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MORE ROOM TO RUN IN THE LAND OF THE RISING SUN
Japan is an absolute economic powerhouse right now. It is is the second largest economy in the world. Japan has the third largest stock market after London. If you are shopping around for the some of the world’s cheapest stocks, Japan is still the most attractive stock market available today. Equities in Japan trade at roughly 1.5 times price-to-book value ratio, or nearly a 35% discount to the MSCI World Index and a 50% discount to U.S. stocks.
In the U.S. and Europe, companies are already aggressively buying back their own stock. But this trend is only just beginning in Japan. And Japanese companies are beginning to boost dividend payouts as well – another big plus for the Nikkei. Also, Japan’s largest companies increased capital spending by 16.8% in the fourth quarter versus 12 months earlier. Corporate profits expanded for the 18th straight quarter, extending the longest streak of growth in 36 years.
So what is holding back Japan? In short, Japanese consumers. Consumer spending in Japan represents 55% of the economy. Though corporations are spending money, earning great profits and buying back stock, consumers simply do not spend enough to boost domestic consumption. However, I see this situation possibly changing.
So how should you position yourself to profit? I am especially bullish on the Second Section Index of Japanese smaller companies. These companies have been mauled since mid-2006. Compared to the large-cap Nikkei, a rising yen will not affect earnings for smaller stocks. I am expecting the Japanese yen and the Second Section Index to rally in 2007 and 2008, providing foreign currency investors with a double-play on capital gains. In 2006, the Second Section Index plunged over 20% in dollars. Historically, previous declines of similar magnitude have resulted in big double-digit gains for small-stock investors in Tokyo.
The yen is also dirt cheap right now. The yen is still trading at a 22-year low versus other major currencies, especially against the euro and its main predecessor before the single currency, the German mark. I cannot help but shudder when I think about how badly the yen-carry trade will end as the Japanese currency finally begins to meaningfully appreciate. The yen has indeed generated a good portion of the world’s speculative capital over the last three years. Any serious yen rally will ignite a massive sell-off, making the mini-panics experienced in February and March look like a picnic. Most of this borrowed yen is invested in risky markets, including emerging market stocks, high-yield bonds, small stocks and even some commodities.
The Japanese yen vs. the euro has one of the most mismatched cross rates on the planet this year. There is no compelling reason for the euro to fetch 159 yen. It might not happen tomorrow, but at some point, the Bank of Japan (BoJ) will raise interest rates more than market expectations, critically wounding the euro-yen cross. The Euro-zone is showing signs of solid expansion, but it is not exactly booming. Deficits run high, peripheral EU members’ economies are severely overheating and labor remains a structural headwind no government can indefinitely control, yet alone restructure.
Even real estate in Japan, once the Mother of all bubbles in the late 1980s, is finally recovering. For the first time in 17 years, Japanese real estate values appreciated in 2006, though mostly in premium areas. I would not necessarily peg the real estate market a bull, but it looks like we have finally completed the secular bear market in Japanese property. I like Japanese commercial real estate as an investment for the next few years, again partially because it is yen-based.
The only asset class that is a bad investment is Japanese government bonds. As the economy continues to recover, the BoJ will continue to raise short-term interest rates to normalize monetary policy, which has remained extraordinarily accommodative since the late 1990s. Interest rates currently stand at 0.50%. Even if inflation remains slightly negative or stays benign, 10-year Japanese government bonds do not exactly make my mouth water at 1.69%.
The yen, smaller company stocks, large-caps and real estate all provide good values in 2007. Japan’s economy is making progress as it finally leaves the “lost 1990s” behind this decade. And unlike the Dow and many other international bourses, the Nikkei remains more than 50% off its all-time high in 1990. Bottom line? There is much more room to run in The Land of the Rising Sun.Link here.
Japan to deregulate banks and brokers.
Prime minister Shinzo Abe asked Japan’s financial regulator to draw up measures to relax the rules that separate banking and broking businesses. The move is expected to boost foreign investment in the country’s financial sector and ease business for its major banks, which at present can own securities businesses only as independent subsidiaries and face limits on how they operate. It is part of a drive by Mr Abe’s government to raise Tokyo’s competitiveness as a global financial center.
Japan wants to allow financial institutions greater flexibility in operating both banking and broking businesses, said Takatoshi Ito, a member of the Council on Economic and Fiscal Policy, which is driving the reforms and which is chaired by Mr Abe. It is unlikely to adopt European-style universal banking regulations but “we are aiming to take [deregulation] further than in the U.S.,” he said.
Japan’s Financial Services Agency has long been concerned that lowering the firewalls would lead to abuse of power by domestic banks, conflicts of interest and insider trading. But it also recognizes that the separation of banking and broking is stifling development of Japan’s financial markets. Details of the moves have yet to be hammered out, but even bringing Japan into line with the U.S. would have a big impact on foreign financial institutions.Link here.
CHINA TO GO ON BUYING SPREE IN U.S. CITIES
China is preparing a multi-billion-dollar buying mission to major American cities next month as part of a package of initiatives to reduce its swelling trade surplus and ease bilateral tensions with the U.S. Although details have yet to be finalized, the buying mission is to be led by Ma Xiuhong, a vice-minister of commerce, and take in the cities of Atlanta, Chicago, San Francisco and Washington. Chinese businesses are expected to announce the purchase of $12 billion in U.S. agricultural and industrial goods as a result.
High-profile buying missions, from Japan and more recently China, have become a feature of trade diplomacy in Asian countries that run large surpluses with the U.S. Its short-term impact will be complemented by potentially more significant changes that Beijing is due to announce about reductions in export subsidies and tax rebates. Such changes would affect trade with Europe, which also has a large and growing deficit with China. China, mindful that its trade surplus is likely to continue to rise this year, has warned that the measures will take some time to have an impact.Link here.
SWEDEN VEERS AWAY FROM WELFARE STATE
Traditionally a European champion when it comes to high taxes, Sweden has been getting a dose of economic liberalism over the past six months from its new conservative government. In just a matter of weeks the new government of Prime Minister Fredrik Reinfeldt has announced it is abolishing the property tax, and very symbolically, the wealth tax. The moves signal an easing of control by the state and a move away from the lavish welfare system which has been held up as a model of social democracy by a large part of Europe’s left-wing for decades.
The measures both featured in the electoral platform of the four parties in the ruling center-right coalition which ousted the Social Democrats in September 2006 legislative elections. The outcome of the election was seen as a sign of a wish by the Swedish population to reform the way Sweden works. In 2005 obligatory tax payments accounted for 52.1% Sweden’s GDP, according to the EU.
Since its arrival in power the center-right coalition has launched a series of reforms. It started out in December by modifying the system of unemployment benefits, reducing benefits and increasing payments. And in March the government proposed ending state participation in six companies, including Vin Spirit, the owner of the famous vodka Absolut. “Sure it is a step towards a more market-oriented policy,” said Klas Eklung, chief economist at SEB bank. “Every single [step] is not very important, but if you add them all up surely Sweden is turning more liberal.”
The left-wing opposition also says the government has shifted to the right. “We are starting to recognize a rightist policy, one week they abolish the wealth tax and the next the property tax instead of relying on the welfare state,” said Par Nuder, the Social Democrats’ economic spokesman. “It is an unfair policy which increases gaps.”
The next challenge for the government is to take on the problem of unemployment of lesser qualified people and immigrants, another electoral promise. Knutson says the government intends to reduce salary costs for businesses which give priority to hiring these people, who form the bulk of the country’s unemployed. In mid-February the OECD said that in spite of excellent macro-economic performance with 4.4% growth in 2006, one of Sweden’s biggest challenges was to integrate immigrants into the work market. It advised Sweden to continue reforms to strengthen the economy by introducing more competition into the public sector.Link here.
EUROPEAN COMMISSION UNVEILS AID FOR CENTRAL AMERICA
(And the quid pro quo is ...?)
For each country of Central American region, the EC has developed a strategy to support that country’s political and social priorities, in particular good governance and democracy, justice, the environment and the fight against insecurity, inequality and poverty. The sums proposed for 2007-2013 are €34 million for Costa Rica, €121 million for El Salvador, €135 million for Guatemala, €223 million for Honduras, €214 million for Nicaragua, €38 million for Panama and €75 million for regional cooperation.
In a statement, EU Commissioner for External Relations and Neighborhood Policy Benita Ferrero-Waldner welcomed the adoption of this program by the Commission, explaining, “Our cooperation strategy with Central America is just one of the ways in which the European Commission is helping the countries of the region cope with the dual challenge of regional integration and social cohesion, and it will accompany the future association agreement between the two regions. It is a powerful symbol of our solidarity with Central America as we begin negotiations with our partners there for an association agreement that we are convinced will be enormously beneficial. ... In order to meet this objective, we have just adopted a new cooperation strategy that increases aid for the region by 25% over previous periods.”Link here.
WORLD TRADE ORGANIZATION DOHA ROUND ON BRINK OF FAILURE
Director-General Pascal Lamy last week said that if the situation in the Doha Round trade negotiations does not change soon “governments will be forced to confront the unpleasant reality of failure.”
“The Doha Round is entering into a decisive moment,” said the Director-General. “If we are to conclude it by the end of 2007, as pledged by a number of players in Delhi this week, we will have to see tangible progress over the coming weeks in Geneva. Success is entirely within reach, provided all WTO members are ready to make a contribution.”
Mr. Lamy emphasized the importance of the WTO’s “Aid For Trade” program in laying down the foundations for a successful outcome to the Doha Round. “Many developing countries have only experienced ‘virtual’ gains from previous multilateral Rounds,” he said, “in part because they lack the capacity to trade effectively. And this had made some reluctant to even consider further trade opening in the WTO Doha Round. Though Aid for Trade is not part of this Round ... it will be critical to maximizing a successful outcome for many countries.”
However, said Mr. Lamy, the decision by WTO Members in February to resume the Doha trade negotiations across the board has not yet led to the breakthrough needed in order to bring the Round to a successful conclusion by the end of this year. Success now seems hardly possible given that the U.S. President’s “fast-track” trade treaty authority will expire in June, and a Democratic Congress seems likely to demand an unacceptably high price for its renewal. And French politicians facing a presidential election in May are almost sure to veto any further agricultural market opening.Link here.
COSTA RICA TO VOTE ON CENTRAL AMERICAN FREE TRADE AGREEMENT
Costa Rican President Oscar Arias has announced that a referendum will be held on whether the country should ratify the CAFTA-DR with the U.S. “For the first time, Costa Ricans will be able to directly decide the future of a very important law for the country,” Arias told a news conference last week, going on to describe his decision as “historic” and “a new era in our democratic development.”
The referendum could take place within the next three months, but with opinion polls showing that less than 40% of Costa Rica’s voters are in support of the trade pact, it opens the possibility that the country could reject the deal altogether. Arias, a supporter of the CAFTA-DR deal, said shortly after his election victory in March 2006 that his government would “cede no ground” in its fight to push through the trade pact. However, the president has been forced to act after a legal ruling issued by a court last week gave opponents of CAFTA-DR the right to call for a referendum if they collect signatures from about 130,000 voters, or about 5% of Costa Rica’s electorate, over a 9-month period.
The U.S., Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua signed the CAFTA-DR in August 2004. All but Costa Rica have ratified the Agreement. Implementing legislation for the CAFTA-DR passed theU.S. Senate in June 2005 and the House in July 2005 and was signed by the President in August 2005.
Under CAFTA-DR, 80% of U.S. exports of consumer and industrial goods will become duty-free in signatory countries, with remaining tariffs phased out over 10 years. The agreement would immediately eliminate duties on more than half the value of U.S. farm exports to the region, expand IP protections and open telecommunications and other markets. Opponents of the trade deal are reluctant to see Costa Rican industry and agriculture opened up to cheaper foreign competition, and the issue has provoked demonstrations from workers and trade unions.Link here.
U.S. REPRESENTATIVE TO CHALLENGE GAMBLING PAYMENTS BAN
After meeting EU Commissioner for Internal Market and Services, Charlie McCreevy, last week, U.S. Representative Barney Frank said in Brussels that he would introduce legislation to repeal the ban on cross-border Internet gambling that was made law in 2006. “I want to get it undone,” said Democrat Frank, who is Chairman of the House Financial Services Committee. “I think a reconsideration among my colleagues is beginning but it is not far enough along yet. If the storm of public unhappiness is great enough then I will try to substantially revise that ban.”
Mr. McCreevy said recently that the U.S. rules against processing of international online gaming transactions were a prima facie case of protectionism and that the WTO was a possible venue for tackling them. But he said that while negotiations were continuing over the WTO’s Doha Round, he would not rush to file a complaint. He told the the European Parliament, “In order to protect, I would say, their own business, their industry there, they have de facto prevented foreigners from online betting into the United States. In my view it is probably a restrictive practice and we might take it up in another forum.”
In its recent ruling against the U.S. over Antigua’s complaint that the U.S. was unlawfully banning payments to offshore gaming websites, a WTO Dispute Resolution Panel noted that the 2006 legislation (which post-dated both Antigua’s original complaint and the first WTO ruling in its favor) confirmed the lack of conformity of U.S. law with its obligations under the GATS. In its minutely argued report, the Panel comprehensively dismissed all attempts by the U.S. to wriggle out of the need to bring its laws into conformity with the GATS, either by banning equivalent domestic betting transactions, or by allowing parity for overseas transactions.
The U.S. passed the Unlawful Internet Gambling Enforcement Act in 2006, which while expanding domestic opportunities for legal gaming, effectively bans all international and interstate online gaming, by making it illegal for banks and credit card firms to make payments to such internet operations.
Frank said that a House bill will be introduced or registered within a couple of weeks to test the level of support, but that no major progress on the bill was likely soon. He also said that his bill would not be able to address the bigger issues raised by the WTO’s ruling, “My committee only has jurisdiction over credit cards. I can’t do more than repeal the ban on the use of credit cards. We don’t have jurisdiction generally over the Internet or other aspects of this.”Link here.
TAX DAY, BY MURRAY N. ROTHBARD
April 15, that dreaded Income Tax day, is around again, and gives us a chance to ruminate on the nature of taxes and of the government itself. The first great lesson to learn about taxation is that taxation is simply robbery. No more and no less. For what is “robbery”? Robbery is the taking of a man’s property by the use of violence or the threat thereof, and therefore without the victim’s consent. And yet what else is taxation?
Those who claim that taxation is, in some mystical sense, really “voluntary” should then have no qualms about getting rid of that vital feature of the law which says that failure to pay one’s taxes is criminal and subject to appropriate penalty. But does anyone seriously believe that if the payment of taxation were really made voluntary, say in the sense of contributing to the American Cancer Society, that any appreciable revenue would find itself into the coffers of government? Why don’t we try it as an experiment for a few years, or a few decades, and find out?
But if taxation is robbery, then it follows as the night the day that those people who engage in, and live off robbery are a gang of thieves. Hence the government is a group of thieves, and deserves, morally, aesthetically, and philosophically, to be treated exactly as a group of less socially respectable ruffians would be treated.
“To force a man to pay for the violation of his own liberty is indeed an addition of insult to injury. But that is exactly what the State is doing.” ~~ Benjamin R. Tucker, 1893
Note: Murray N. Rothbard (1926-1995), a scholar of extraordinary range, made major contributions to economics, history, political philosophy, and legal theory. He developed and extended the Austrian economics of Ludwig von Mises, in whose seminar he was a main participant for many years. He established himself as the principal Austrian theorist in the latter half of the twentieth century and applied Austrian analysis to historical topics such as the Great Depression of 1929 and the history of American banking.Link here.
U.S. TAXPAYERS TO CELEBRATE TAX FREEDOM DAY ON APRIL 30, TWO DAYS LATER THAN 2006
Tax Freedom Day for taxpayers in the U.S. will fall on April 30 in 2007, according to the Tax Foundation’s annual calculation, using the latest government data on income and taxes. “Tax freedom will come two days later in 2007 than it did in 2006,” announced Tax Foundation President Scott A. Hodge, “and fully 12 days later than in 2003, when tax cuts caused Tax Freedom Day to arrive comparatively early, on April 18.”
However, 2007’s Tax Freedom Day is still slightly earlier than it was in 2000, when the economic boom, the tech bubble and higher tax rates pushed tax burdens to a record high, and Tax Freedom Day was postponed until May 5. “The economy has been growing at a good clip since mid-2003,” said Hodge, “and those growing incomes are pushing people into higher tax brackets. When that happens, tax collections grow faster than incomes.”
The report traces the course of America’s tax burden since 1900, examines the composition of today’s tax burden by type of tax, calculates a Tax Freedom Day for each state, and compares tax payments to other typical consumer expenditures. The report compares the number of days Americans work to pay taxes to the number of days they work to support themselves. “Americans will work longer to pay for government (120 days) than they will for food, clothing and housing combined (105 days),” observed Hodge. “In fact, Americans will work longer to afford federal taxes alone (79 days) than they will to afford housing (62 days).”
In 2007, Americans will work another 41 days to afford their state and local taxes, according to the report. That makes taxation a bigger financial burden than housing and household operation (62 days), health and medical care (52 days), food (30 days), transportation (30 days), recreation (22 days), or clothing and accessories (13 days). Six out of the 10 states with the heaviest tax burdens and the latest Tax Freedom Days are in the Northeast: Connecticut (May 20), New York (May 16), New Jersey (May 10), Vermont (May 09), Rhode Island (May 9), and Massachusetts (May 6). The other four are Nevada (May 08), California (May 7), Washington (May 6), and Minnesota (May 4).
The 10 states with the lightest total tax burdens celebrate Tax Freedom Day the earliest. Oklahoma’s April 12 is the earliest of all. The next nine are Alabama (April 12), Mississippi (April 13), Alaska (April 13), Tennessee (April 15), New Mexico (April 15), Louisiana (April 16), South Dakota (April 16), Texas (April 19), and Idaho (April 19). In most of these states, Tax Freedom Day is early because of a large number of low-income taxpayers who pay most of their federal income taxes at the lower rates, 10% and 15%.Link here.
BUSH, CHENEY RELEASE TAX RETURNS
George W. Bush paid an effective tax rate of 29% on his income in 2006 according to data on his tax return, which was released by the White House last week. The President and Mrs. George W. Bush reported taxable income of $642,905 for the tax year 2006, resulting in a total federal tax bill of $186,378. Currently, the President’s salary is set at $400,000 per year, but he also derives some income from investments and other assets held in trust. The Bushes also paid $27,474 in state property taxes on their ranch in Crawford, Texas. The President and Mrs. Bush contributed $78,100 to churches and charitable organizations, including the Crawford Volunteer Fire Department, the Federal Government’s Combined Federal Campaign, Operation Smile, Martha’s Table, the Salvation Army, Susan G. Komen Foundation, and the Yellow Ribbon Support Center.
Meanwhile, Vice President Dick Cheney and his wife reported gross income for 2006 of $1.8 million, and paid $464,789 on taxable income of 1.6 million – more than $50,000 in excess of their actual tax bill of $413,326. Instead of claiming the refund, the Cheneys will apply the overpayment to their tax bill for 2007. The Vice President’s salary is $200,000 per year.Link here.
AS U.S. TAX RATES DROP, GOVERNMENT’S REACH GROWS
Maybe the era of big government is not over, after all. As Americans finish their annual tax-filing flurry, it is true that tax rates are lower than they were a few years ago. But according to a different yardstick, the federal government’s reach is expanding.
52.6% of all Americans now receive significant income from government programs, according to an analysis by economist Gary Shilling. That is up from 49.4% in 2000 and far above the 28.3% in 1950. If the trend continues, the percentage could rise within 10 years to pass 55%, where it stood in 1980 on the eve of President Reagan’s move to scale back the size of government. That two-decade shrink-the-government trend now appears over, if for no other reason than demographics. The aging baby-boomer generation is poised to receive big payments from Social Security and government healthcare programs.
Mr. Shilling’s analysis found that about 1 in 5 Americans hold a government job or a job reliant on federal spending. A similar number receive Social Security or a government pension. About 19 million others get food stamps, 2 million get subsidized housing, and 5 million get education grants. For all these categories, Mr. Shilling counted dependents as well as the direct recipients of government income. Many Americans, in surveys, say they do not like the way their tax money is spent. And a majority now says, in a reversal from a year ago, that their federal income taxes are too high, according to an April Gallup poll. Yet at the same time, much of U.S. population is on the receiving end of that tax-revenue stream.Link here.
REPUBLICAN PRESIDENTIAL CANDIDATE PITCHES U.S. FLAT TAX PLAN
As U.S. taxpayers tried to beat Tuesday’s tax filing deadline, Republican presidential candidate Sen. Sam Brownback (R-Kansas) took the opportunity to push his proposals to simplify the tax code, including a form of flat tax. Speaking to reporters in Iowa, Brownback hinted that his plans would be less controversial than those proposed by former Republican presidential candidate Steve Forbes, and would yield a comparable level of revenue for the government as the current system.
“I’m not taking on the current tax code from the standpoint of removing it,” he explained, according to the Associated Press. “I’m saying create an alternative and let people pick.” Although Brownback has not yet finalized his ideas into concrete proposals, he said that one option he is considering would give taxpayers an element of choice regarding how they pay and file their taxes for a pre-determined period, likely to be about five years. The Kansas Senator has previously argued that the need for a new Federal tax system is “urgent”, describing the current tax code as “confusing, complex, and overly burdensome.”
“In 2003 alone, $203 billion were spent just on preparing taxes; increases in the tax law’s complexity have added roughly 1 billion hours in annual paperwork over the last 10 years,” Brownback notes in a statement posted on his website. He has pointed out that the 2003 1040 Form contained 73 lines, up from 68 lines in 1985 and 34 lines in 1935. Meanwhile, the 2003 Instruction Booklet for the 1040 has grown to 131 pages in length, from 52 pages in 1985 and 2 pages in 1935. “Hard working American taxpayers spend too much of their time and money preparing their taxes each year. It is time for the Federal government to sunset the Internal Revenue Code of 1986, and move to a simple, fair alternative system,” his statement added.
Brownback has weighed in that the U.S. should move to a tax system that embodies 6 key principles: (1) applying a low rate to all Americans, (2) providing tax relief for working Americans, (3) protecting the rights of taxpayers and reducing tax collection abuses, (4) eliminating bias against savings and investment, (5) promoting economic growth and job creation, and (6) not penalizing marriage or families.
Tax reform and simplification of the tax code was initially a central plank of President Bush’s economic policy, although this goal seems to have been placed on the back burner since a tax reform panel reported its recommendations in late 2005. While this panel briefly flirted with the idea of introducing some form of flat tax, it was shelved in favor of two less controversial proposals that reduced the number of tax brackets and stripped away the deductions and special interest tax breaks that make the current system so opaque.Link here.
Tax reform high on House agenda says Democrat leader.
According to House Majority Leader Steny H. Hoyer, House Democrats remain committed to the goal of tax reform and simplification, and are determined to find a remedy for the growing reach of the Alternative Minimum Tax with regard to middle income taxpayers. In a statement, Hoyer responded to recent criticism from senior Republicans over Democrat tax policy since reclaiming control of Congress by pointing out that tax legislation passed during the Bush administration has hindered rather than helped efforts to simplify the U.S. tax code.
“Unfortunately, the complexity of our nation’s tax laws only increased during previous Republican-controlled Congresses,” he said. “In fact, since 1995, the U.S. tax code and regulations have grown by one-third to more than 60,000 pages. And, while President Bush appointed a bipartisan commission to study tax reform, he has ignored its recommendations and failed to engage on this important issue.”
Hoyer, who claims to be a long-standing advocate of tax reform and simplification, continued, “Perhaps nothing better illustrates the need for federal tax reform than the expanding reach of the Alternative Minimum Tax (AMT) – the so-called stealth tax. Originally designed to ensure that wealthy taxpayers paid their fair share, the AMT will arbitrarily ensnare an estimated 4 million taxpayers this year and force them to pay more in taxes than they otherwise would pay under our tax system.”
Hoyer’s statement concluded by announcing that House Democrats are “committed to permanently fixing the AMT, as well as to tax reform and simplification generally.”Link here.
HOUSE APPROVES U.S. TAXPAYER PROTECTION ACT
The Taxpayer Protection Act of 2007, H.R. 1677, which passed by a vote of 407 to 7, includes measures to: (1) require IRS investigations to provide notification of possible citizen identity theft, (2) simplify business tax filing for spouses in a family-owned business, (3) provide more protections for citizens who have had wrongful IRS levies, (4) increase penalties on those impersonating the IRS on the internet, and (5) allow the IRS to post unclaimed tax refunds on the internet. The legislation was introduced by Chairman Charles B. Rangel (D-New York) and Oversight Subcommittee Chairman John Lewis (D-Georgia).
“This bill improves and increases IRS outreach to provide taxpayers with stronger protections against tax fraud and identity theft” observed Lewis after the bill passed through the House Ways and Means Committee last month. “It is a shame and a crime to use schemes to steal personal information from American taxpayers, so this legislation cracks down on misleading websites and subjects them to a higher penalty for any violations.”
According to California Democrat and House Speaker Nancy Pelosi, the Democratic budget, passed last month in the House, also promotes permanent protection for middle-income taxpayers, as part of ongoing House action to keep the Alternative Minimum Tax (AMT) from hitting American families. The AMT was created in 1969 to respond to the fact that 155 of the wealthiest families in America were avoiding paying any federal taxes by using loopholes, deductions, and exclusions.Link here.
U.S. TREASURY SECRETARY PAULSON TESTIFIES ON “TAX GAP”
Recommends avoiding new “draconian” reporting requirements.
Testifying before the Senate Finance Committee, Henry Paulson said that the administration has formulated concrete proposals to narrow the “tax gap” between what is paid and legitimately owed by U.S. taxpayers, estimated at $345 billion in 2001. “It is very appropriate that we have this conversation the day after tax day,” Paulson stated. “Over the last few months, millions of Americans have collected their W-2s, their 1099s, their home mortgage interest statements, and countless other pieces of paper to fill out their tax returns. This is an annual ritual for Americans, completed without great enthusiasm, but with remarkable honesty and effort. The vast majority of Americans pay their taxes without additional prodding by the IRS, out of a sense of fairness and civic duty. They understand the importance of paying what they owe, and they know that when people fail to pay their taxes, it serves as a de facto tax increase on everyone else.”
Paulson’s testimony continued, “While the current compliance rate is high, it can and should be improved. ... The amount of taxes that are owed but not paid is commonly referred to as the tax gap. An important part of addressing the tax gap is to understand not only the types of taxpayers – individuals, small businesses, corporations – that don’t comply, but also why these taxpayers fail to comply. ... In September of last year, we released a comprehensive seven-point strategy to address the tax gap. The budget we put forward for 2008 is critical to implementing that strategy. It requests new funding for taxpayer services, research, improved technology, and targeted enforcement. We ask for your help in working with the Appropriations Committee to make sure the IRS has the resources it needs to improve compliance while maintaining its commitment to taxpayer service. ...
“The most recent data we have on the tax gap comes from 2001. It indicates that the vast majority of the tax gap was attributable to underreporting of income. Most of the underreporting is attributable to individuals with business income and corresponding self-employment tax liabilities. This includes small businesses, farms, and ranches. It’s unclear whether this underreporting is the result of deliberate deception or a simple misunderstanding of what needs to be reported and how to do it.
“To substantially improve compliance in this regard, Congress would have to mandate additional requirements, which would affect not only those who do not report all of their income, but also those who already do. I have come to the conclusion that there is a big part of the tax gap we simply will not be able to reach without adding draconian and painful requirements on all taxpayers. And I do not believe any of us really want to do that. We must remember that the tax gap is simply not a pot of gold that we can dip into every time we want to pay for a new or expanded program. Nor should it be viewed as an easy solution to existing challenges, such as the alternative minimum tax.
“As you know, narrowing the tax gap is about improving compliance. It is not about changing the baseline to raise more revenue. The budget resolution passed by the Senate assumes revenue collections are raised by hundreds of billions of dollars. ... I believe it is unrealistic to assume that reducing the tax gap will yield that level of additional revenue.
“In developing our 16 proposals, we focused on changes that would narrow the tax gap with minimal additional burdens. Some have suggested that far more expansive proposals should be put forward. Most of these proposals would require steps that I would not recommend because they are bad tax policy and would be unnecessarily painful, expensive, and time-consuming for taxpayers – for example, requiring individuals to file 1099s reporting their transactions with service providers, such as their doctor, auto mechanic, and dry cleaner; eliminating cash transactions in favor of electronic transactions, with card issuers and banks providing statements to the IRS so the payments can be matched with a business’s reported income; or doubling or tripling the number of IRS agents and audits. In theory, each of these measures could bring in some additional revenue, but the cost of compliance for individuals and businesses – most of whom already pay what they owe – would far outweigh the gains. In many cases, such measures would also raise privacy concerns due to the government’s heavier focus on the daily transactions in each of our lives.
“I hope we can all agree that such extreme measures are not the approach we should take. Instead, as a strong first step toward narrowing the tax gap, I hope you will work with us to approve the additional IRS funding and enact the legislative proposals the President has requested. ... We should also look for ways to reduce the complexity of the U.S. tax code.”Link here.
The evader next door.
In cold months Bruce Piermarini produces abstract “new new” style acrylic paintings in his West Brookfield, Massachusetts studio. In warm ones he builds custom pools. Except this April he is doing 30 days in the federal pen for filing a false tax return. Piermarini, 54, reported customers’ checks but not their cash payments, which shaved his receipts by 12% and cut his net to $50,000 or so a year, when he earned more like $150,000. When he applied for loans, his tax pro created a second set of 1040s showing higher income. His case is unusual in that fewer than 500 defendants got federal jail time for a pure tax crime last year. But his tax finagling was not. The IRS estimates that proprietors who, like Piermarini, report their business activity on a Schedule C or CZ of their 1040s fess up to just 43% of their real earnings.
Six years ago Forbes detailed how the promotion of borderline tax shelters, combined with old fashioned tax cheating, was tearing the tax system apart. Since then a revived IRS has squashed the most blatant cookie-cutter shelters that KPMG, Jenkens & Gilchrist and others used to create phony losses for the rich. But they have made little progress on the bigger, older, more mundane problem of do-it-yourself tax evasion. Now some Washington pols are dreaming of raising big bucks from the $345 billion “tax gap”, or what the IRS estimates business and individuals owed on legal income and did not voluntarily pony up in 2001. If they are serious, they will have to do more than attack exotic offshore shelters. They will have to go after your pool man, your plumber and your podiatrist and so change the behavior of millions of self-employed and small business folks.
No question there is lots of tax money to be had in the cash economy. After conducting research audits on 46,000 randomly selected 2001 tax returns, the IRS estimated that individuals report just 57% of the business income they should. That is down from 70% in 1988, when a similar study was last done. The nonreporting in 2001 cost the Treasury $148 billion in individual income and payroll (Social Security and Medicare) taxes – 43% of the tax gap. “In terms of the tax gap, that is where the money is,” says Joseph Bankman, a professor of law and business at Stanford who was one of the first to warn that corporate tax shelters were spinning out of control. He is now studying unreported income. He argues the government needs to get tough now because honest businesspeople cannot compete. Still, Bankman admits, enforcement may not be popular. “These aren’t some easy-to-vilify Silicon Valley entrepreneurs. They’re Ma and Pa who run a successful, or a not-so-successful, restaurant.”
This is an old problem, so why the fuss now? Partly, it is deficit politics. But a lot of smart tax folks worry compliance is slipping further and not just because of a decade of low audit rates. With the growth of self-employment and illegal immigrant labor, and the burgeoning use of corporate shells, more folks have the opportunity, motive or means to hide income.
IRS Taxpayer Advocate Nina Olson, who labels the tax gap the second-biggest problem – after complexity – for honest taxpayers, is lobbying for a slow, sustained buildup in IRS funding to pay for both increased auditing and service. But Olson, IRS Commissioner Mark Everson and others say the government cannot simply audit its way out of the tax gap. To make real progress, they insist, Congress will have to impose new reporting burdens on law-abiding businesses. As a start, in February the Treasury Department proposed a package of 16 tax-gap closers that includes the broadest expansion of information reporting requirements in two decades. One provision, which has small business lobbyists howling, would require any business that pays $600 or more in a year to another business to report the payment to the IRS.Link here.
IRS corporate audits producing less for more.
IRS agents are now spending substantially more of their time on corporate audits that produce no revenue for the government than they did in the recent past, according to agency data obtained under the Freedom of Information Act by the Transactional Records Access Clearinghouse (TRAC). The year-to-year growth in nonproductive audit time, defined by the IRS as face-to-face examination hours that produced what it calls “no change” results, occurred for corporations in every asset class, according to TRAC.
In Congressional testimony, IRS Commissioner Mark W. Everson has repeatedly claimed that corporate enforcement is one of his top priorities, and that the number of corporate audits has increased substantially under his leadership of the agency. However, as TRAC pointed out, quantity is not the same as quality, and Everson appears to be brushing aside concerns that increased audit rates are not being justified by higher revenues. On March 20, The New York Times published an article which said that more than a dozen revenue agents – all speaking anonymously – had told the reporter that they had been pressured by their managers to close cases too quickly and that this could result in the loss of billions of dollars in unpaid taxes.Link here.
SENATE BILL TO MODERNIZE U.S. FEDERAL TAX LIEN SYSTEM
Propose to move from paper-based to electronic filings.
Citing $570 million in cost savings for federal taxpayers, Sen. Carl Levin, (D-Michigan), and Sen. Norm Coleman, (R-Minnesota), have introduced legislation to modernize the federal tax lien system by moving it from paper-based filings in local recording offices to electronic filings on a national tax lien registry accessible through the internet.
“Outdated laws are forcing the IRS to waste taxpayer dollars on an old-fashioned, inefficient, and burdensome paper tax lien filing system that could be easily replaced by a modern electronic filing system that could save taxpayers a half a billion dollars over the next ten years,” explained Levin. “Using a centralized, electronic filing system instead of a decentralized system requiring tax liens to be filed on paper in over 4,000 local recording offices across the country would save millions of taxpayer dollars, while actually improving taxpayer service. Liens would be filed faster, errors would be easier to correct, and, once resolved, liens could be released quicker – in 10 days instead of the 30 days now permitted.”
“The current federal tax lien system is costly, antiquated, and generally unreliable. Tax liens are an essential tool to recover unpaid taxes, which is why we need to bring the system into the twenty-first century,” added Coleman. “In short, the bill would enable the IRS to file federal tax liens electronically and would post all federal tax liens on the IRS website. ... Posting the liens on-line will make tax lien information more readily available to the public and will make it easier for federal contracting officials to make sure that the federal government is not handing over hard-earned taxpayer dollars to tax-cheating federal contractors.”
Tax liens are a key tool used by the IRS to collect funds from persons who are delinquent in paying their taxes. Notices of tax liens must be made public. Currently, tax lien notices are made public by filing them in one or more of 4,100 local recording offices.
The bipartisan Tax Lien Simplification Act is the result of investigations into abusive tax shelters, offshore tax havens, and tax delinquent federal contractors conducted over the last four years by the Senate Permanent Subcommittee on Investigations, on which Levin serves as the Chairman and Coleman serves as the Ranking Member. During the course of those investigations, the Subcommittee learned of the existing, decentralized system for filing federal tax liens and the high costs of maintaining it. The IRS, for example, maintains a service center dedicated to monitoring dozens of varying local requirements regulating the format and legal styling applicable to tax lien filings, preparing those liens in the proper format, requesting local officials to file the liens, paying lien filing fees, tracing and replacing lost filings; correcting errors, and, once resolved, releasing appropriate liens.
The bill would replace the local filing system with a centralized, federal tax lien registry that would be operated by the IRS and made accessible and searchable by the public on the internet at no cost. Each federal tax lien would use the same format and be made effective from the date and time of its recording in the national registry, in the same manner as now occurs with local filings. Once the underlying tax liability was resolved, the IRS would have 10 days instead of the current 30 days to release the tax lien and remove it from the registry.
The Treasury would be required to make the registry secure and prevent data tampering. Before the registry was implemented, the Treasury Secretary would also be required to review the information currently included in public tax lien filings to determine whether any of that information should be excluded or protected from public viewing on the internet. For example, the Treasury Secretary would be expected to prevent the disclosure of social security numbers that are currently included in many public tax lien filings, but, if disclosed on the Internet, could facilitate identity theft. The bill is thus expected to provide greater protection of some taxpayer information than occurs in current tax lien filings. The bill would require the registry to be operational by January 1, 2009, but would allow continued use of the existing local filing system for an appropriate time to ensure a smooth transition.Link here.
GRASSLEY URGES TOUGHER SANCTIONS AGAINST TAX PREPARATION “SHARKS”
Senate Finance Committee hearings on the prevalence of tax fraud and identity theft highlights the need for tighter control of the loosely-regulated U.S. tax preparation industry, according to Chuck Grassley, Committee ranking member. “Taxpayers, beware,” Grassley said. “Sharks are in the water. The predators feed on the hope of making easy money. The ease of stealing identities and the lack of federal oversight of paid tax preparers are just chum for tax cheats. Be very careful with your personal financial information. If you use a paid preparer, choose someone you really trust.”
The Finance Committee holds an annual hearing to alert taxpayers to filing season dangers and to question the IRS on ways to protect taxpayers. Grassley said that this year’s hearing highlighted two problems, identity theft to commit tax fraud and a failure to police paid preparers. Testifying at the hearing, a federal inmate serving a prison sentence for tax fraud and other financial crimes stated that he easily used his mother’s W-2 tax form information, and other information, to defraud the U.S. government of thousands of dollars, which he used to travel around the world. He told the committee he even called the IRS to inquire about the status of his bogus refund.Link here.
PARTNERSHIPS CAN E-FILE THROUGH NEW IRS PLATFORM
The IRS has reminded taxpayers that the new electronic platform, Modernized e-File, allows partnerships to electronically file Form 1065, U.S. Return of Partnership Income, and Form 1065-B, U.S. Return of Income of Electing Large Partnerships. Partnerships can also submit their request for extensions through Modernized e-File. Previously, using an older IRS system known as Partnership e-File, partnerships could electronically file Form 1065, but not Form 1065-B. Modernized e-File supports the filing of both and improves the e-file experience for taxpayers and practitioners.Link here.
UK’S CHARTERED INSTITUTE OF TAXATION OBJECTS TO NEW PRE-EMPTIVE TAX PENALTY POWERS
The UK’s CIOT has published concerns regarding what it dubbed “Alice in Wonderland Tax Penalties” put in place by the recent Finance Bill. Writing on behalf of the CIOT, Simon Goldie observed that, “In Alice in Wonderland, the Red Queen said ‘sentence first, verdict afterwards.’ A similar approach is now being taken in tax law.”
New penalties legislation was included in the 2007 Draft Finance Bill which makes a penalty payable if HMRC think that a taxpayer has done, or not done, something. This is a significant shift from the taxpayer actually doing or omitting to do something. John Cullinane, President of The CIOT added, “Where penalties are concerned, the test should always be objective rather than subjective. ... Either there has been an offence giving rise to a penalty or there has not. ... Despite objections to this subjective clause, it remains in the draft legislation.”Link here.
HM REVENUE AND CUSTOMS ANNOUNCES NEW DISCLOSURE SCHEME FOR OFFSHORE ACCOUNT HOLDERS
HMRC has announced arrangements enabling investors with offshore accounts to disclose to HMRC any income and gains not previously included in their tax returns. The UK tax authority explained, “HMRC has recently obtained information about holders of offshore accounts from a number of banks and has obtained similar details through the European Savings Directive.” The banks in question are thought to include Barclays, HSBC, HBOS, Royal Bank of Scotland and Lloyds TSB, according to reports.
HMRC continued, “There is nothing wrong with holding an offshore account as long as you pay any tax due on the money deposited in it, and on the interest from it. If you have done this you do not need to use the Offshore Disclosure Facility. We want to encourage those with unpaid tax and duties to pay what they owe. Therefore, we are introducing the Offshore Disclosure Facility to help them get their tax affairs up to date.”
The facility is open to those who hold or have held an offshore account, either directly or indirectly, that is in any way connected to a loss of UK tax and/or duty. For a limited period, taxpayers can come forward and make a full disclosure of all undeclared liabilities, not just those connected with an offshore account. Investors will need to notify HMRC by 22 June 2007 of their intention to make a disclosure and then make their disclosure by 26 November 2007. HMRC warned, however, “At the end of the notification period, HMRC will target those with offshore bank accounts and undeclared tax liabilities who have chosen not to come forward to make a disclosure.”Link here.
HMRC sweeps decks to focus on hardcore offshore evaders.
HMRC have taken UK taxpayers by surprise by their recent announcement of a form of amnesty for all tax evasion including VAT, Income & Corporation Tax, Inheritance Tax and PAYE – the first time in living memory that the UK has embarked on such a bold initiative, says Andrew Watt, Director of Tax Investigations at Chiltern PLC. But he believes that it remains to be seen whether it will have the effect HMRC so desperately wishes to achieve.
According to Andrew Watt, the move is born out of the need to be able to cope with the anticipated surge in the numbers of investigations following HMRC’s success over the last 18 months in obtaining from five High Street Banks access to the details of UK residents (individuals and companies) with an address in the UK and an offshore bank account. In the course of the next few years HMRC will serve similar information notices on all Banks trading in the UK including the branches and subsidiaries of foreign Banks. It is estimated that this exercise will yield almost a million pieces of information. The amnesty, it is hoped, will clear the decks by encouraging evaders to come forward in large numbers and make a clean breast of previous tax irregularities leaving HMRC free in due course to target the hard core who choose not to make a disclosure.
The booklet published to coincide with the announcement of the amnesty (or to give it its official name the “Offshore Disclosure Facility”) appears to suggest that the benefits are open only to those who hold, or have held, an offshore bank account. However, this would clearly in due course have led to a challenge under Human Rights legislation and the booklet goes on to make it clear that tax evaders who have never held an offshore bank account are entitled to make disclosures on precisely the same basis, and to expect to receive the same treatment, as those who do have offshore accounts.Link here.
GUERNSEY SETS UP TAX EVASION HOTLINE
Guernsey’s Treasury and Resources Department has set up a Tax Evasion Hotline which will allow taxpayers to report people they suspect of evading tax. There is also a confidential email address for the same purpose. “Having heard from the Administrator” says a press release, “that it is common for him to receive information, often in the form of anonymous letters, from concerned taxpayers about others who they believe to be evading tax, Treasury & Resources Department has authorized the Administrator to establish a telephone Tax Evasion Hotline that can be used by members of the public to pass on this information directly to an officer at Income Tax.
“The Administrator will treat information given via the Tax Evasion Hotline in the strictest confidence. Callers can remain anonymous if they wish, although they will be encouraged to leave contact details in case it is later necessary to refer back to them for clarification or to establish if they have other useful information. If the Administrator is in possession of the full facts, the more likely it is that he will be able to tackle the tax evasion being reported.”Link here.
EMPLOY THE MANY OFFSHORE OPTIONS NOW AVAILABLE, WHILE YOU STILL CAN
Since the newly Democrat-controlled U.S. Congress took office in January, I have commented on the anti-offshore antics of two legislative demagogues and their proposed bills, U.S. Senators Carl Levin (D-Michigan) – S. 681 – and Bryon Dorgan (D-North Dakota) – S. 396. Levin’s “Stop Tax Haven Abuse Act” would curtail Americans current freedom to invest and do business in 34 low-tax jurisdictions. Senator Dorgan’s bill creates an even larger blacklist of 40 nations and territories, without any explanation of how these nations got on his blacklist or how they could get off.
The bills and their objectives are not based in fact, but rather in the personal prejudices of the senators. Levin has used his official status to churn out a series of questionable Senate reports that make preposterous claims about tax havens, claiming tax havens are used for massive tax evasion by Americans. His latest figures, without proof, claim that $100 billion is being lost by the IRS every year because of tax haven abuse. (Not even the IRS endorses that claim!)
Both senators falsely portray tax havens as being evil sinkholes filled with billions of hidden cash from illicit drugs and political corruption. In reality, offshore financial havens now have far stricter anti-money laundering laws and enforcement than the scenes of most financial crimes – New York and London.
The danger is that this loony legislation may wind up as part of a larger tax bill that a preoccupied President Bush might sign into law. Already the Democrat Congress has enacted a preliminary budget proposal. Budget committee chairman, Senator Kent Conrad (D-North Dakota), seeks to hoodwink taxpayers by insisting that “... our modest additional revenues can be achieved by closing the tax gap, shutting down abusive tax shelters and addressing offshore tax havens – without raising taxes.” Levin’s fictitious $100 billion from offshore tax haven “reform” will be the phony cash cow for all sorts of spending. But that would require new restrictions and taxes on offshore financial activity by Americans.
My advice to prudent planners is to employ the many offshore options now available – investments, currency deals, banking, and asset protection plans – while you still can. How ironic, in the age of free trade and globalization, that demagogic politicians are trying to drag America back into the isolationist Dark Ages.Link here (scroll down).
WHAT HAPPENS IN OFFSHORE PRIVACY HAVENS STAYS IN OFFSHORE PRIVACY HAVENS
If you are making a so-called “private” transaction in either your U.S. bank or securities account, you might as well publish your financial activity right on the front page of The New York Times. After all, practically anyone can see it anyway.
Why do I say that? First there is the U.S. Department of Justice. Armed with only with a “national security letter”, with absolutely zero due process, the FBI and other federal investigative agencies can demand a complete list of every banking transaction you have ever conducted. And, it is illegal for your bank to tell you about their demands. (You can thank the U.S. PATRIOT Act for this legal provision!)
Second, there is the IRS, which may also obtain your bank records without the use of a summons or other legal procedure if the IRS believes you could be violating tax laws. Third, there are “pretexters”. Those are private investigators, identity thieves and others who, by impersonating you, can gain access to the information in your bank account.
Next, if you are sued, and lose, the winner may be able to obtain a court order to obtain your bank records. And finally, there are banks and brokers, who themselves can sell your personal financial information to the highest bidder. They can do so without restriction, if the transactions are made between “affiliates” or with outside service providers that market the bank or broker’s products or services.
But privacy still reigns elsewhere.
Things are very different in countries like Switzerland, Liechtenstein and Austria, where professionals at financial institutions are forbidden from disclosing any aspect of your financial transactions, including private bank account information, without an order from a local court. Closer to the U.S., Panama also has stringent bank secrecy laws to protect your privacy. Unlike the U.S. where average bank employees can – and must – reveal your personal financial details, many offshore nations impose fines and prison sentences on bank employees who violate the privacy of account holders. That is the outstanding hallmark of an offshore account.
Naturally, the IRS and other U.S. government busybodies do not like offshore bank secrecy. They constantly whine that terrorists, tax evaders and narcotics dealers use these offshore banks to keep their illicit secrets. But these accusations are mostly hot air. Panama, Liechtenstein, Switzerland and the rest of the privacy havens have strict anti-money laundering laws and procedures to ensure that its financial institutions are not used for unlawful purposes. They do not want to assist illegal dealings either. Offshore banks must comply with strict “know-your-customer” procedures.
KYC rules mean you can no longer set up anonymous “numbered accounts” in offshore jurisdictions. If you walk into a bank in say Liechtenstein, and ask to set up an offshore account, they will politely ask you to fill out several forms. These forms will include a detailed application and your source of funds, so they can make sure you are exactly what you are – a freedom-seeking individual who is interested in higher investment returns, stronger asset protection and true financial privacy.
The bottom line is that offshore privacy havens like Switzerland and Austria vigorously defend their bank secrecy laws, so they offer wonderful alternatives to the absolutely ZERO privacy available in the U.S. Rest assured, as long as you are keeping your offshore dealings legal, your secrets are safe in such an offshore region.Link here.
BETTER AND CHEAPER INSURANCE COVERAGE IS NOW AVAILABLE OFFSHORE
The state of Vermont as an offshore tax haven? Does not sound right, does it? Particularly when you know that Vermont has moved so far left on the American political spectrum that some conservative locals ruefully call it “The Peoples Republic of Vermont”. But, according to The New York Times, “Vermont is an offshore haven in one very real sense: It offers American companies lucrative tax breaks through unusual insurance arrangements. ... Vermont now rivals the Cayman Islands and Bermuda as the insurance destination of choice for American companies.” Indeed, Vermont, and more than two dozen states, South Carolina, Arizona and Hawaii among them, are cashing in on the ballooning demand for less costly, tax-advantaged captive insurance.
Looking for ways to provide alternative insurance coverage, medical professionals and many other business and professionals groups, have found an excellent alternative – a captive insurance company. These captive insurance companies are owned and operated by the professionals or corporate owners it insures. And under U.S. tax law, lower cost captives enjoy special tax breaks only available to insurance companies.
There are now over 5,000 captive insurance companies in operation. A large number of these are domiciled in Bermuda, where captive insurance began, and other offshore jurisdictions where laws are tailored for captives with more reasonable regulations. Out from under American law, they can operate with a more realistic level of capitalization that matches the risks involved. And these specialized offshore jurisdictions provide far better asset protection and insulation from domestic U.S. lawsuits as well. That is a major plus offshore has to offer over Vermont or any other American state where costly lawsuits can be easily filed and runaway juries routinely award unreasonably huge sums.
U.S. persons – and their assets – are sitting ducks.
For Americans, lawsuits are a real hazard. With more lawyers and lawsuits per capita than any other nation, U.S. persons are sitting ducks. Anyone who conducts a business in the U.S. is an automatic target for litigation. One professional group that has been a special target for contingency fee lawyers are healthcare providers – doctors, dentists, nurses, hospitals, clinics and pharmaceutical companies.
A new report issued early this month, Jackpot Justice: The True Cost of America’s Tort System, claimed the out-of-control U.S. legal system costs the U.S. economy $865 billion annually in direct and indirect costs – a yearly “tort tax” of $9,827 for a family of four. The authors claim, “These are astounding figures with real world consequences for American businesses and their employees. To put this in perspective, the average American household pays more annually in ‘tort taxes’ than in federal income taxes.”
This flood of lawsuits has driven business coverage and professional malpractice insurance costs sky-high. In some cases, these costs are far beyond companies and healthcare providers’ ability to pay. In many areas, medical specialists who are especially vulnerable to being sued, simply have moved away or stopped practicing. The American Medical Association identified 20 states facing a “medical liability crisis”, where medical malpractice insurance costs are so high that physicians have to abandon their practices or “go naked” without malpractice coverage.
Captive insurance is big business. More than 40% of the Fortune 500 corporations and many multinational companies own one or more captives. But captive insurance can be cost effective for small businesses and professional associations, such as physicians, dentists, medical group practices and hospitals. If you own a business or a professional association with annual insurance costs of $200,000 or more, forming or joining a captive insurance company may provide you significant cost savings, plus far better management and settlement of claims.
But do not let recently publicity about Vermont fool you. If you want true, iron-clad protection, you need to establish a captive insurance company in an offshore jurisdiction where your corporate and professional assets are far beyond the immediate reach of U.S. tort lawyers and American state and federal courts.Link here.
LIECHTENSTEIN TO REFORM FOUNDATION LAW
The Liechtenstein government has launched a consultation on planned revisions to the Liechtenstein foundation law. The government said that the consultation report on the amendment of articles 552 to 570 of the Law on Persons and Companies (PGR) it recently adopted establishes a modern foundation law that meets national and international demands for a homogenous and largely self-contained legal framework.
The goal of the total revision of foundation law is to harmonize foundation law with the relevant applicable jurisprudence and, by means of a systematic restructuring and differentiated design of key aspects of the content of foundation law, to achieve more legal certainty for those applying the law, while strengthening the Liechtenstein foundation in general.Link here.
I was jolted to read last week that public schools in Taunton, Massachusetts are planning to use a fingerprint scan as a way to enable students to pay for lunch. At the cash register, the student will simply tap a finger on an electronic reader, and a pre-stored mathematical formula derived from a fingerprint will bring up the student’s account. Some parents, as well as lawyers for the American Civil Liberties Union, raised objections. In some other states, fingerprints-for-lunch have already been banned. The explicit concern is articulated in terms of worries about identity theft, but a more visceral reaction to fingerprints may account for the skepticism.
In my case, that reaction is personal. As a college student nearly half a century ago, I spent summers working for the FBI in Washington. I went each day to what was called the “Ident Building”, the mammoth headquarters of the Identification Division, which occupied most of a block in an anonymous corner of Southwest D.C. near the rail yards. In the building’s vast open rooms were thousands of file cabinets holding millions of cards, each with ink smudges and classification codes. A swarm of file clerks (of whom, for a time, I was one) buzzed around the drawers like bees around a network of hives.
Soldiers and sailors were fingerprinted, and so were certain categories of government employees. When I was hired as an FBI summer clerk, I was fingerprinted. Such records could be used to identify accident victims or war dead. The FBI distinguished between “civil files” and criminal files, but those of us working at “Ident” knew that the enterprise was centrally about the government’s campaign to catch bad people and put them away. That is why I remember the day that my own fingers were pressed onto the inkpad and card as one of foreboding. With my fingerprints in the bureau file, the absolute presumption of innocence to which I was entitled as an American was mitigated. J. Edgar Hoover had a tag on me, and even though I admired him then, I felt the chill of his cold breath on my neck. The ink stain was hard to get off my fingers.
In later years, it became clear, even to those of us who began by admiring him, that J. Edgar Hoover was in pursuit not just of criminals, but of a whole range of people whom he disliked – “security risks”, “subversives”, “agitators”, “deviants”, “black nationalists”, “peaceniks”. When, a decade after my employment at the FBI, I was arrested at a peace demonstration in Washington, the ritual of being fingerprinted intimidated me more than others. I knew all about the FBI by then, but the fright was that the FBI knew all about me. My fingerprints were a window into who I was, and my accusers could see into me whether I wanted them to or not.
Imagine if, in addition to fingerprints, J. Edgar Hoover had access to the high-tech biometrics of the iris scan. And in addition to wiretaps, the eavesdropping technologies that snatch conversation out of the air. And in addition to agent surveillance, the electronic trails of credit cards, cameras on subways, satellite imaging, and EZPasses that register auto traffic through every toll booth.
Privacy, the dictionary says, is the state of being free from unsanctioned intrusion. But that definition seems anachronistic, with ubiquitous intrusion a new fact of life. For security, or mere efficiency, we Americans are sanctioning the end of our right to deny sanction to such invasion. Now, of course, it is not just law enforcers in the mode of J. Edgar Hoover who have the capacity to intrude, but also MasterCard, the credit bureaus, the Google user, the phone company, the email provider, the airport screener – and the lunch room cashier in the local school. And why shouldn’t parents be uneasy?Link here.
HANDS OFF MY MAIL!
Your correspondence reveals a great deal about you. Your mail reveals who your friends are, what magazines you read, what political organizations you support and a lot of other information you might want to keep private. That is one reason why it is not a good idea to receive mail at your residential address. Anyone can look through your mail if you keep it in an unlocked mailbox on the curb, as do millions of suburban Americans.
A post office box is the easiest and cheapest way to receive your mail outside your home. In the U.S., you must complete Postal Service Form 1093 before renting the box. This requires that you submit a valid photo ID and reveal your home address. Unlike the post office, a mail receiving service (or “mail drop”) gives you a street address. That makes it easier to receive packages not sent via post. It is also possible to receive correspondence under a pseudonym. And, in some states you can also list the street address on your driver’s license. This is a good privacy strategy, if only to prevent someone who steals your license from knowing your home address. To rent a private mailbox at a U.S. mail drop, you must complete U.S. Postal Service Form 1583, and again show a photo ID and reveal your home address.Link here (scroll down).
MONTANA REJECTS REAL ID ACT
Gov. Brian Schweitzer signed a law rejecting national driver’s licenses for Montanans, saying the message to the federal government was “no, nope, no way, hell no.” The bill the governor signed rejected implementing the Real ID act in Montana, a federal law that sets a national standard for driver’s licenses and requires states to link their record-keeping systems to national databases.
Montana joined two other states, Idaho and Arkansas, in enacting laws that outright refuse to comply with the federal law, according to National Conference on State Legislatures. Washington’s legislature has also passed a similar bill and Maine and Hawaii have passed resolutions opposing the Real ID act. The law says that the federally approved identification cards eventually would be necessary to board airplanes or enter federal buildings.
“We also don’t think that bureaucrats in Washington D.C. ought to tell us that if we’re going to get on a plane we have to carry their card, so when it’s scanned through they know where you went, when you got there and when you came home,” Schweitzer said. “This is still a free country and there are no freer people than the people that we have in Montana.”Link here.
SWISS BANKING SECTOR MONEY LAUNDERING REPORTS HIT NEW RECORD
While the Swiss Money Laundering Reporting Office Switzerland (MROS) received fewer reports on suspicious transactions in 2006 than in the previous year, reports from the banking sector on suspicious financial transactions reached an all-time high last year.
With 619 reports on suspicious financial transactions submitted to MROS in 2006, the number of reports received decreased 15.1%, from 729 in the previous year, according to the 9th MROS Annual Report 2006. As in the past few years, this decrease was due to a steady decline in the number of reports from the payment transaction services sector and in particular from the money transmitters, culminating in a substantial drop of 52.9% in 2006. The payment transaction services sector still accounted for a remarkably high share of 26.5% of the total reports in 2006. However, the quality of reports improved, a fact that translated into a higher percentage of reports forwarded to the prosecuting authorities for further handling (57% in 2006 vs. 45% in 2005). Another result of the better-quality reports is that in 2006 a mere 15% of the cases forwarded were dismissed, as opposed to 34% in the year before.
The number of reports from the banking sector rose by a significant 22.5% to 359. This represents an all-time high in the number of reports submitted by the banking sector since the duty to report suspicious financial transactions became effective in 1998. Accounting for 58% of the total of reports in 2006, this sector filed the bulk of reports again for the first time in five years. This increase is largely due to Article 305 of the Swiss Criminal Code, providing for the right to report suspicious financial transactions without violating the business-client privilege. The compliance services and their efficient monitoring system that take a risk-oriented approach also account for this increase.
The aggregate assets involved in suspicious-transaction reports rose 19.7% from about CHF681 million ($562 million) in 2005 to some CHF815 million ($672 million) in 2006. This increase, too, correlates to the increase in reports from the banking sector. About 2% of the aggregate assets or 1.3% of the sum total of reports MROS received in 2006 involved reports filed in relation to suspected terrorism financing. Most of the reports were triggered by lists made available publicly with the names of terrorist suspects.Link here.
BREWERS FINED FOR OPERATING A CARTEL IN THE NETHERLANDS
The EC announced that it has fined the Dutch brewers Heineken, Grolsch and Bavaria €274 million for operating a cartel in the beer market in the Netherlands, in clear violation of Article 81 of the EC Treaty, which outlaws restrictive business practices. In addition to the three breweries, the Commission’s decision named the InBev group, which also participated in the cartel. According to the EC, between at least 1996 and 1999, the four brewers held numerous unofficial meetings, during which they coordinated prices and price increases of beer in the Netherlands. InBev received no fines as they provided decisive information about the cartel under the Commission’s leniency program.
“It is unacceptable that the major beer suppliers colluded to hike up prices and carve up the market between themselves. The highest management of these companies knew very well that their behavior was illegal, but they went ahead anyway and tried to cover their tracks.”
After the Commission, on its own initiative, uncovered a cartel on the Belgian beer market, InBev provided information that it was also involved in cartels in other European countries. This led to surprise inspections on brewers in France, Luxembourg, Italy and the Netherlands. These investigations led to decisions condemning cartels in Belgium, France and Luxembourg. The Italian investigation was closed without charges being brought.Link here.
THE FIRST RULE OF MILK CLUB IS YOU DON’T TALK ABOUT MILK CLUB
The second rule of Milk Club is you do not talk about Milk Club.
That is what I learned this week while investigating what my wife described as Brooklyn’s Underground Raw Milk Movement. “I know something you might have some interest in that one of my friends is into, but I doubt you will be able to find anyone who will talk about it,” she told me. “She is smuggling milk that is not pasteurized from a farm in Pennsylvania to her Bay Ridge apartment.” Milk smugglers? “If the government finds out they could shut her down, shut the farmer down, shut everyone down.”
For drinking raw milk?
I immediately flashed back to a children’s book I once owned about how Louis Pasteur saved all of humanity by discovering that spoilage could be thwarted in wine by heating it below its boiling point. He then applied the same process to milk to destroy unwanted enzymes that looked a lot like unshaven Mr. Yuck stickers. “Your friend is a paranoid – and an idiot,” I told her. “Why would she want all those enzymes in her milk? And I have serious doubts that anyone is going to jail for drinking milk.”
“You are the idiot,” she replied. “If you ever read a book you would know that a lot of people believe it is much healthier, and that the government will go after you if they find out you are distributing.” I was intrigued, especially after I learned she was correct. It turns out that while possession of raw milk is legal, selling it is a crime. It is also a violation of federal law to transport raw milk across state lines with the intent to sell it for human consumption. So, I asked my wife if she would email her friend (we will call her Deep Milk) and get more details about this alleged milk underground.Link here.
AMNESTY INTERNATIONAL: U.S. IS ABUSER OF HUMAN RIGHTS
Human rights around the world are under siege as never before, the executive director of Amnesty International USA told a Madison, Wisconsin audience. What makes this attack so serious and damaging, said Larry Cox, is that it is not just coming from governments that have always demonstrated contempt for human rights. It is coming from a country that has long been held up as the champion of human rights.
Human rights mean that all people, no matter who they are, what they believe, or even what they have done, have certain rights rooted in the inherent dignity of human beings that cannot be violated for any reason, by any power, Cox said. For 45 years Amnesty International has documented and mobilized public pressure around the world against some of the cruelest abuses human beings can inflict on other human beings, Cox said. The organization has always raised concerns about human rights violations committed by the U.S., including cases of unfair trials, racial discrimination and the widespread use of the death penalty. It has also documented and fought against the U.S. role in condoning or even encouraging torture.
“But if we are honest, even in our most pessimistic and discouraged moments, none of us ever expected to live to see precisely the gross violations of human rights associated with dictatorship not just carried out but openly and publicly defended by the highest elected officials in the land, including the president and vice president and then ratified by the U.S. Congress,” Cox said.
Cox quoted an FBI agent on what he witnessed at Guantnamo, “On a couple of occasions I entered interview rooms to find a detainee chained hand and foot in a fetal position to the floor, with no chair, food or water.” Most of the time, the agent continued, the detainee had urinated or defecated on themselves and had been left there for 24 hours or more. On one occasion, the air conditioning was on so high the barefooted detainee was shaking. On another occasion, the air conditioning had been turned off and the temperature in the unventilated room was well over 100 degrees. The detainee was on the floor with a pile of hair next to him. “He had apparently been literally pulling his own hair out throughout the night,” an FBI agent reported.
Cox said that he offered the testimony of the FBI agent because of its source. “It is not the testimony of another detainee or of a bleeding heart human rights advocate like me,” Cox said, adding that the techniques, when used by other countries, are properly considered torture by the U.S. State Department.Link here.
THE SOUND OF SILENCE
There is scant space for silence today. We saturate ourselves in sound. We have largely grown uneasy with the domain of the imagination and the inner life, the silence of our own minds – a place that the poet e.e. cummings described as “the turning edge of life.” Yet Vijay Eswaran, chief executive of the Qi Group, a Hong Kong conglomerate, believes that time spent there makes him a better businessman. He has written a management book, In the Sphere of Silence, in praise of the power of an hour of quiet introspection every day to sharpen the mind.
Eswaran, whose $700 million (sales) company has interests ranging from eCommerce to ecotourism and interactive marketing, is a Malaysian who grew up in a meditative Hindu tradition that reflected his family’s Indian origins. He learned mouna vratham, a ritual of silence, at his grandfather’s knee. A part from the hour’s meditation, of which more later, the book’s advice can be summed up as listen a lot, think before you speak, make to-do lists daily. None of it necessarily bad advice for any leader. Quite the contrary. Stretching it to book length requires a lot of large type, centered text, many aphorisms and quotations from an eclectic list that ranges from Mother Theresa to Norman Schwarzkopf by way of Aristotle, Keats and the Prophet Mohammed.
Eswaran attributes his business success to following the book’s precepts for 18 years. This would mean he takes an hour a day to be in absolute silence. But this is proactive being. He divides the hour into five parts. The first three and the fifth take 10 minutes each, the fourth 20 minutes. Optimal time is between 4:30 a.m. and 6 a.m. If, for any reason, the silence is broken you start again.
The first part is to be taken up with reflection about the previous day, what could have been done to make it better, and analysis of why the better way was not taken yesterday. Part Two is to write down all the things that you need to do today. Part Three is to write down one’s goals – for the next seven days, for the next 12 months and for the next five years. Restate these goals daily. Part Four is to read for 15 minutes. The book can be inspirational or informative, and about anything that tells you something new. Spend the final five minutes of this part jotting down a summary of what you have just read. The following day, read the summary before you start your 15 minutes of reading. Part Five is to communicate with your god, in the way that is most comfortable to you, and write a summary of that reflection.
Do all this for 21 days, says Eswaran, and it becomes a habit. The silence and introspection make you a better you, because they help you channel your energies to maximum effect. And being a better you makes you better at business. This will probably be the oddest management book you will read this year, but it has a message to contemplate.Link here.
THE PARTY OF BROWNSHIRTS
Neoconservatives have turned the Republican Party into a Brownshirt Party. Look at the evidence. While real patriots flee the party, the remaining supporters cling to power by asserting dictatorial dominance for President Bush. The Republican Attorney General denies that the U.S. Constitution provides habeas corpus protection to American citizens. Rudy Giuliani and Mitt Romney, Republican candidates for the 2008 presidential campaign, believe the president has the power to imprison U.S. citizens indefinitely without warrants or trials. The “conservative” Federalist Society favors concentrating more power in the executive. Neoconservative ideologues claim the right to impose American hegemony over all others – especially over Muslims.
All of these Republican tyrants and budding tyrants claim to be protecting liberty and democracy. Polls show that the percentage of Americans who tilt Republican has declined to 35%. Republican recruits are refusing to run for Congress. Decency and intelligence have departed Republican ranks. The party’s shrunken base consists of ignorant and fearful people who believe Muslim jihadists are going to murder them in their beds, rapture evangelicals who believe that war in the Middle East is the prelude to their being wafted up to heaven, the military-security complex reveling in power and fortune, and resentful and frustrated people who can freely vent their anger and hate on “terrorists”. This collection of fear, delusion, greed, and resentment comprises the 30% of Americans who constitute Bush’s base.
The Bush administration’s determination to exercise American hegemony through warfare, and its assaults on civil liberties, the separation of powers, American prestige, and on good American jobs and the value of the dollar, have destroyed the party’s support. America’s virtue is its Constitution. An administration that attacks the Constitution attacks America’s virtue. The true dangers that Americans face come from George W. Bush and Richard Cheney and their neoconservative Brownshirt Party.Link here.
THE UNSTRUCTURED 21ST CENTURY
A hedge and private equity fund-run dystopia.
The decline of established institutions is supposed to be a liberating process, allowing individuals to express themselves fully and society to reach its potential through temporary structures that express its needs and values at a given time. Yet for those of us who are not 28 year old hedge fund traders, the new unstructured world seems likely to be a pretty grim place. “If you want a friend, get a dog” is in the long run an unpleasant way to live life.
The public sector in this respect is less of a problem than the private. The IMF and the World Bank have lost their useful economic role (to the extent they ever had one) but it appears unlikely that they will ever be abolished. The World Bank in particular is currently going through a bout of questioning because of its president Paul Wolfowitz’s crusade against Third World corruption. This is an entirely worthy if unpopular cause that is marred by the World Bank’s arrogance in tying it to handouts of money and by Wolfowitz’s own activity in arranging an overpaid tax-free job for his mistress. Were the World Bank a private sector operation, there is no question that its shares would currently be trading at a low multiple, while Carlyle, Blackstone or KKR geared themselves up for an asset-stripping bureaucracy-slashing leveraged buyout (Carlyle, given its political connections, might be the most appropriate buyer.)
The World Bank represents one extreme, that of a public sector bureaucracy that has become hopelessly ossified yet is unable to be put out of its misery (no international bureaucracy of this type has ever been eliminated – at best it has been replaced with another bureaucracy performing many of the same functions). At the opposite extreme, the private sector is currently eliminating large corporate bureaucracies at the rate of four or five a week. It is the latter problem that appears more urgent. Most people do not have the ability to turn on a dime that is required when their job is suddenly eliminated. Instead they must struggle to find further employment that may well not be as well paid or comfortable as the job that disappeared. The alternative of entrepreneurship, so alluring in principle, is in reality for 90% of the people who try it a recipe for anxiety, poverty and remuneration far below what is appropriate for their services.
It is not at present clear whether this is a phenomenon due to excessive cheap money since 1995 – but if it is, it has been remarkably prolonged – or whether the 21st century will see the death of the large corporation and its replacement by rapidly shifting aggregates of capital seeking to maximize returns. It is worth considering for a moment what in the latter case the world of say 2030 might look like.
In terms of income distribution, there would be a small elite of very rich people, managing hedge funds and private equity funds, whose reach would be worldwide. In theory, these would be the best and brightest of each generation, a true meritocracy. In practice, judging by hedge fund management’s current practices as well as by what appears to be acceptable in a World Bank president, nepotism and favoritism would be rife.
As well as the truly rich who ran the Funds, there would be the gilded youth, chosen by the Fund elite as their minions and eventual successors, who would be paid superbly, but would have to abandon both their integrity and all semblance of a life outside their Fund in order to qualify for their largesse. And there would be the managers employed by the Funds to asset-strip the companies they bought. These would be tough operators, probably military-trained, whose job would be to overcome the hostility of the masses whose lives they destroyed. Inevitably bomb threats and assassination attempts would be an accepted part of their existence. Their sole goal would be to extract “value” from the assets they oversaw, rather than to produce any operating improvements. They would be less well paid than the titans of the Funds, and would serve at their pleasure, but would still be hugely richer than everyone else.
There would be completely free migration around the globe, since the Fund titans would have paid off politicians to ensure that all barriers were removed, whatever the wishes of the electorate. This free movement of labor and utilization of the near-infinite pool of Third World cheap manpower would be the most important weapon enabling Fund managers to “extract value” from all situations, breaking up or squeezing out any activities whose operating managers and staff appeared to be building a Fund-proof alternative power nexus.
Job security would be something that little people did not enjoy. Jobs would be available in most specialties, and career ladders would be dangled before the proletariat to ensure docility and hard work, but jobs would be terminable at a moment’s notice. Naturally the masses would need to be kept in a state of passive discontent rather than outright rebellion, in spite of their modest living standards and lack of prospects. The Fund managers and their political allies would have a number of ways to achieve this.
The government would be large, supported primarily by taxing the labor force (the Fund titans would not pay taxes, like the Russian mafia and foreign bankers in today’s London.) As well as providing innumerable reasonably paid near-sinecures, the government would also provide social security and healthcare, available to all but revocable at the pleasure of the bureaucracy so that control could be maintained. Elections would be held, but only candidates acceptable to the Funds would get adequate campaign financing and access to the Fund-controlled media.
Internationally, an immensely powerful World Bank, supported by the West’s taxpayers but controlled by the Funds, would provide handouts for Third World governments to keep them in line with the Funds’ worldview and to ensure that sufficient labor was adequately educated and available for the Funds’ needs. Cooperating governments would find their people’s living standards modestly improving, and their leaders would be directly rewarded in person by Fund-controlled think tanks or the World Bank. If there were governments that refused to cooperate, they would be largely cut off from international trade and investment and World Bank subsidies. Military force would be controlled by the UN and other international bureaucracies, which would themselves be controlled by subsidies from the Funds and the World Bank.
Do not like this future? Recognize aspects of it already appearing? Well then, pray that the present period of easy money and rapid-fire private equity acquisitions ends quickly. In that way a healthy recession will allow normal economic and democratic forces to retake control of the world economy, removing the more egregious capitalist cowboys to the jail cells where they belong. Otherwise, every month of rising stock prices and negative real interest rates will increase the control of the Fund managers and lock the new dystopia more irremovably into place.Link here.
THE SONG OF THE PARASITES
Sunday Morning, the weekly CBS magazine on TV, had a segment on the financial squeeze of the middle class in the current U.S. of A. Sunday Morning is one of my (few) favorite television shows when it manages to stay away from politics and left-liberal preaching, which it manages to do more often than not, surprisingly. The thrust of the story was that the middle class is being eaten alive by inflation. Costs are increasing faster than income.
Well, uh ... sure they are. Do we need CBS to tell us this? But they do, and they go on to give examples of the problems in the form of two supposedly typical families. And sadly, they probably are representative. In one family, the husband is a policeman, the wife a nurse. In the other, the husband runs a “Community Improvement Corporation”, while his wife is a respiratory therapist at local hospital. These couples are whining about the fact that they are being deprived of the “American Dream”.
But pay attention here. Both men are engaged in the act of controlling and restricting the choices of others. And they do this while being paid (tax) money that was taken by threat of force from those very same people whose lives they feel entitled to control, using the threat of, or even actual, deadly force. And both wives in these “typical families” are employed in the socialized medical industry where payment and standards are set, not by the customers, but rather by a fascistic consortium of corporate and government pencil-and-favor pushing parasites.
There was not an example of a person working in a free market, exchanging value for value here. Nope. What we are shown is cogs in the criminal cartel, complaining that those productive people they are sucking the life-blood from are no longer giving out such large and lustrous golden eggs as they did in the past – when there were fewer leeches.Link here.
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