80,000 member families, has confirmed in a news alert to members the German government’s offer to the family. “The authorities wanted the Busekros’s to give up custody of their other five children in order to resolve this situation. Hubert said the authorities are considering doing psychiatric exams on the other five children in order to implicate Hubert and his wife as unfit parents and thereby break up the family, the HSLDA said. Such actions, the homeschool organization said, are “an outrage.”
“There are approximately 40 other cases pending in Germany [against homeschoolers],” the HSLDA said. “Many homeschool families have fled to Austria or another nearby country where homeschooling is legal. The German government is persecuting these innocent families without mercy. The German Embassy has indicated they cannot allow ‘parallel cultures.’ Christian homeschooling is a ‘parallel culture’ that Germany does not want.”
“It is beyond belief that Germany is still enforcing a law that was written for one reason only – to be used by Hitler to control and indoctrinate German youth. It had no other redeeming value,” said Shoshona Bat-Zion on a homeschoolers’ blog. American homeschoolers need to be worried because the ease with which similar restrictions on free choice could be imposed in the U.S., if the U.S. ratified U.N. treaties such as the U.N. Convention on the Rights of the Child, or the European Convention on Human Rights, which is an offshoot of the U.S. Universal Declaration of Human Rights. That is the foundation being cited by the German government to ban homeschooling entirely, and to indoctrinate public and private school students. In the last several years, many homeschooling parents in Germany have been sentenced to prison for teaching their children in a Christian lifestyle.
Michael Farris, cofounder of the Home School Legal Defense Association, has called for an amendment to the U.S. Constitution to protect the right of parents to educate their children at home, in light of such developments in Europe. His concern is exactly that U.N. Convention on the Rights of the Child, a plan already accepted as law by many nations around the globe. A homeschool advocate in Germany who works with Netzwerk-Bildungsfreifeit, earlier wrote, “We are not far away from an intolerant dictatorship in our country. Parental rights are more and more abolished. If you do not educate the way the state wants, the so-called Jugendamt (youth welfare office) is quick to check out if they can take away the custody of your children.”Link here.
CITY OF LONDON MINISTER UNVEILS CRACKDOWN ON MONEY LAUNDERING
“Asset freezing” to be heavily featured.
The self-styled City minister Ed Balls will announce today creation of an “asset freezing” unit at the Treasury to target criminal and terrorist bank accounts as part of a sweeping crackdown on money laundering
Mr. Balls will also announce new measures to “safeguard the charitable sector from terrorist abuse” with an additional £1 million of funding to the Charity Commission to ensure it has the resources to “disrupt terrorist exploitation of charities and protect donor confidence.” Other measures to be announced include the creation of a licensing system for “money services businesses” such as money transfer services and bureaux de change, underpinned by a new action plan from HM Revenue & Customs for regulating them. Law enforcement agencies will be required to make proper use of data held at Companies House while new targets will be set for the recovery of “dirty money”. Mr. Balls also said he wanted to improve data sharing between the public and private sectors and create a new Money Laundering Supervisors Forum.
The strategy is being launched before Britain takes the presidency of the Financial Action Task Force (FATF) in July. The intergovernmental body’s goal is to combat the laundering of dirty cash and strangle the flow of funds to terrorist organizations. The FATF recently voiced alarm over misuse of charities to provide funding for terrorists: “The misuse of non-profit organizations for the financing of terrorism is coming to be recognized as a crucial weak point in the global struggle to stop such funding at its source.”
The FATF has demanded that all countries “review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. Non-profit organizations are particularly vulnerable, and countries should ensure that they cannot be misused by terrorist organizations.”
Mr. Balls stated, “The Government’s overriding goal is to protect its citizens and reduce the harm caused by crime and terrorism. We know that finance is the lifeblood of terrorist operations.” However, Mr. Balls sought to ease the pressure on businesses by introducing measures to simplify onerous identification and due diligence checks. The Financial Services Authority, which imposed a series of heavy fines on banks for having “weak” anti-money laundering controls a couple of years ago has been consulted on the plans.Link here.
UK’S FINANCIAL SERVICES AUTHORITY ACTS HALT ASSISTANCE TO OVERSEAS BOILER ROOMS
The High Court has placed The Inertia Partnership LLP (Inertia) into compulsory liquidation after the company assisted boiler rooms which were unlawfully promoting and selling shares to UK consumers. The order was made against the company as a result of a winding-up petition presented by the FSA because Inertia was found to have arranged at least £1 million worth of investment deals without authorization.
The Judge said that Inertia played a significant role in the operations of these boiler rooms and its participation was calculated to provide comfort and reassurance to consumers. He found that consumers were charged “exorbitant” commissions – up to 200% of the actual price received by the share issuing company. He added that this is an appropriate case for the court to mark its disapproval of Inertia’s activities. The FSA investigation found that investors were cold called by boiler rooms who misled investors. Inertia acted as an “escrow” agent and made arrangements for the purchase of shares in a number of UK companies.
Investigations also revealed that Inertia had dealings with a Seychelles-based company which is not authorized by the FSA and is believed to be involved in boiler room activity. As the company is based overseas the FSA can take little direct action against it. Jonathan Phelan, head of retail enforcement at the FSA, said, “Investors were encouraged to take comfort in the fact that Inertia was based in the UK so their investment was supposedly safe, when in fact it was transferring substantial sums of investors’ money to an unauthorized overseas organization. Because Inertia was not authorized, investors do not have protection for the money they have paid over ... Investors should always be cautious when they are cold called by any firm promoting or offering to sell shares and should first check to ensure that the firm is authorized by the FSA.
“UK companies who are seeking to raise finance for their business should also be aware of the dangers of dealing with unauthorized firms and individuals. Even where UK companies do not realize they have become involved with boiler rooms, they are likely to suffer adverse consequences to their business if the FSA has to intervene in order to protect investors.”
Boiler rooms act illegally by promoting and selling shares in the UK. In the majority of cases, the shares promoted and sold are not listed on a recognized stock exchange so investors will have difficulty selling the shares. The boiler room often vanishes, leaving the investor out of pocket. Because boiler rooms are based outside the UK, the FSA is usually unable to take direct action to shut them down. The FSA can, in some circumstances, take action against a UK based individual or company connected to a boiler room.Link here.
WHY THE REPUBLICANS ARE DOOMED
Imagine that you are blindfolded and told that the food you are about to eat is ice cream. It turns out to be chicken liver. Or imagine that you think you are diving into warm water but instead it turns out to be near-freezing. This is pretty much what it is like to be governed by Republicans, and there is no better case in point than George W. Bush. He, like all Republicans since the 1920s, campaigned as a shrink-the-government man. More incredibly to recall, he blasted the “nation-building” of Bill Clinton and insisted that the U.S. needed a “humble” foreign policy. What we got instead is, well, what we got ... the polar opposite. The man who wailed over Bill Clinton’s big government has made Clinton’s spending record look great by comparison. The guy who decried “nation-building” has decided that bombs and tanks are a great means to inspire a wholesale upheaval in the Gulf region.
What is interesting here is what motivates big-government Republicanism. The party itself has no strong investment in the public sector as it currently stands, apart from the prison bureaucracy and the military. Most civil servants and teachers and postal workers support the Democrats, knowing full well who is buttering their bread. Republicans, essentially, see the public purse as something not to conserve but to loot and give to those who do vote Republican. Thus is the government contracted out – and vastly so. Thus are religious charities eligible for public funding. Thus are private schools encouraged to get on the dole. Thus are industrialists eligible for every privilege one can imagine. Heck, if you are big enough and powerful enough, the Republicans might even start a war on your behalf. This gets very expensive indeed, even more expensive than old-fashioned, reformed-minded, repair-the-schools, renew-the-cities, make-the-government-work social democracy!
And you know how the left says that the Republicans care nothing for your privacy or for individual rights? The Republicans seem to be living up to a caricature of their reputation. Anyone who questions whether the FBI ought to be permitted to tap your phone or read your email, or whether the CIA ought to be able to lock people up forever without a formal charge, is denounced as a leftist.
Where have Republican grassroots been? Here we find disgrace. They were charmed by Bush going into all this, and they have not ceased to be loyal. As for foreign policy, my goodness, the rank and file are gullible in the most ghastly way. These people went from scorning Clinton’s exertions in Somalia to calling anyone who does not support the war on Iraq a traitor to America itself. The display of Nazi-style jingoism has been nearly unbearable. The flag is worshipped as a holy object, the national anthem is treated as a sacred hymn, every character in a military costume is canonized, and the president himself is exalted as a godhead incarnate. Now we know – because we are living through it – the stuff of which fascism is made.
We could go on. But rather than decry the hypocrisy, lies, and unrelenting bamboozlement, it would be more productive to examine the underlying social theory that leads Republicans to campaign one way and govern another. Elsewhere we discussed how the Democrats believe in a conflict-based model of society, with their imagined society consisting of groups of warring tribes (men vs. women, blacks vs. whites, etc.). In the same way, the Republicans imagine that the social order is rife with conflict, but a conflict of a different sort.
Republicans believe that all of society, whether your town, the nation, or the whole world, is divided between those who adhere to the law and those who are inclined to break it. These they define as good guys and bad guys, but it is not always true since the law these days is not the law written on our hearts but rather the rules as laid down by state masters. But this seemingly important point is completely lost on the Republican mind, since they believe that without the state as lawmaker, all of society and all of the world would collapse into a muddle of chaos and darkness.
This view they get from Hobbes. Not that the average buyer of Ann Coulter’s books reads political philosophy. They rather accept a popular version of the fundamental anti-liberal idea: society is a wreck without Leviathan. This is why they celebrate the police more than merchants, why they think that war deserves more credit than trade for world prosperity, why they call drafted killers for the state the “greatest generation”, whereas the pioneers of the 19th century are merely historical curiosities. In short, their meta-understanding of politics bypassed the liberal revolution of the 18th century and embraced the anti-liberal elements of the Enlightenment. “Up with Hobbes, down with Locke” is their implied creed. Liberty is fine but order – ORDER! – is much more important, and order comes from the state. They cannot even fathom the truth that liberty is the mother, not the daughter, of order. That thought is too complex for the Manichean mind.
Now, it is true that Republicans tend to be better on issues of welfare, environmentalism, social legislation and the like. They reject egalitarianism, more or less, and have no strong beef with business. But none of this matters in the defense of liberty because they are intellectually wedded to the state in the most fundamental way. They believe that it and not voluntary cooperation is the source of order in society, and what they fear more than anything is revolution. Freedom, to them, is not a right but something conferred as a reward for good behavior.
I once heard a leading Republican intellectual, a respected figure with lots of books on everyone’s shelves, express profound regret when the Soviet Union was falling apart. The problem, from this person’s perspective, is that this led to disorder, and order – meaning control even by the Soviet state – is the fundamental conservative value. That about sums it up. Even communism is to be tolerated so long as it keeps away what they dread more than death: people within their rights doing whatever they want.
Republicans intellectually inhabit a world long past, a world of warring states and societies made up of fixed classes that fought over ever-dwindling resources, a world unleavened by enterprise and individual initiative. They imagine themselves to be the class of rulers, the aristocrats, the philosopher kings, the high clerics, the landowners, and to keep that power, they gladly fuel the basest of human instincts: nationalism, jingoism, and hate. Keeping them at bay means keeping the world of their imaginations at bay, and that is a very good and important thing for the sake of civilization.Link here.
FEELING, EMOTION, INTELLECT
What do “logical” and “rational” mean? The freedom movement prides itself on being logical and on behaving rationally, but these are relative terms. A human action can only be rational or logical in the context of the situation, and of one’s history, desires, preferences, beliefs, and expectations – all interpreted through the rules of logic as one understands them, and perhaps especially as one does not understand them. Which is to say, as one’s unconscious sees them.
For example, you are in charge of the government (or at least have serious influence) in a large nation, and you have strong, long-held ties to oil companies and government contractors. You can use your government position to initiate or lobby for war overseas (if in areas with oil deposits or potential pipelines, so much the better) generating huge income for favored companies and perhaps for yourself as well (e.g., Dick Cheney’s famous stock options). At the least, you gain the gratitude of multi-billion dollar corporations. The downside of all this is the moral and financial bankrupting of your own nation, the imposition of a police state to monitor and quell dissent, the death of thousands of your own citizens, the death of hundreds of thousands of civilian men, women, and children (plus thousands of foreign soldiers) in the war zones, and the near-eternal contamination of the area (and eventually the entire Earth) with poisonous and radioactive depleted uranium.
But hey, is that really so bad? With scarcely a moment’s reflection, you decide you can live with it. An entire logical structure grows around the issue in your mind, smothering any feeling you might have for the victims, making the war seem necessary and even righteous. The mass killing seem almost like mercy ... a sad but necessary sacrifice for the greater good. Advancing your own agenda is entirely secondary. It is scarcely worth mentioning. It becomes increasingly hurtful when others suggest you have such an agenda. Soon you begin to wonder if those who oppose you should even be allowed to speak.
Where does logic lead you? The scenario above (with much variation) has been played out repeatedly in American history, as Stephen Kinzer describes in Overthrow: America’s Century of Regime Change from Hawaii to Iraq. U.S. government treatment of the American Indian Tribes, in particular, would also fit the basic thread of Kinzer’s book.
How can such intelligent creatures behave so unintelligently? How can humans be so cruel and destructive? The answer is that when our natural ability to feel is disrupted, our behaviors are disrupted as well – because the primary purpose of feeling is to guide behavior. Those bizarrely-oversized upper brains of ours produce such high-wattage symbolic intelligence that we are easily blinded to the other abilities of our brains and bodies, and their importance.
There are actually three distinct brains within us, each experiencing the world in its own way. The lowest level is sometimes called the ancient reptilian brain, and it can be seen at work in lizards and other reptiles and in amphibians – and in any animal, really, because all vertebrates have this level of functioning. It is however the main level available to, e.g., a lizard, and so lizard behavior showcases the character of this lowest level of consciousness, which, as you would expect, includes autonomic functions, midline body control, hunger, mating instincts, raw terror (the feeling in a night terror, for example) and fight-or-flight responses.
The second level of consciousness involves the limbic system or palleomammalian brain. Your dog or cat is a good example of this second level at work. Mammals in general have well-developed second-line consciousness. This level includes expressive emotions – feelings of grief, sadness, joy, and love, among others. Complex social behavior in mammals, including primates, is largely (although not entirely) regulated by second line feeling and perception. One reason dogs and humans get along so well is that there is significant overlap in the social rules of both species, as laid down in the limbic system of each.
The third line of consciousness, based largely in the neocortex, is dramatically expanded in humans – no surprise given the dramatically expanded physical size of that part of our brains. This level of consciousness allows for symbolic thought and complex symbolic language, highly developed deep-time navigation (revisiting the past and simulating the future to learn from experience and to plan ahead), and other characteristics mostly, or most strongly, found in humans.
All three levels work together and communicate with each other. A healthy human has all three levels active and connected. An intertwining stream of threads from all three levels moves constantly into our consciousness, so that we experience the world in part through the most ancient (and therefore most wise, in some respects) part of our brains – brains that were powerful enough to keep our ancestors alive through hundreds of millions of years. We also experience each moment with the middle brain – the limbic system – which has also been our home and our selves for many millions of years, despite being much younger than the beginnings of the ancient reptilian brain. Finally, we have this enormous upper brain and the highly-developed third-line consciousness it allows for.
Three levels, all active, and each conscious in its own fashion. Each with its own agenda and logic. The older, lower levels form the core of our humanity, and create the largest part of our experience. Intellect is the newcomer, and the gigawatt version that humans carry is still something of an experiment. The three levels work together smoothly, each making an important contribution to the whole. Full, normal adult consciousness involves fluid input from all three levels.
Except for one thing. Not a small thing, either. This is the most important fact of human life today, and has been for thousands of years. The character of the human world, and of the human condition, is tied to this one reality, chained down by it, crushed and stunted by it, infected and withered by it into something almost unrecognizable. The results are visible throughout history and nearly everywhere in today’s world. This one thing is a magic trick, really. A trick our ancestors learned and then became virtuosos at. The trick was – and is – a last, desperate attempt to maintain system integrity in the face of overwhelming trauma. It usually succeeds at that, in a fashion, but at terrible cost. The trick is disconnecting experience from full consciousness, while maintaining enough function for life to continue. The name for this trick is repression, and it is a well-established fact of human life.
By definition, repression disrupts communication among the levels of consciousness. The brain’s lower levels are constantly reacting to the sequestered events while striving to prevent upper-level awareness of those events or, failing that, to diminish the impact of third-line awareness of the events. We can know what happened without having felt what happened. The meaning of our experience – the meaning of that part of our lives – is missing The walling-off of lower-level experience from upper-level logic – in plain language, the disconnection of feeling from thinking – is the foundation for most aberrant, harmful, and “illogical” behavior. Compounding the problem is that the system is in a state of tension, waiting for painful experiences (which lower levels of consciousness know about already) to finish their natural and, for non-trivial events, mandated journey to full, tri-level consciousness. The result is a system (i.e., a person) constantly anticipating painful events that have already occurred but have not yet finished happening.
That is how educated, intelligent, functional people, e.g., the infamous “Nazi doctors” of the concentration camps, can behave in such cruel and insane fashion. I am certain that every one of those medical professionals would have told you (and at some level even believed) that they were behaving logically, and would have defended their actions as being “for the good of mankind.” However, their logic had been corrupted by massive, repressed early trauma. “Logic” changes in response to early experience.
Not everyone who suffers a horrible childhood becomes a horrible person. Humans are complex and there are many ways to respond to almost any early situation. Massive early trauma reliably leads to damage but not always, thank goodness, to someone becoming a mass-murderer or other criminal. Love, compassion, and freedom are what bring out the best in us, and the lack of love, compassion and freedom are what bring out the worst.
An emotionally healthy person exhibits healthy behavior including healthy logic because his or her logical upper brain is not constantly having to make sense of and defend against repressed pain leaking up from lower levels, and because healthy access among all three levels of consciousness provides natural, healthy guidelines for behavior. These guidelines become confused, diminished, or silent in a heavily repressed person.Link here.
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