Offshore News Digest for Week of December 29, 2003

GLOBAL BUSINESS

FROM OVERLY CAUTIOUS TO OVERLY TRUSTING: THE TALE OF INVESTORS IN 2003

Quite possibly, investors became too fearful of companies and economic prospects at the end of 2002, shunning anything with the merest whiff of risk. Quite probably, they have taken too much on trust in 2003. Those assets that had been shunned as lepers became this year’s must-have buy. Thus did money flood into investment-grade and junk bonds. Thus, too, did money pour into equities. Having fallen sharply in the previous three years, their worst performance since the 1930s depression, this year world equity markets have put in their best performance for 17 years.

Some of the enthusiasm shown by investors is understandable. The headlines in the past few months have mostly been of the rosier kind: bumper corporate profits, balance-sheet repair after the ravages of the bubble and, above all, the seemingly miraculous economic recovery in America and elsewhere. There is, in fact, nothing very miraculous about the American recovery. A massive fiscal stimulus combined with a sharp boost to monetary policy -- both from a sustained reduction in short-term interest rates and the hefty trade-weighted fall of the dollar (which this week slipped to a record low against the euro) -- has had quite an effect. Whether recovery is sustainable is another matter.

But the paradox of most concern is this: why, despite the strong pick-up in growth and growth expectations around the world, the surge in equities and corporate bonds, and the dramatic rise in the price of gold, do ten-year Treasury bonds -- the world’s benchmark risk-free asset -- yield only a fifth of a percentage point more than they did at the start of 2003?

“BOLD” ECONOMIC PREDICTIONS FOR 2004 FROM FORBES

What to expect from business in 2004? Here is a healthy serving of bold predictions for the coming year from our editors on the state of the global economy, the markets and a handful of important industry sectors.

CONCERNS RISING WITH DOLLAR’S CONTINUED FALL

With the economy expanding smartly, interest rates low and inflation in check, President Bush is sailing into the presidential election year with perhaps only a single dark economic cloud on the horizon: the shrinking U.S. dollar. Whether that cloud produces a nourishing rain shower -- in the form of swelling U.S. exports and a recovery of manufacturing jobs -- or a deluge of rising interest rates and soaring budget deficits is the subject of increasingly heated economic debate.

Concerns are growing, especially on Wall Street, that the dollar’s slide will inevitably drive up long-term interest rates, and some analysts think the decline could even force the Fed to raise the rates it targets. That could slow the nascent economic recovery, swell the already-record federal budget deficit and possibly resurrect an economic problem unseen for nearly 20 years: inflation.

The nation’s twin deficits -- a trade gap approaching $500 billion for 2003 and a federal budget shortfall nearing the same mark for the current fiscal year -- will inevitably bring pain, in the form of rising interest rates and slowing increases in the standard of living, they say. “A lasting recovery cannot be built on a foundation of ever-falling saving rates, ever-widening current-account and trade deficits, and ever-rising debt burdens,” Stephen Roach, chief global economist at Morgan Stanley, wrote in his year-end economic analysis.

Economists warn rise of euro could stifle recovery.

The rise of the euro against the dollar is beginning to worry European economists who fear it may hit signs of a eurozone recovery, notably in Germany which depends heavily on exports. The euro climbed Monday above the 1.25-dollar mark for the first time, and stood Tuesday at 1.2499 dollars despite a minor rally. But the German government is, officially, remaining calm, and the country’s trade surplus is expected to hit another record this year.

Euro’s gains spotlight diversity in markets.

Four years after 11 European countries adopted a common currency, a substantial amount of uncertainty has been eliminated from continental commerce. Today, the euro zone comprises 12 nations that have, in many important ways, fused themselves into a single, unified marketplace.

Prices are converging toward uniformity from Germany to Portugal, particularly on big-ticket items such as cars. A single currency makes it easier for consumers to comparison shop, eroding the ability of companies to charge different amounts from place to place. For better or worse, the advent of the euro has accelerated a move toward competition across Europe, furthering the process of globalization on a continent known for strong national identities and resistance to change.

Still, in significant ways, the European market envisioned by backers of the euro, one in which capital flows easily across borders and the rules of the market are generally the same everywhere, remains an unfinished project.

A dollar crisis?

The main reason why the dollar is weakening is well known -- the U.S. is importing much more than it can pay for through exports of goods and services. To cover the deficit, America has to attract capital from the rest of the world. There is nothing new about that, except that the foreign trade deficit has reached frightening proportions yet continues to increase. The gap is expected to widen to more than $600 billion next year. But foreign capital has not been enough to prevent the dollar’s slide... Does this mean that we can expect a major dollar crisis next year?

The most likely scenario is that the dollar will continue to weaken without much being done to stop it, but with rallies as speculators who have gone short take profits. The decline will eventually accelerate and trigger a crisis. At that point the world’s big central banks will hurriedly agree on joint action to come to the aid of the dollar. The greenback will bounce back smartly (at least for a while).

The Fundamentals of a falling dollar.

The exchange rate is a measure of the relative value of these two currencies, not the value of the dollar or the euro per se. We cannot a priori rule out either that both the value of dollar and the euro have risen lately but the euro a bit more, or that both have lost in value but the euro less, or that one of them has kept its value and only the other changed. I believe both have lost value since mid-2001, as we shall see below, only the euro has lost less.

The ultimate proof of this is that the average prices still are rising on both sides of the Atlantic. It is hard to tell which currency is falling faster because of these reasons. However, I suspect that the magnitude of the dollar’s fall -- a third -- versus the euro since middle 2001 cannot be explained by these reasons alone. There must be other reasons as well.

How far will the dollar fall? And should we care?

We should be concerned, but if the administration, the Federal Reserve and the Congress act responsibly, the dollar should be near its bottom and begin to rise against most foreign currencies. At the moment, one has to pay about $1.24 for each euro, while three years ago one only had to pay about 80 cents for a euro, but at the beginning of 1999 the euro cost about $1.15. The dollar has also fallen in recent months against the British pound, the Japanese yen and many other currencies, but as much as it fell against the euro.

So long as the U.S. continues to offer a higher return on capital than its foreign competitors, both foreign banks’ and private investors’ demand for dollars grow, and the current account deficit can be sustained. However, the U.S. government made a series of mistakes that have discouraged foreign investors. America now is viewed as unfriendly to foreign investors. Certain provisions of the Patriot Act and the Sarbanes-Oxley Act produce excessive and costly paperwork and unnecessary privacy intrusions. The president’s tax bill reduced the tax on capital for U.S. taxpayers, but kept very high withholding rates on dividends for foreign investors, making them pay relatively more for helping our economy.

The Treasury Department also has not withdrawn the proposed, destructive foreign interest-reporting requirement, opposed by nearly all economists, even the administration’s. The U.S. needs foreign investment to sustain its economic growth, and foreign governments and private investors need a safe and stable haven, with reasonable rates of return, for their savings.

RIDE THE DEATH SPIRAL: VICIOUS CYCLES IN ENTITLEMENT SPENDING

The Long-Term Budget Outlook, released last week merely puts the Congressional Budget Office’s imprimatur on what taxpayers under the age of 40 have known for years: We are f*cked. The CBO’s projections indicate that our current spending policies will become unsustainable over the next half century. We face a choice between unprecedented rates of taxation, steep (and politically unpalatable) cuts in government benefits, or simply racking up debt until we have crippled the economy while nevertheless requiring some combination of tax hikes and benefit cuts. The last, most insane option is also the most politically probable.

COSTA RICA GROWS BUT FISCAL DEFICIT STILL A WORRY

Growth in Costa Rica this year is expected to reach 5.6%, the best performance since 1999. Total exports grew 15% from $4.41 billion in 2002 to $5.19 billion in 2003, including exports from duty-free production zones of $3.08 billion, up 25% on last year. Chip manufacturer Intel is a major contributor to this good export performance, with a large, state-of-the-art plant which is set to receive a further $110 million of investment after Intel decided to locate production of next-generation chipsets in the country.

Business leaders argue that the recent wave of economic growth includes only a small fraction of the country’s businesses and that most companies -- nearly 95% -- depend on the local market, which has not showed signs of recovery. However, a survey conducted by the National Statistics and Census Institute reported that Costa Rica’s poverty rate dropped during the last year to 18.5% -- its lowest level in nearly two decades. General unemployment grew from 6.4% last year to 6.7% this year. The large fiscal deficit in Costa Rica is fuelling doubts over the country’s ability to service its debt. International credit rating agencies Moody’s and Standard and Poor’s lowered the country’s ratings in April.

FIRST TAIWAN-PANAMA FREE TRADE AGREEMENT TO COME INTO EFFECT

he Taiwan-Panama Free Trade Agreement (FTA), Taiwan’s first FTA after it joined the World Trade Organization, will come into effect January 1, 2004. When the FTA comes into effect, up to 4,181 categories of Taiwan-made items, both industrial and agricultural, will instantly enjoy tariff-free access to Panama and 6,187 categories of Panama-made products will enjoy tariff-free access to Taiwan.

Although the FTA is expected to boost bilateral trade between the two sides, trade between Taiwan and Panama was relatively small in past years, accounting for only 0.06% of Taiwan’s total trade, according to statistics provided by the BOFT.

EASTERN CARIBBEAN STOCK EXCHANGE WITNESSED RECORD VOLUME IN DECEMBER

On December 17 total volume hit 1,128,941 shares, with trading particularly heavy in the Eastern Caribbean Financial Holding Company Ltd. whose stock achieved a 52-week high of $7.50. Bank of Nevis stock also hit a 12 month high at $4.50 per share. A significant amount of this increased liquidity originated from overseas investors.

THE CANADIAN RURAL ECONOMY, CAUGHT IN THE LINE OF FIRE

Without question, the road to Canada’s high standard of living and democracy was originally paved by the rural economy. Our forefathers cultivated a lifestyle of individual liberty, independence, and self-reliance through sustainable fishing, farming, and forestry. The harvest was prosperity, mutual respect, and good government. However, Canada’s prosperous rural economy is crumbling and under attack from urban socialism and the weight of government deception.

PAY THE RENT VIA CREDIT CARD AND EARN REDEEMABLE REWARD POINTS

A landlord is allowing tenants in 16 buildings in Manhattan to pay rent with American Express, which gives cardholders rewards points each time the card is used. These points can be redeemed for plane tickets and other items. American Express has also signed agreements with 12 property management companies nationwide that represent nearly 130,000 apartments. Its competitor Visa, which started working with property management companies two years ago, had deals with up to 1,000 buildings and 350,000 apartments nationwide as of last summer. Visa has a similar rewards program for its cardholders.

Tenants like the perk. But what else is in it for the landlords? Jim Eitler, a Visa USA vice president, cited a survey by his company last summer that showed that credit and debit card payments made for rent were processed 72% faster than checks and that there are at least 20% fewer delinquent payments by credit and debit cards than by check -- at the cost of a 2% or so processing charge paid to the card company.

Since the monthly rent check is the largest payment most New Yorkers make, it could easily bump up against a tenant’s credit limit. The president of a property management company in Manhattan, is concerned that middle-income renters with modest credit card limits could quickly max out. “What we don’t want,” she said, “is to see more people in bankruptcy.”

WEALTH GAP WORRIES EU STATES

Britain is now the richest of the big European countries, measured by gross domestic product per capita -- ahead of Germany, France and Italy -- but several small countries are far richer. Wealthiest of all, according to figures issued last week by Eurostat, the statistical service of the EU, is Luxembourg, with GDP per capita at 189% of the EU average. Ireland ranks as second-most wealthy at 125%, followed by Denmark, the Netherlands and Austria, Britain and Belgium, France and Sweden, Finland and Germany. Italy, Spain, Greece, and Portugal are all below the EU average.

But the new member states from Eastern Europe, who formally join the European Union on May 1, are on average less than half as wealthy as the current EU countries. The poorest, Latvia, has a GDP per capita only one-third of the EU average. Candidate countries expected to join in the future -- Romania, Bulgaria and Turkey -- are closer to one-quarter of the EU average wealth per capita.

Long the economic locomotive of Europe and still the biggest economy, Germany’s average performance in the EU listings is sobering. The new rankings reveal the cost of Germany’s long economic slowdown, and the impact of absorbing the lower-wage and less-productive former East Germany after the fall of the Berlin Wall.

POLITICAL UPHEAVAL MARKS SWITZERLAND’S YEAR

A parliamentary election result few political pundits predicted and a super-Sunday of voting were a couple of the highlights in a year which put paid to the myth that little changes in Swiss politics. The year was topped off with a cliffhanger cabinet election.

SPANISH OUTRAGED OVER ROYAL VISIT TO GIBRALTAR

Britain enraged Spain yesterday by announcing that the Princess Royal will travel to Gibraltar next year to celebrate the 300th anniversary of the colony’s conquest. The announcement that the Princess will visit the Rock added to Madrid’s anger after the failure earlier this year to strike a deal on Anglo-Spanish co-sovereignty over Gibraltar. The talks were abandoned after the Gibraltarians overwhelmingly rejected the proposal in a referendum.

UK LENDERS WARN GOVERNMENT NOT TO TREAT HOMEOWNERS AS THEIR “CASH COW”

A report published recently by the UK’s Halifax bank has found that the savings enjoyed by homeowners from historically low interest rates have been negated by an increase in taxes and other charges associated with home ownership, such as council tax and stamp duty. According to the Council of Mortgage Lenders, the number of home-buyers paying stamp duty in 2003 will be half a million higher than it would have been if the Government had uprated the threshold since 1997. Coupled with a sharp rise in council tax rates in recent months, the costs of running a home in Britain rose 7.2% last year, or three times the rate of inflation, the CML revealed.

HOW DID THE PARMALAT COLLAPSE HAPPEN AND WHO BENEFITED?

When Enrico Bondi, a turnaround expert, arrived at Parmalat in mid-December, he thought his job was merely to help restructure the finances of Italy’s biggest dairy group. Within days, however, events moved faster than even the shrewd Mr. Bondi can have predicted. He quickly discovered that Parmalat had overseen a huge and long-running deception, perhaps dating back nearly a decade.

Until there is more precise information, most people can only guess at how such a large fraud can have been constructed. But the broad outlines have begun to emerge. On the face of it, a financial-holding company seems to have been used to grab cash from the operating company, before losing that money through the silly use of derivatives and other speculative financial dealings. As the losses mounted, instead of coming clean, it seems that the stakes were raised in a desperate and ultimately futile effort to keep the scam going. If such a picture is broadly accurate, then Parmalat will look much like other corporate scandals. Until then, the worry is that fresh horrors may yet emerge.

Parmalat woes shine fresh spotlight on tax havens.

Once a mosquito-infested swamp and pirate’s lair, the Cayman Islands has ridden its tax-free status to become the world’s fifth largest financial center. On the way, the British territory has played a part in scandals from the Bank of Credit and Commerce International (BCCI) to Enron. Now the islands are enmeshed in what Italian magistrates believe is a decade-long fraud at Parmalat, which has plunged into insolvency owing up to €10 billion ($12.5 billion). Locals bristle at suggestions that the Caymans, like other tax havens, allow unscrupulous businessmen to evade the prying eye of regulators and taxmen. At least two Caymans Parmalat units purportedly between them held billions of euros in assets, which have been revealed to be fictitious, while others issued off-balance sheet bonds that kept Parmalat’s true debt levels out of sight, prosecutors say.

Cayman authorities often counter criticism by pointing out they have tough anti-money laundering laws. It is harder to open a bank account in George Town than in New York. They have also signed information sharing agreements with Washington and others. Nevertheless, corporate security experts say the scandals can only muddy the reputations of offshore centers, in which some estimate a quarter of the globe’s wealth is stored.

Parmalat’s Bonlat now in hands of Ernst & Young.

The Cayman Islands company at the center of the collapse of Parmalat, Bonlat Financing Corp., is now under the control of local liquidators Ernst & Young as a result of the liquidation of other Parmalat companies.

Milk money earned through web of deceit.

The company that Calisto Tanzi founded in 1961, using the proceeds of a small family prosciutto and tomato paste business in northern Italy, was built on milk. His big idea was to exploit a new Swedish technology for packaging long-life milk in cardboard cartons and thereby to turn a humble local food company into a giant international business. Parmalat did, indeed, become a corporate icon. As Italy’s eighth-largest company, it has operations stretching across five continents and 30 countries, employing more than 35,000 people in 200 units.

But it is now at the center of what increasingly looks like Europe’s biggest corporate scandal: a fraud, in the view of Italian prosecutors, that involved sophisticated financial mechanisms designed to siphon money from the company to Mr. Tanzi, to benefit other family owned operations, to prop up Parmalat’s share price, to disguise the parlous financial state of the group, to invent paper assets purporting to be worth billions of euros, and to hide what in retrospect has proved to be an ill-considered spree of expansion and acquisitions in the 1990s.

The seeds of Parmalat’s disaster were sown many years earlier. Even before Parmalat was listed on the Milan stock exchange in 1990, Mr. Tanzi relied on debt to grow the company. Although Mr Tanzi portrayed himself as a parsimonious entrepreneur who would call his production managers each morning to check on deliveries, he appeared to have a weakness for spending money on behalf of himself and his family.

The role of Italy’s “family capitalism” in the Parmalat collapse.

The bankruptcy of the Parmalat dairy giant has put a sharp edge on questions about corporate regulation in Italy, where traditions of weak independent oversight have long combined with a tendency for even big business to be family affairs dominated by insiders.

The government has proposed strengthening its toothless securities watchdog to better police the behavior of public companies. But the Parmalat scandal -- with allegations of crudely forged bank documents and losses hidden offshore in Cayman Islands accounts -- is a sign, some say, that Italy’s family capitalism needs even tougher controls.

GO WEST, UKRAINE

The EU and Ukraine have a common interest in accelerating the democratic and economic transition process in Ukraine. A successful transformation will bring prosperity not only to Ukraine but to the entire region. Ukraine has enough potential to make a breakthrough towards new technologies in industrial production, towards new relations in the sphere of economy, towards new views on quality of life and living standards, towards social and cultural integration of our population into the European community.

ARAB ECONOMIES IMPROVING?

When war in Iraq loomed, the country’s Arab neighbors predicted dire economic consequences for themselves. In fact, Arab countries have done quite nicely, thank you. Several of the biggest oil exporters saw their incomes surge by a good 30% this year, as prices stuck at the comfortable end of OPEC’s $22-28 target range. The reckoning that economists have long predicted, with oil monarchs failing to pamper their growing number of subjects, has again been put off.

But it is not just governments and contractors cashing in. The All-Arab Index, which tracks 79 stocks in 12 Arab countries, posted a gain of 50% in dollar terms in 2003. As for those fickle tourists, they seem to have more nerve than expected. Lebanon has enjoyed its best year since 1974, the last year before civil war wrecked its reputation as the Switzerland of the Middle East. And Egypt hosted a record 6 million tourists this year, up 20% on 2002.

CREDIT COMES COLD CALLING IN SHANGHAI

Ge Li is one of an army of sales people deployed in 10 target cities by China Merchants Bank, a mid-sized listed commercial bank based in Shenzhen, since it opened its credit card business in June. China Merchants aggressive sales strategy is an attempt to push itself ahead of what will be an ever-larger pack of financial institutions, foreign and local, climbing into the growing credit card business.

Their sales tactics, however, may trigger nervousness among financial regulators in Beijing. They want to encourage credit -- and through it, personal consumption -- but fear a headlong rush into debt. China has plenty of cautionary tales on its doorstep, most prominently South Korea, which encouraged spending on credit to revive the economy in 1999 after its financial crisis, only to find itself now laboring under about $100 billion in debt.

By the end of June this year, China had 544 million bank debit cards, but just 25 million credit cards, according to central bank figures. The card industry has been held back on a number of fronts, but mainly by an absence of reliable credit information on individuals and a relative paucity of retail outlets that will accept them. The other constraint, often cited elsewhere in Asia prior to credit card markets being opened, is a Confucian culture of thrift. But such nostrums are usually quickly swept aside by the hard-sell of ambitious financial institutions, once the market is opened. Few doubt that China has enough wealthy people to support a healthy credit card market, and a growing retail and back office network to support them.

Multinational firms rush to take advantage of CEPA agreement.

According to reports in the regional media, multinational companies are rushing to take advantage of the Closer Economic Partnership Arrangement (CEPA) between Hong Kong and the Chinese mainland, as the January 1 deadline draws closer.

CHINA’S COMMUNISTS PROPOSE PRIVATE-PROPERTY AMENDMENT

After months of internal debate, leaders of China’s communist party have submitted to the National People’s Congress a constitutional amendment aimed at protecting private property. Yes, you read correctly. According to the Associated Press, “The proposed property amendment says that ‘private property obtained legally shall not be violated,’ the official Xinhua News Agency reported. It said that would put private property ‘on an equal footing with public property.’” Optimism for a politically free China, however, should be tempered with a healthy dose of skepticism.

Chinese businessman executed.

A man has been executed in southern China after being found guilty of amassing a fortune while his state-owned investment company went bankrupt. The Chinese official news agency, Xinhua, said the former chairman of Hainan International Investment Group was convicted of illegally amassing over $5 million over a period of six years. His execution comes as China continues an anti-corruption drive.

THOUSANDS OF PROTESTERS MARCH IN HONG KONG (AGAIN)

Tens of thousands of people calling for democratic reform in Hong Kong marched through the city on New Year’s Day in scenes reminiscent of the July 1 protest when half a million people poured onto the streets. Lee Cheuk Yan, a pro-democracy member of the Legislative Council and an organizer of both this march and the July 1 event, claimed that about 100,000 participated. “It’s a very good turnout because we had expected around 20,000,” said Mr Lee.

Thursday’s orderly march will remind the government of Tung Chee-hwa, Hong Kong’s Beijing-appointed leader, as well as the Chinese leadership itself that despite an improvement in the economy and the abandonment of controversial security legisalation, interest in democratic reform persists.

As in previous marches, the protesters appeared to represent a broad cross-section of Hong Kong society and were remarkably orderly, following directions from police and leaving the park where they had gathered almost entirely free of litter. But there was nothing subdued about their message. The most popular chant of the day was, “Tung Che-hwa, step down!”

THAILAND CONSIDERS HEDGE FUND TAX TO CURB CURRENCY SPECULATION

Thailand’s government is considering placing taxes on hedge funds as part of proposals to discourage speculation in the baht and stabilise flows in and out of the currency. The proposed taxes would be applied when investors transfer money out of the country, although the Finance Minister Suchart Jaovisidha revealed that each case would be judged on its individual merits. “Something wrong can be detected when players invest in Thai shares and then draw their money out in one or two months,” Suchart observed in a recent Wall Street Journal report.

EXPATRIATES RESIDING IN THE U.S. SEEK VOTING RIGHTS IN HOMELAND ELECTIONS

Barbados citizens are not welcome to vote in elections back home. The reason, according to the island nation’s top elections official: “You left, you are not affected.” Brazilians, on the other hand, are not only allowed to vote but are required to cast ballots for president every four years. If they do not, they face a small fine and other penalties. Brazil and Barbados represent the two extremes of policies on expatriate voting rights, a contentious political issue in several Latin American and Caribbean nations.

As the international population in South Florida and the nation booms, more immigrants here are clamoring for a greater voice and influence in politics in their home countries. Immigrant activists from Nicaragua, Haiti, Mexico and Ecuador -- countries that do not allow citizens outside their borders to vote -- are working hard to gain the right to cast ballots by collecting petitions, buying radio time, and lobbying their national congresses and presidents. But often efforts to get the vote are stymied by politicians worried about the political consequences of giving even more clout to citizens abroad.

TAXES

I.R.S. REGULATIONS WILL CURTAIL OPINION LETTER TRADE

The I.R.S. will announce that it is going to focus on misconduct by lawyers and accountants who represent wealthy individuals and corporations. The move is intended to shut down the lucrative trade in opinion letters, which taxpayers buy in the expectation that they can get penalties waived if their strategy is disallowed. Opinion letters, typically scores of pages long and freighted with caveats, sell for as much as $1 million each. Such letters typically assert that a particular tax strategy is “more likely than not” to survive an I.R.S. audit, but often they are based on unreasonable economic and legal assumptions that do not necessarily match the specific circumstances of the taxpayer who buys the letter. Under the new regulations to be issued this morning, such opinion letters would become worthless for deals made since last Jan. 1, as a defense against penalties, which can run as high as 75% of the taxes not paid.

Another move would require legal and accounting firms to police their partners through high-level oversight committees. This strategy is intended to counter the weakening of self-policing resulting from a shift in the legal form of most professional firms from partnerships to limited liability partnerships. Under the old form, each partner was liable for all acts by all partners, a powerful incentive to enforce compliance with the law. Under the new form, the liability of each partner for misconduct by other partners is limited or even eliminated, provided that the partner remains unaware of the misconduct.

A novel approach to fighting tax evasion: simplify the code.

Rather than try to weed out companies and wealthy individuals, the IRS is attacking questionable tax shelters at their roots by taking on the lawyers and accountants who devise these scams and lend them credence. Cutting a weed’s roots usually kills off pesky plants. But not if there is a constant source of fertilizer. And wily accountants and lawyers are not alone in encouraging the growth of shady tax-avoidance schemes. Today’s tax code is so complex and pocked with special-interest provisions that exploiting it is easier than detecting abuses. The U.S. tax code is more than 54,000 pages long, with another 16,339 pages of instructions and forms. The average American spends more than 28 hours preparing his or her taxes, up from 17 hours in 1988, according to the National Taxpayers Union.

Things could get worse. An energy bill and a manufacturers’ tax cut being considered by Congress are loaded with special-interest provisions that would greatly complicate the corporate tax code. Such measures provide lawyers and accountants with the loopholes they use to practice their craft. By targeting those who aid tax scams, the IRS signals the importance of getting all taxpayers to play by the rules. Ultimately, though, Congress and the president need to simplify those rules and stop handing tax breaks to special interests. That approach would be truly novel.

IRS speeds corporate tax audits.

The IRS is fundamentally shifting its approach to auditing business tax returns, hoping to rapidly expand the number of businesses it audits by shrinking the time and scope of many of those tax examinations. Commissioner Mark W. Everson believes that by hastening the audits, the IRS will collect more taxes because more companies will fear that audits are coming. But others say faster audits will miss major tax fraud and would only embolden corporate tax cheats.

Everson said dramatic change is necessary to overcome the agency’s “scandalous” complacency in a worrisome deterioration in corporate attitudes toward paying taxes. Corporate auditors are still finishing work on tax returns from 1997, or even earlier, he said. The IRS was not even a “player” in uncovering the corporate scandals of the late 1990s because “we were not even near the year these returns were filed, which is inexcusable,” said Everson, who took control of the agency in May.

IRS appoints new “Office Of Professional Responsibility” chief.

IRS Commissioner Mark Everson announced the appointment of Cono Namorato to the post of Director of the Office of Professional Responsibility, in a move that the IRS hailed as an important step towards restoring faith in the nation’s tax system. The Office investigates allegations of misconduct or negligence against tax practitioners, and enforces the standards of practice for those who represent taxpayers before the IRS. Namorato’s appointment is particularly pertinent in the light of recent headlines surounding this issue, and the publication of new conduct guidelines by the IRS and the Treasury this week.

IRS (and acolytes): More cheats using Caribbean cover to beat taxes.

Rich Americans are stealing billions of dollars from average wage earners through creative tax-dodge scams involving idyllic Caribbean islands, Byzantine accounting ploys and the rarified world of high art. (etc., etc., etc.)

IRS extends reporting deadline for “offshore” firms.

Instead of being due on January 5, companies that made the move -- which tax experts sometimes call an “inversion” -- will now have until January 12 to file their notice of a “substantial change in capital structure” with the IRS. The requirement applies to U.S. companies that placed their headquarters on paper in a lower tax foreign country without changing its actual operations, after December 31, 2002.

US Treasury & IRS turn attention to Roth IRA abuses.

The US government has issued new guidance with the intention of preventing tax abuse involving the channeling of funds to Roth IRAs. The guidance addresses situations in which value is shifted into an individual’s Roth IRA through transactions involving entities owned by the individual. “The notice illustrates that a contribution to an IRA through a transaction that disguises the value of the contribution may disqualify the IRA,” stated Treasury Assistant Secretary for Tax Policy Pam Olson.

For example, notes the Treasury, a business owned by the individual could sell its receivables for less than fair value to a shell corporation owned by the individual’s Roth IRA. This scheme artificially shifts taxable income away from the individual’s business into the shelter of the Roth IRA structure. “In effect, this is a disguised contribution to the Roth IRA and the notice makes clear that it will be treated as such,” Olson concluded.

IRS cracking down or cracking up?

The IRS says it is cracking down on misconduct by corporate lawyers and accountants, that it will hasten audits of corporate returns, and that it is going after fraud stemming from the earned-income tax credit as well. But while the IRS says it is cracking down here and there, the long-term trend towards dramatically reduced criminal enforcement of the tax laws shows no sign of abating. A recent report by the Transactional Records Access Clearinghouse analyzing Justice Department data indicates that, as of 2002, criminal tax prosecutions brought as a result of IRS investigations currently are running at about half of what they were only ten years ago. Such prosecutions are at an all-time low, the TRAC report says.

The use of administrative penalties is also way down. In 2002, there were just 22 negligence penalties and 159 fraud penalties assessed against corporations. In 1993, there were 2,376 negligence penalties and 555 fraud penalties.

THE U.N. TAX?

The United Nations, for instance, wants to create an International Tax Organization (ITO) that would have the power to interfere with national tax policies. This crazy idea first surfaced two years ago in a report from the world body’s “High-Level Panel on Financing for Development”. Since then, the U.N. has been working to turn it into reality. For instance, U.N. General Secretary Kofi Annan recently called for the creation of a global tax commission.

An international tax organization, of course, would mean higher taxes and bigger government. Indeed, U.N. officials have been quite open about their intentions. The chairman of the U.N. panel that first endorsed the creation of an ITO said that it would “take a lead role in restraining tax competition.” For all intents and purposes, the U.N. wants to create an “OPEC for politicians”. Governments would conspire to keep taxes high, and countries with free-market tax systems would be targeted for persecution.

The U.N. also wants the power to levy its own taxes. The original report looked at two options, a tax on currency transactions and a tax on energy consumption. In the past, the U.N. has endorsed new taxes on the Internet, including a tax on e-mail. But the prize for the worst U.N. idea probably belongs to the proposal to give governments permanent taxing rights over emigrants.

TWO CANADIAN MUTUAL FUND EXPERTS DUKE IT OUT ON TAX EFFICIENCY

Two in-house tax gurus at competing fund companies both agree taxes are a critically important issue for mutual fund investors. But when it comes to talking about the tax efficiency and after-tax rankings of mutual funds, they appear to be from different planets.

One guru’s firm sponsored a tax-efficiency study that concluded the impact of taxes “scrambles” fund rankings and there can be significant differences between pre-tax and after-tax performance. The study further concluded that one of the most significant determinants of tax efficiency in mutual funds is low portfolio turnover. From the competing guru’s perspective, the importance of low distributions is blown way out of proportion. “When people are paying tax on distributions, they’re not paying taxes they wouldn’t have otherwise paid. They’re paying them early,” he says.

SKEPTICISM EXPRESSED ON GERMAN TAX AMNESTY

After the German government increased capital gains taxes in the early 1990s, thousands of well-heeled Germans secretly stashed away their fortunes -- about €1 trillion by some estimates -- in so-called low-tax safe havens such as Switzerland and Luxembourg. The center-left government of chancellor Gerhard Schröder has now granted an amnesty for the rueful sinners, hoping to fill empty state coffers with at least parts of the illicit money.

But the government is playing down expectations that they expect a flood of money to come back in under the new law. The 25% tax rate is only valid for those coming clean by the end of 2004. inance Minister Hans Eichel hopes his efforts will match the success rate of a tax amnesty granted by Italy in 2001. The government in Rome was able to lure more than €60 billion back into the country and gained about €1.5 billion in additional taxes. Experts say this was primarily thanks to a purely symbolic tax rate of just 2.5%. Friedrich Merz, finance expert for Germany’s opposition conservative Christian Democrats, is also doubtful whether a ten times higher tax rate here may really tempt offenders.

Tax reform to remain on German political agenda in 2004.

After pushing through several billion euros in tax cuts, German Chancellor Gerhard Schroeder has indicated that he is willing to discuss further tax reforms being formulated by opposition Christian Democrats, ensuring the taxation issue is to remain on the agenda in the months ahead. Referring to draft legislation tabled by Christian Democrat financial spokesman Friedrich Merz which calls for a radical simplification of the German tax code, Schroeder told Bild am Sontag recently: “I am definitely in favor of sitting down with the [Christian Democratic] Union and reaching an agreement to simplify the tax system.”

ASSET PROTECTION

LIFE INSURANCE CAN BE USED TO AVOID ESTATE TAXES

A general rule is that if a person retains the right to the income or the enjoyment of an asset during his lifetime, or even the right to completely give it away to someone else, then the value of the asset is a taxable asset of his estate and is taxed at its full fair market value as of the date of his or her death.

There are some plans and valid trust or gift arrangements that avoid the estate-tax bite, but they are subject to strict requirements that have been established either in the Internal Revenue Code and regulations or by case law. Life insurance trusts can be used to provide for ample funds for education of the children and support of a surviving spouse in any family, and especially to afford protection against an untimely death of a parent in a younger family. These trusts continue to be used with regularity by estate planners, and they will produce favorable tax treatment if the rules are followed.

The typical life insurance trust is irrevocable and is used to own an insurance policy that will pay off on the death of the owner or on the death of the survivor of the owner and spouse The trust is both the owner and the beneficiary of the policy. The trustee pays for the insurance with annual gifts from the father to the trust in amounts that will qualify for the annual gift tax exclusion, presently $11,000 per donee.

Estate planning tips to consider.

The estate tax is scheduled to phase out gradually from 2002 to 2009, be repealed in 2010, and then reinstated in 2011 based on 2001 tax laws. That, of course, assumes that there will be no further tax legislation during this time. To deal with these evolving rules, consider the following tips...

The proper use of living trusts in estate planning.

In the right situations, revocable living trusts can pave the way for a smooth, quick transfer of assets at death without the hassles of probate, the court-supervised process of settling an estate. But revocable living trusts, which are trusts that you can revoke or change while you are alive, are also widely misunderstood and often aggressively marketed to the wrong people. The hard sell is most often targeted at retirees. Financial planning and law firms, for example, may sponsor coffee-and-donut seminars to drum up business.

Meanwhile, so-called trust mills pump out poorly drafted, one-size-fits-all living trusts that are promoted as essential estate-planning tools for everyone to avoid the supposed horrors of probate and reap tax benefits that will not actually materialize with the run of the mill trust. Here are some FAQs to help you put them in perspective for your estate.

THE VERY RICH, IT NOW APPEARS, GIVE THEIR SHARE AND EVEN MORE

The top 400 American earners in 2000 provided nearly 7 percent of all the charitable gifts reported on income tax returns for that year, well in excess of their roughly 1 percent share of overall income, according to data released by NewTithing Group, an organization that tracks giving. The 400 taxpayers with the highest reported incomes in 2000 made an average of $174 million and gave away, on average, $25.3 million that year.

NewTithing Group received a breakdown of how much was donated in cash and how much in assets. It showed that nearly all of the increase came from gifts of assets, which qualify for a bigger tax break than cash.

Edward N. Wolff, whose research has concentrated on documenting increased inequality in American society, cautioned that other research reports showed that little giving by wealthy Americans went to charities that directly benefited the poor. He also contended that charitable giving by the superrich, measured against their assets, had been on a long-term decline.

PRIVACY

HOW TO HAVE A NATIONAL ID CARD THAT DOES NOT THREATEN CIVIL LIBERTIES

Debate about the concept has been polarized in the extreme. Techno-positivists argue that for a secure state, the government should have access to as much data as possible. Principled libertarians respond that government should not have access to any data at all -- that a badly designed system could keep tabs on citizens’ travel, spending, and personal habits.

The truth is, any identification system is inherently neutral; it can either respect privacy or threaten it. A privacy-friendly card is feasible if it follows one simple rule: verification, not identification. In other words, the card would confirm identity but would not allow the government to pick you out of a crowd. Technology alone will not prevent mission creep. After any card’s deployment, the government would have to be prohibited from accessing private fingerprint databases or linking them with other information without cause.

Designing a card that respects privacy in theory will be easier than getting Americans to accept it in practice. A poll conducted six months after 9/11 found that only 26% of Americans supported the idea. Moreover, a powerful antigovernment coalition of libertarian conservatives and liberal civil rights advocates opposes a government-issued ID card under any circumstances. These unlikely allies persuaded Congress to prohibit a national ID card in the Homeland Security bill. The pressure for ID cards will be overwhelming after the next attack, so a well-designed one is better than a desperate one. But rather than fixating on whether ID cards threaten privacy, civil libertarians and techno-positivists should explore security measures that might actually thwart terrorism.

U.S. TO REQUIRE PHOTOS, FINGERPRINTS OF VISITORS

Things were already rough for the tourism industry. First came a plunge in foreign visitors after Sept. 11. Then the United States made it far more difficult for foreigners to obtain tourist visas. And last week, the government warned travelers of heightened terrorism risks, and several Christmas Eve flights from Paris to Los Angeles were canceled because of those concerns.

Now there is a new headache for the industry: Starting next Monday, government inspectors will require the millions of foreigners arriving at this country’s air and sea ports to be fingerprinted and photographed every time they enter the United States. Federal authorities say the change is vitally needed to keep terrorists out of the country and should add just 10 to 15 seconds to the time it now takes to screen these travelers. But some in the tourism trade worry that it will provide one more reason for international travelers to bypass the United States.

US-VISIT will be put into effect at all 115 airports that receive international passengers and 14 seaports Monday, followed by 50 major land border crossings Dec. 31, 2004. All other land border spots will employ the system by Dec. 31, 2005. U.S. citizens and permanent residents will be exempt, but millions of other visitors with visas will be photographed and have their index fingers electronically fingerprinted, in addition to having to answer the usual questions from U.S. Immigration and Customs Enforcement officials. The fingerprints and photographs will be matched against government databases containing information about known criminals and terrorists to verify the visitor’s identity. The process will be repeated when the person leaves the country, in part to make sure they have complied with the terms of their visa. But questions have been raised about how well US-VISIT will work.

The situation could worsen after Oct. 26, 2004, when residents of 27 countries who can now travel here without a visa will be required to have machine-readable passports or be forced to go through the lengthy process of applying for a visa. Travel industry experts say some of the 27 nations -- including Spain, Italy and France -- may not meet the deadline, which could discourage their citizens from coming to the United States.

Brazil to fingerprint US citizens.

A Brazilian judge has announced that US citizens will be fingerprinted and photographed on entering the country. Judge Julier Sebastiao da Silva was reacting to US plans to do the same to Brazilians entering the United States. He made the order after a Brazilian government office filed a complaint in a federal court over the new US immigration measures.

Skeletons in closets haunt visitors to US.

Australians traveling to the US are being told to be honest about any past crimes or misdemeanours, no matter how trivial or how long ago, or face deportation, and even fraud charges, on their arrival. In tandem with the anti-terrorism crackdown in the US, existing visa conditions are being more strictly enforced. Anyone with a record of offences such as drink-driving or shoplifting, even as long as decades ago, is compelled to reveal his or her personal history in a visa application. Fingerprinting will be introduced to ensure that the same person who applied for the visa in their home country is the one who presents at immigration in the US.

PRIVACY ROW LOOMS OVER U.K. ID CARD CONTRACT

David Blunkett, the home secretary, is understood to favor asking private companies to bid for a multi-million pound contract to set up and run Britain’s new national identity register. The database, part of the government’s move to issue identity cards from 2007, is expected to contain “biometric” details such as fingerprints and iris scans. The disclosure heightens controversy over the ID card scheme, which will be set out in a draft bill next year.

Simon Davies, director of the pressure group Privacy International, said: “What you are dealing with is the potential to compromise for all time the identity of the entire population.” David Davis, shadow home secretary, indicated that the government would face a tough parliamentary battle over the plans.

Biometrics will be key to national identity register.

The planned national identity register is intended ultimately to be capable of holding key information about all of the UK’s 60 million citizens plus all the foreign workers in Britain. Contained in the database, which would cost about £186 million to set up over three years, would be information such as name, address, date of birth, sex, nationality, photograph, signature and biometric information -- e.g., an iris image.

David Blunkett, the home secretary, says the UK has no choice but to introduce a biometric-based ID card system -- or risk becoming the easy option for terrorists, people-traffickers and fugitives. Passports containing biometric information on a chip are to be introduced from 2005, and a pilot scheme has already been launched. The ID card scheme would be based on passports and driving licences. Only those UK citizens who have neither a passport nor a driving licence, or foreign nationals, would need to have a specific identity card.

LAW

PATRIOT ACT USED TO SNAG RUSH LIMBAUGH?

It was widely reported as an outrage, a use of the USA PATRIOT Act by the puritanical Attorney General John Ashcroft and his Justice Department to go after a crime that had nothing to do with terrorism. FBI agents conceded using Title III, the section of the USA PATRIOT Act that covers money laundering, in Operation G-string -- an investigation of corruption allegations against a strip-club owner in Las Vegas. However, Republican House leaders and the Bush administration wanted the Title III provisions considered only as separate legislation but it was Democrats who were adamant that it be attached to the USA PATRIOT Act. Justice Department spokesman Mark Corallo says although the Ashcroft team did not ask for the anti-money-laundering powers, it will use them whenever feasible to fight crime.

Radio commentator Rush Limbaugh reportedly is being investigated by Florida authorities for “structuring” -- that is, withdrawing money from his bank accounts just below the $10,000 threshold under which banks are required to report cash transactions to the government. There are provisions against “structuring” in both federal and Florida money-laundering laws. “I was not laundering money,” Limbaugh protested, just after coming back from treatment for addiction to prescription pain pills. “I was withdrawing money, for crying out loud!” That does not matter, says Charles Intriago, publisher of the Money Laundering Alert newsletter, and it also does not matter for what Limbaugh was withdrawing his money.

There are increasing numbers of prosecutions in which a money-laundering charge appears to be added just to beef up cases where the underlying charges are minor, say critics. In a case that now is on appeal to the Supreme Court, money-laundering charges were added to the weak “environmental-crime” case of David McNab. The fisherman was charged in 2000 with violating the Lacey Act, which makes it a crime to “import fish or wildlife taken in violation ... of any foreign law.” The foreign law in question was a Honduran regulation that made it a crime to harvest lobsters with tails less than 5.5 inches long. While Honduran government officials testified that the law actually was null and void, and only about 3% of McNab’s lobsters had tails less than 5.5 inches, prosecutors somehow convinced the courts that McNab’s depositing of the proceeds of this “crime” in his bank account constituted money laundering. Civil-liberties groups have signed a letter urging the Supreme Court to hear the case and free McNab, who has spent the last four years in prison.

FBI ISSUES AN “ALMANAC” ALERT

No, this headline is not from the satirical journal The Onion. The FBI is warning police nationwide to be alert for people carrying almanacs, cautioning that the popular annual reference books covering everything from abbreviations to weather trends could be used for terrorist planning. In a bulletin sent Christmas Eve to about 18,000 police organizations, the FBI said terrorists may use almanacs “to assist with target selection and pre-operational planning.” It urged officers to watch during searches, traffic stops and other investigations for anyone carrying almanacs, especially if the books are annotated in suspicious ways.

WHY WERE THE MODERN POLICE CREATED?

It is generally assumed, among people who think about it at all, that the police were created to deal with rising levels of crime caused by urbanization and increasing numbers of immigrants -- a “crime-and-disorder” theory. Despite its initial plausibility, the idea that the police were invented in response to an epidemic of crime is, to be blunt, exactly wrong.

Urbanization certainly had a role, but it is not the role it is usually assumed to have had. Rather than producing widespread criminality, cities actually promoted widespread civility; as the population rose, the rate of serious crime dropped. The crisis of the time was not one of law, but of order -- specifically the order required by the new industrial economy and the religious moralism that supplied, in large part, its ideological expression. The police provided a mechanism by which the power of the state, and eventually that of the emerging ruling class, could be brought to bear on the lives and habits of individual members of society.

The enforcement of the law no longer relied on the complaints of aggrieved citizens, but on the initiative of officers whose mission was to prevent offenses. Hence, crimes without victims need not be ignored, and potential offenders need not be given the opportunity to act. In both instances the new police were there doing what would have been nearly inconceivable just a few years before. It was in this way that the United States became “a policed society.”

HOW MONEY IS LAUNDERED

Money laundering occurs when criminals turn cash made from illegal activities into “clean” money through what appear to be legitimate business enterprises. The issue arose this week when Royal Canadian Mounted Police announced that a 20-month investigation into marijuana trafficking and cocaine importing led to police executing search warrants at various locations, including the legislature offices of two non-elected staff members.

Drug trafficking generates huge amounts of cash for organized crime, which “launders” illegal profits to avoid prosecution, increase wealth and evade taxes, according to an RCMP report on money laundering. Police say the amount of laundered money in Canada’s financial system is staggering. The report says money laundering has devastating social consequences, in that illegally gained funds provide financial support for drug dealers, terrorists, arms dealers and other criminals to operate and expand their criminal empires. The report provides a summary of commonly used money laundering methods.

PHILIPPINES TO STAY ON DIRTY-MONEY BLACKLIST UNTIL MID-2005

The Philippines will likely remain on the FATF blacklist of countries considered to be money-laundering havens by the international community until mid-2005 when the new Presidential administration would have proven its commitment to fighting dirty money. While the Philippines remains on the list, international financial transactions are expected to stay difficult, and counterpart nations maintain strict standards for identification to ensure that the funds being transacted are not sourced from illegal means. Especially at risk are the remittances of an estimates seven million overseas Filipinos who are expected to subsidize the local economy to the tune of $8 billion next year.

As an offshoot of these restrictions, banks operating domestically already require the registration of the serial numbers of US dollar bills whenever they pass through bank tellers. The time-consuming process—meant to improve security—delays transactions and has the potential to push legitimate clients to informal money lenders where the act of exchanging dollars to pesos is less bureaucratic and less strict.

FREEZE ON TERROR CASH NOT WORKING, ACCORDING TO SENATORS

The top senators on the powerful Senate Finance Committee are openly questioning a key federal agency’s ability to block terrorist money, citing examples in which U.S. officials failed to freeze the money of people identified as terrorist financiers by American allies. The committee chairman and its senior Democrat, cited numerous concerns about Office of Foreign Assets Control’s performance, including evidence of sloppy record keeping, failure to provide required information to Congress and reliance on voluntary compliance by banks to impose sanctions against suspected terrorists.

Though an internal investigation in 2002 recommended OFAC make changes to ensure it has the legal authority to test banks’ compliance with sanctions, the agency has not taken steps to do so, according to the letter obtained by the Associated Press. OFAC is an obscure office that is charged with freezing the bank accounts and other financial assets of countries, companies and individuals who are deemed enemies of the United States -- everyone from Saddam Hussein to Osama bin Laden. Based on orders from Congress and the president or just raw intelligence, OFAC names people to a “specially designated nationals” list that requires all financial institutions to block their money.

SUDDEN SUCCESSION OF PROPERTY RIGHTS TRIUMPHS FOR THE INSTITUTE FOR JUSTICE

Who could have guessed a week that began so dismally for private property would be so quickly followed by three major victories advancing this fundamental right? Before the next week would end, Institute for Justice would win in court on behalf of clients in New York and Arizona, and in the court of public opinion on 60 Minutes. With these current battles and victories already won, IJ is working to turn the tide against eminent domain abuse. Development will happen, but it will take place as it was meant to -- through private negotiation rather than by government force.

OPINION & ANALYSIS

ANOTHER COVERUP DECONSTRUCTED: WHO KILLED THE RED BARON?

The Red Baron’s all red triplane is synonymous with chivalrous knights of the air gallantly fighting in the skies over France during “the Great War” of 1914-1918. Rittmeister Manfred von Richthofen was a Prussian of noble lineage who became the most effective, the most feared and ultimately the best known exponent of air combat in World War I.

The memory of Richthofen has been mythologized in modern media, as has his death. The mystery surrounding his death is due to the uncertainty of the events in the last hour of his life. This mystery has led to disputes, past and present, over who actually shot Richthofen down. The basis for the confusion lies largely at the hands of the Royal Air Force. The controversy began with a mistake by the Royal Air Force. This mistake, rather than being corrected was perpetuated by the RAF for their own purposes.

One of Richthofen’s rules was to never chase an enemy aircraft on your own in enemy territory. Richthofen broke that rule with fatal results. Historians have studied his final flight in depth. More recently Norman Franks and Alan Bennett published The Red Baron’s Last Flight. In the light of this recent publication and their authoritative research, it is timely to ask the question again: Who killed the Red Baron?

WHY THE STATE IS DIFFERENT

A common accusation against libertarianism is that we are unnaturally obsessed with tracing social and economic problems to the state, and, in doing so, we oversimplify the world. If you let the people who say this keep talking, they will explain to you why the state is not all bad, that some of its actions yield positive results and, in any case, the state should not always be singled out as some sort of grave evil.

It is not inconceivable, they say, that the state is performing actions that weave themselves into the normal operation of society. The state is not always exogenous to the system but is sometime intrinsic to it. To constantly blame the state for our ills is as cranky as those who single out the Bilderbergers for all the world’s ills; it is a half truth gone mad. Without attempting a wholesale refutation of this position, what this criticism overlooks is the uniqueness of the state as an institution.

Among the state’s unique characteristics is that it is exempt from the laws it claims to enforce, and manages this exemption by redefining its criminality as public service. What is considered theft in the private sector is “taxation” when done by the state. What is kidnapping in the private sector is “selective service” in the public sector. What is counterfeiting when done it he private sector is “monetary policy” when done by the public sector. What is mass murder in the private sector is “foreign policy” in the public sector.

THE WAR ON RELIGION

The notion of a rigid separation between church and state has no basis in either the text of the Constitution or the writings of our Founding Fathers. On the contrary, our Founders’ political views were strongly informed by their religious beliefs. Certainly the drafters of the Declaration of Independence and the Constitution, both replete with references to God, would be aghast at the federal government’s hostility to religion. The establishment clause of the First Amendment was simply intended to forbid the creation of an official state church like the Church of England, not to drive religion out of public life.

The Founding Fathers envisioned a robustly Christian yet religiously tolerant America, with churches serving as vital institutions that would eclipse the state in importance. Throughout our nation’s history, churches have done what no government can ever do, namely teach morality and civility. Moral and civil individuals are largely governed by their own sense of right and wrong, and hence have little need for external government. This is the real reason the collectivist Left hates religion: Churches as institutions compete with the state for the people’s allegiance, and many devout people put their faith in God before their faith in the state. Knowing this, the secularists wage an ongoing war against religion, chipping away bit by bit at our nation’s Christian heritage. Christmas itself may soon be a casualty of that war.

Christmas Tree Freedom: A symbolic struggle for the soul of America

‘Tis the season to argue about Christmas trees, menorahs, nativity scenes, and the separation of church and state. Do the symbols and trappings of a religious holiday in public spaces, such as state universities, municipal park grounds, high schools, or City Hall displays, exclude and oppress citizens who do not belong to the majority religion? Or do restrictions on such displays sacrifice religious expression to sensitivity run amok?

LIBERTARIAN HEROES OF 2003

We gave Attorney General John Ashcroft heat, for example, for his fair-weather federalism. We took President Bush to task for growing government at rates unseen since the Roosevelt administration. We excoriated William Bennett and his defenders for the “no guardrails” double standard they apply to how regular people ought to live their lives. We bashed Ralph Nader for scamming college students. And we praised Sen. Ernest Hollings, not for anything he did as a senator, but for retiring, thus ending a decades-long political career spent tirelessly chipping away at progress, freedom and prosperity.

In a fit of misguided optimism, then, I have decided to start the New Year on a more upbeat note. I have managed to find a few politicians who did a thing or two right in 2003. The elected officials below are not perfect; on the whole, some of them probably deserve more scrutiny than praise. But each in some way took a stand (or several) to limit the size of government, defend our civil liberties or otherwise uphold the freedom of Americans at the expense of the state.

FREEDOM QUOTES

Not to be taken out of context, nor blindly accepted, but nonetheless fun. Among the morsels:

“What is ominous is the ease with which some people go from saying that they don’t like something to saying that the government should forbid it. When you go down that road, don’t expect freedom to survive very long.” -- Thomas Sowell

“Moderation in temper is always a virtue, but moderation in principle is always a vice.” -- Thomas Paine

“That’s the difference between governments and individuals. Governments don’t care, individuals do.” -- Mark Twain; and: “It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.” -- Thomas Sowell

SHAMPOO AND THE STATE

My shampoo says, “Wet hair thoroughly. Apply shampoo to scalp and gently massage into hair to work up a rich lather. Rinse completely. Repeat, if necessary.” I guess the manufacturers assume I would sit in the bathtub, staring at the shampoo bottle, completely stumped. Do they also think I might blow-dry my hair while sitting in a bathtub full of water? The sign on the hair-dryer warns me I should not do this. Where does it end? How about this warning: DO NOT STEP ON SIDEWALK CRACK. YOU WILL BREAK YOUR MOTHER’S BACK. Or this instruction: THIS IS A NOVEL. START AT PAGE 1 AND READ THROUGH TO THE END. DO NOT READ ENDING FIRST!!!

I am reminded of a quote by C.S. Lewis: “Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. It would be better to live under robber barons than under omnipotent moral busybodies. The robber baron’s cruelty may sometimes sleep, his cupidity may at some point be satiated; but those who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

Speaking of signs, I would like to see this one on all politicians: I WILL LIE TO YOU AND ROB YOU BLIND, ALL THE WHILE SAYING IT’S FOR YOUR OWN GOOD. Now that one I would agree with.

HOW THE NEW DEAL HARMED MILLIONS OF POOR PEOPLE

Democratic presidential candidates as well as some conservative intellectuals, are suggesting that Franklin Delano Roosevelt’s New Deal is a good model for government policy today. Mounting evidence, developed by dozens of economists, however, makes clear that poor people were principal victims of the New Deal. We should evaluate government policies according to their actual consequences, not their good intentions.

EUROPEAN UNITY: THE HISTORY OF AN IDEA

The drive for “European unity”, which will proceed further next year when the EU’s membership expands to 25 countries, has deep historical origins. Indeed, they stretch back to the dissolution of the Roman empire. Ever since the fall of Rome in 476AD, a strain in European thought has longed for the re-creation of an over-arching political structure for Europe, and used the Roman empire as a model. In 800AD Charlemagne, the king of the Franks, had himself crowned in Rome by the pope. His new empire stretched from the Pyrenees to the Danube and from Hamburg to Sicily; and his imperial seal bore the words Renovatio Imperii Romani, “the Renewal of the Roman Empire”. Charlemagne’s empire fell apart fairly swiftly after his death. But the memory of Charlemagne -- and of the empire that he wished to renew -- continued to inspire those who sought to unify Europe by fair means or foul.

It is easy to see common elements in the Roman and the Carolingian empires that might appeal to modern-day builders of Europe. Most obvious is sheer territorial expanse. To that may be added the creation of a common legal code, the issuance of a common currency as a symbol of imperial rule, the building of roads linking the empire (or trans-European networks, as they are unsmilingly called in Brussels). And all this is based upon a new, and supposedly lasting, peace within the empire -- for the Romans, the Pax Romana.

DIFFERENCES IN AMERICAN AND EUROPEAN WORLDVIEWS

Rather than viewing European anti-Americanism solely in terms of current policy disputes, we must look at our deep-seated cultural differences. According to a study conducted by the Pew Global Attitudes Project, Americans and West Europeans advocate very distinct philosophical stances, especially regarding matters of individual responsibility and the role of the state. Less than a third of Americans view their lives as defined by external forces, implying that the majority see the world in terms of individual responsibility. Meanwhile, Europeans minimize individual responsibility and attribute much greater importance to outside forces. Whereas Europeans tend toward a deterministic worldview, Americans focus on individual freedom.

THE CURRENT SYSTEM IS TO CAPITALISM AS MUSSOLINI IS TO JEFFERSON

Libertarians often find themselves squirming to explain why they are not apologists for the rich, protectors of the powerful and defenders of the privileged. This predicament usually comes when we face off against the left, the self-styled defenders of the little guy and the powerless. I suppose we have ourselves to blame for not making ourselves clear. We have not marketed ourselves well. Though we are thought to be spokesmen for billionaires, none of them to my knowledge gives us (non-beltway libertarians) any money. While we do in fact speak for the interests of the individual, often poor or struggling, few of them know it or identify with our (their) cause.

It was a recent letter from a nice fellow responding to one of my articles that prompted this essay. He asked, as we have all been asked a million times, who is going to take care of the poor in a libertarian society? I responded, in substance, you are under the false impression that the current system is designed to help the little guy when in fact, it is designed to screw the little guy. That is why there are so many of them (us).

The left thinks the current system is capitalism. It is not, unless they view Mussolini as a capitalist. No, it is corporatism or the corporate state, a marriage between big government and big business with big labor as a junior partner. This system is dominated by small, cohesive groups -- political machines -- out for graft, whose superior organization, discipline, greed and ruthlessness allow them to seize control of the state and use it for their own confiscatory purposes. This system is far from free-market capitalism. In fact, it is precisely engineered to eliminate the individual freedom and competition of the free market.

The political left often complains about the disparity in wealth between the rich and the rest of us. It is the corporate state, not the free market, that has created a society where a few at the top are doing very well while the bulk of the population struggles. We can break down the corporate state into three main elements...

THERE ARE NO NEOCONS IN FOXHOLES

It is said that there are no atheists in foxholes. It is also clear from the collective wartime contribution of the War Party that there are no neoconservatives in foxholes either. Fighting the wars they agitate for is a task for the “great unwashed”, not the Philosopher-Kings of neoconservatism. Perhaps this is why the neoconservatives are more concerned about the porous borders in Iraq than in the United States. Perpetual wars need perpetual sources of men, and is there any better source of cannon fodder for America’s wars than her own porous borders?

Whilst neoconservatism may owe its neo-Jacobin impulses of “global democratic revolution” to the Trotskyite pedigree of many of its principal ideologues, it owes much of its core political philosophy to Professor Leo Strauss. Strauss moved to America from Germany in 1938 on the suggestion of the Nazi legal theorist Carl Schmitt, taking up residence at the University of Chicago and developing a political philosophy that drew heavily on the writings of Plato, as well as the ideas of Nietzsche, Heidegger and Schmitt.

Strauss believed, like Plato, that the ideal society was one guided by the wise and not by the masses. Whereas Plato had recognized the impracticality of such a solution and instead settled for a rule of law, Strauss believed that the “wise” could indeed rule by implementing a policy of “perpetual deception” where the “populist” masses would be continually deceived for their own good and to protect the ruling elites from popular reprisals. Although Strauss remained relatively unknown outside academic circles until recent years, a cult formed around the Professor and today some 60 members of the Bush Administration are identified as Straussians.

The year of the liars.

The liars who rule us have taken their art to a whole new level. Truth, falsehood, it is all the same to this White House. Denying everything, conceding nothing, when caught in a lie they brush it off as irrelevant. This kind of brazen arrogance, combined with such power, has no real precedent in world history: not even the maddest of the Roman emperors, who claimed to be divine, exhibited such a lordly disdain for truth. The Greeks had a word for the illness that afflicts the warlords of Washington. They called it hubris.

LORD OF THE RINGS: MOVIE MAGIC, BUT PHILOSOPHICAL POISON

When I first read the Lord of the Rings as a child, I was moved beyond words. It was like entering a boyish fantasyland of adventure, danger, and romance. Tolkien painted Middle Earth with such poetic beauty that I wanted to unsheathe my sword and come to its rescue. His portrait of evil was captivating in its relentless malevolence. But now, decades after my first reading of the series, my perspective has changed. My “propaganda radar” is always on, and it picks up smuggled concepts and hidden political agendas like a tireless bloodhound. As much as it genuinely pains me to say it, this movie trilogy is philosophically corrupt.

Generally speaking, I see two politically-charged ideas advanced by this series. First, and of lesser importance, is a strong anti-technology message that is plainly evident. The heroes are warm and fuzzy people who live in pastoral environs. Cities and industry, on the other hand, are portrayed in the worst terms imaginable. Saruman’s demesnes are downright Dickensian.

While this Marxist/environmentalist propaganda is annoying, the more serious problem is the attack on “isolationism”. America, and much of the Western world, has had a long-running conflict between two irreconcilable views of the purpose of our civilization. One group, most aptly typified by the Jacobins of French Revolutionary fame, believes that society is an idealistic pursuit of utopia. This school of thinking holds that there must be a unifying goal which must be pursued relentlessly in order to justify society’s collective existence. The opposite pole, typified by the America First movement of 1930s fame, holds a position usually described as “conservative”. This group believes that the purpose of society is to provide a framework of liberty so that the people can go about living their lives. It requires a military of minutemen, not centurions. It believes in “community building” at home, not “nation building” abroad.

The psyche of our elites is essentially one endless loop of Lord of the Rings, with themselves starring as Gandalf (the wise one who must convince everyone else of the need for the Crusade). Their worldview focuses on a continuing series of Saurons. Southerners, Spaniards, Serbians, Muslims, etc., have each, in turn, served as the evil straw man against which the elites can release the grapes of wrath and swing their terrible swift sword. The problem with this “Middle Earth” view of reality is that it does not accurately reflect the world around us. Arabs are not orcs. Milosovic is not Sauron. This philosophy of endless Crusading will leave us with mounds of corpses and a bankrupt treasury. So as much as we might enjoy swinging our make-believe sword at those imaginary orcs, adulthood beckons.

THE CULTURAL ASCENDANCY OF AYN RAND

Admirers of Ayn Rand’s writings revel in the fact that two decades after the author’s death, sales of her combined works continue at a brisk pace. But Rand’s cultural impact can be measured in ways far beyond book sales. It stretches from academia to comic books to electronic media. In this year-end essay, I would like to take a brief look at the extent of that impact by surveying both scholarly and popular references to the author -- which, by any measure, have increased exponentially.

Of course, mere mentions of Rand do not necessarily translate into influence, especially when many of the mentions are negative. But there is truth to Oscar Wilde’s maxim: “There is only one thing in the world worse than being talked about, and that is not being talked about.” The fact that Rand has so profoundly entered the Zeitgeist is something that needs to be celebrated. What we are witnessing is nothing less than Rand’s cultural ascendancy as an iconic figure.