Offshore News Digest for Week of July 24, 2006

GLOBAL LIVING & BUSINESS

SINGAPORE REAL ESTATE – GET THERE BEFORE THE “GANG” ARRIVES

Hot investment money is pouring into mainland China’s biggest and most well-known cities. Shanghai has been a haven for foreigners buying commercial properties. Buoyed by rising property values, they are now also purchasing luxury residential real estate, mostly for rental purposes. Today the money is coming quickly from U.S., European, and Indian investors. But Chinese speculation in the Shanghai, Hangzhou and Beijing real estate markets is over. Oddly enough, while hot Western money is flowing into the People’s Republic of China (PRC), Chinese money for real estate purchases is flowing out. For anyone who wants to make money in the Asian real estate market, it is important now to watch closely where the mainland Chinese themselves buy and where trends likely will lead them.

For the last three years mainland Chinese who have returned to the PRC from the U.S. are brokering property purchases in America. Despite the distance and the hassle to get there, wealthy Chinese still see property in the U.S. as a solid investment that will return dividends over the long run. The U.S. market is a no-brainer for the Chinese investor. It is safe, transparent, mature, and it has endless choices based on your preferences. But, with the Hong Kong investment boom in Vancouver long over, no spot in North America, outside of the traditional California markets, has proved a highly concentrated “settling” point for Chinese investors’ cash.

Chinese speculators, who currently are peaking their run in Southwest China’s Sichuan Province, however, are another story. Anyone who knows anything about real estate in the PRC has heard of the “Wenzhou Bang”. In this case “bang” (pronounced in Mandarin Chinese with a short vowel ‘a’) benefits as much in meaning from its sound as the English word “BANG!” as from its Chinese meaning of “gang”. Indeed, the “Wenzhou Gang” causes all kinds of smoke and noise when it arrives in and leaves a city. This amorphous group is from one of the historically wealthiest cities in all of mainland China – wealth that never really disappeared when the Communist government took over in 1949.

The “Wenzhou Gang” demonstrated a pattern where they woul descend upon a city and begin buying up multiple available properties, driving real estate prices through the roof. Some would take their profits and leave quickly, while others would hold properties long enough to profit from downstream speculation generated by those following the Gang’s activity. The “Gang” has blasted its way already through the PRC’s most obvious and attractive Hangzhou, Shanghai, and Beijing markets. However, the mainland Chinese government has been busy trying to fight this domestic speculation phenomenon in China’s property markets. In addition, the PRC government is doing what it can to stop the hot foreign money flowing into Chinese real estate. Social pressure is forcing the government seriously to move quickly toward new property tax laws that will take the profit out of speculative ventures such as flipping properties in periods of less than five years. Unrest among the middle class in China as well as the poor continues to grow as they see that property, which was not even allowed to be in private hands 15 about years ago, is now already unaffordable to those of modest means.

It is obvious that Chinese money will have to flow elsewhere since the early glory days of real estate speculation in China are coming to an end for all. Moreover, rich people in China have never felt safe or completely at ease. So where will the “Wenzhou Gang” go? Although they have not yet figured it out, the hottest prospect for fast growth in Asian real estate available to mainland Chinese money is Singapore. And, if the “Gang” is reading the papers, the tip-off came for them in a Saturday, May 27th, when the Singapore government proudly announced that the Las Vegas Sands Corporation won the hotly contested contract to build a casino in a new “integrated resort” project on Marina Bay. From there, the “Gang” does not have to look far to see that all the international fundamentals are in place for a quick profit in a Singapore residential property boom. If Western investors want to reap the rewards from Singapore’s solid fundamentals that point to a significant chance for even stronger mainland Chinese investment, they will have to arrive now – before the “Gang” gets there!

China to restrict foreign investment in real estate to curb price boom.

The Chinese government is to place restrictions on foreign real estate investors in a bid to curb speculative investment and cool the country’s soaring property prices. New regulations will mean that foreigners seeking to buy homes in China will not be permitted to do so until they have resided in the country for at least 12 months. This restriction will not apply to Chinese nationals living in Hong Kong, Macao and Taiwan who buy houses for their own use. Furthermore, individuals and institutions will be required under the new regulations to set up a company to purchase property that is not intended for their own use. The regulations will also impose capital restrictions. The report failed to detail when the proposed measures would go into effect.

The Chinese government has tried a variety of tax, regulatory and monetary measures in order to avert a real estate market bubble, but the measures seem to have had little effect. In May, it was reported that China would in certain cities apply the previously unenforced 20% tax on capital gains from property transactions on houses sold within two years of purchase. The law would also apply a tax of between 2% and 5% on the full transaction value if the capital gain could not be established.

In Beijing, prices rose 14.8% in the first three months of this year vs. a year earlier – to 6,885 yuan, or $860, per square meter, according to the city government. Prices in the southern city of Shenzhen have risen by 25%, and prices in the north-eastern city of Dalian have jumped by more than 10%, government data showed. Meanwhile, the number of newly-established foreign-invested property firms increased by 25.4% in the first half of this year vs. H1 last year.

REAL ESTATE IN THE TURKS AND CAICOS ISLANDS

About 2 years ago a nice young American fellow I knew decided that starting a business in the Turks & Caicos would be too much of a hard slog. He sold his truck, packed up his belongings and fiancé and moved to a family investment property in the jungles of Belize. It turns out that the property was a hut without indoor plumbing on an impressive stretch of land which I expect was bought for a song. He affectionately called it the “Love Cabana”. He and his prospective better half stuck it out bravely for about 6 months. Then the fiancé left him in for the mod-cons of the Big Apple and he eventually followed suit, but Cupid’s arrow was by then irretrievably lost in the back woods of Belize. If there is a point to this it is that you are often better off buying the best quality real estate product that you can afford rather than going the other route. You only live once as they say, so you might as well live as well as you can.

I have visited the Dominican Republic on various occasions. Construction costs are comparatively cheap and the craftsmanship and quality of materials are good so I have always kept an eye out for “the deal”, but I was never moved to buy property there. I cannot afford the price of a small damp cottage outside Hamilton or anything else on Bermuda that I would regard as possibly habitable with a bit of upside potential on a resale. Cayman is similar in many respects to the Turks & Caicos but it has a tendency to be walloped unmercifully by passing hurricanes. Dominica has (large) snakes which I can do without. Neither Dominica nor Puerto Rico have what I would regard as white sandy beaches, which is central to my concept of a Caribbean lifestyle. Jamaica and the Bahamas have a bad rep for crime. Turks & Caicos is cheaper than Bermuda, Cayman and BVI but it is developing as a very high-end tourist destination, which is the driving factor behind real estate price appreciation. There is an shared view among many with broader investment experience than me, that the real estate tables will likely turn in 5 to 10 years with the Turks & Caicos leading the island nations of the Caribbean Basin (and the North Atlantic) in terms of pricing.

From an investor’s perspective the first point worth noting is that undeveloped land prices here have been on an unmitigated tear for the past 5 years – so much so that investors have increasingly (and quite rightly) been looking at other areas of the local real estate market for the next investment opportunities. So what makes the most sense for a prospective European real estate investor looking at the Turks & Caicos in 2006? One possibility which is right under everyone’s nose, and which I find increasingly interesting, is the condo market right in the center of Grace Bay beach, where it all began. While condos have proven to be solid investments over the past five years they have not doubled or tripled in price (yet) unlike undeveloped oceanfront land in certain areas, so the best investment returns may not have been seen yet.

WORLD TRADE ORGANIZATION TALKS FAIL OVER IMPASSE ON FARM TARIFFS

Negotiations aimed at reaching a new global trade agreement have collapsed, touching off a bitter new round of recriminations between the U.S. and Europe over farm trade barriers and dealing a blow to the Bush administration’s international economic agenda. After two days of wrangling by negotiators from six leading trade nations and blocs, the director general of the World Trade Organization, Pascal Lamy, formally suspended the talks, declaring that he no longer had hope of overcoming resistance in wealthy countries to sharply reducing domestic protection for their politically powerful farm industries.

With the apparent failure of the negotiations – which have been proceeding in fits and starts for five years – went the hopes expressed recently by President Bush and the leaders of other industrial nations for a deal they have said would create jobs at home while reducing poverty in Asia, Africa and Latin America. The World Bank called a trade deal essential to its goal of alleviating human suffering. The breakdown in the talks does not mean that the global effort to reduce trade barriers is dead. But there now appears to be little chance of a trade accord being negotiated before the end of President Bush’s term in office.

A deal, its proponents said, would have benefited Americans by greatly expanding the exports of farm products, reducing prices for a variety of food and creating new opportunities abroad for insurers and other financial services providers. Nearly 30% of American agriculture products are exported. But some farmers and their representatives in the U.S. had grown concerned that whatever new markets were gained would not offset the reductions in government subsidies contemplated by the trade talks. The farm lobby is so powerful in Congress that its opposition would doom the chances of any deal’s winning legislative approval.

The failure of the talks was especially embarrassing because at the Group of 8 meeting earlier this month, Mr. Bush and other leaders had called for a redoubled effort to break the impasse on farm goods. The goal was also to create opportunities for African, Asian and Latin American countries to gain stronger footholds in the global economy by growing more crops for export and developing basic industries that would help put their vast numbers of unemployed and underemployed to work. The collapse of the current talks at the W.T.O. is unlikely to stop trade from expanding, business groups said, mainly because trading powers like the U.S. and the E.E. will continue to sign two-way and regional trade agreements. But it could introduce a higher level of tension into the global economy and contribute to growing pressures for more subsidies and domestic protection, rather than less.

Why Doha’s derailment matters.

Free trade is essential for global prosperity. But negotiating a free-trade deal between ornery, go-it-alone nations is harder than herding cats. Just ask Pascal Lamy, the director-general of the WTO, who on July 24 reluctantly suspended the Doha Round of trade talks until further notice. The Doha Round “is not dead, but it’s definitely between intensive care and the crematorium,” Indian Commerce Minister Kamal Nath declared.

The danger now is that the world will break down into regional trading blocs. That would be especially bad for the U.S., which as the world’s biggest economy and only military superpower has the most to lose from economic and political fragmentation. What went wrong in these talks, which began in Doha, Qatar, in the aftermath of the terror attacks of September 11? The easy answer from negotiators in the hallways of Geneva, where the talks ground to a halt, was that the U.S. did not bend enough. They said the U.S. was the only nation that refused to negotiate further cuts in farm subsidies.

In reality, though, the U.S. is not the primary culprit. The real problem is that the Doha Round may have been doomed from the start by its own unrealistic objectives. First, it put great emphasis on reducing U.S. and European agricultural subsidies, even though those hurt a relatively small group of exporting nations and actually benefit many poor countries, which receive subsidized food exports. Second, the planners built up Doha as a “development” round, creating the unrealistic expectation among developing countries that they would get big benefits in exchange for few if any concessions.

SOUTH KOREA’S ECONOMIC GROWTH SLOWS AS SPENDING COOLS

South Korea’s economy expanded at the slowest pace in more than a year in the second quarter as consumer spending cooled, adding to evidence record oil prices are curbing Asian growth. GDP climbed 0.8% from the first quarter, when it rose 1.2%, the Bank of Korea said. The increase was the weakest since the first quarter of 2005. Slowing expansion in Asia’s third-largest economy highlights the risk of a regional slump as fuel costs soar and global central banks raise interest rates, threatening to damp growth in economies from Indonesia to Taiwan. The “soft patch” will extend into the second half, the Bank of Korea said.

“This definitely provides further evidence of a regional slowdown,” said Rob Subbaraman, senior economist at Lehman Brothers Asia Ltd. in Hong Kong. “Higher energy costs and higher interest rates are slowing demand, which likely will weaken further in the second half.” Subbaraman last month cut his 2006 growth forecasts for every Asian nation except China, Hong Kong and Singapore. “Asian countries are dependent on oil. Risks for growth are on the downside,” he said. The price of Dubai crude has jumped 27% this year, raising costs for South Korean consumers and businesses in a nation that imports almost all its oil.

Near-record fuel costs are damping other Asian economies. Thailand consumer confidence slid to a four-year low last month and Taiwan’s industrial production had the smallest increase in five months. Malaysia’s economy will grow at a slower pace than forecast as higher oil prices curb export demand, the Malaysia Institute of Economic Research said yesterday.

U.S. COLLEGE-GRAD WAGES STUCK IN A SLUMP

Wage stagnation, long the bane of blue-collar workers, is now hitting people with bachelor’s degrees for the first time in 30 years. Earnings for workers with four-year degrees fell 5.2% between 2000 and 2004 when adjusted for inflation, according to White House economists. It is a setback for workers, and it may explain why surveys show that many Americans think President Bush has not managed the economy well. Not since the 1970s have workers with bachelor’s degrees seen a prolonged slump. These workers did well during the last period of growth, with average wages rising 12% from 1995 to 2000, according to an analysis by the Economic Policy Institute.

A college education can still be a ticket to higher-paying jobs. College graduates earned an average of $51,206 last year, while high-school graduates earned $27,915, according to Census Bureau figures. Those with no high-school diploma earned $18,734. Although earning a bachelor’s degree is still worth hundreds of thousands of dollars in lifetime earnings, on average, the recent wage slump has affected a substantial part of the workforce. About 30 million Americans ages 20 to 59 have a 4-year degree and no advanced degree, according to the National Center for Education Statistics. The analysis did not lay out wage trends for people with advanced degrees. But other studies have found that wages for those workers were flat between 2000 and 2004, when adjusted for inflation, while confirming the decline for people with undergraduate degrees.

When wages for people with bachelor’s degrees declined in the 1970s, the cause was a flood of baby boomers entering the job market. This time, economists say, much of the blame goes to trends familiar to workers with less education. Offshoring, which has shifted manufacturing and call-center jobs to Mexico and India, is increasingly affecting the white-collar sectors of engineering and software design. Companies have continued their long effort to replace salaried positions with low-paid, nonsalaried jobs, including part-time and freelance positions without benefits.

Bush’s advisers say graduates are earning less because their ranks are swelling and they face tougher competition for better-paying jobs. But they see good news in the increase in productivity, and they say eventually wages will follow. However, some experts say wage stagnation could become a permanent fixture for most 4-year degree-holders. Harvard University economist Richard Freeman, in his 1976 book The Overeducated American, detailed the previous erosion of graduates’ wages. Today, he believes that college-educated workers will continue to see their wages erode because of the global labor market. Moreover, the pressure will intensify as China, India and other offshoring hubs develop their own glut of graduates.

IMF SAYS EASTERN CARIBBEAN IS DOING WELL, BUT …

Praises “important reforms”, including introduction of value added taxes.

David O. Robinson, head of an IMF staff mission to the Eastern Caribbean Currency Union (ECCU) countries, said recently that most Eastern Caribbean countries are benefiting from good economic conditions in the U.S. and the U.K. Said Mr Robinson, “Recent economic outcomes have been strong – growth for the ECCU region accelerated in 2005 to about 4½ percent, largely due to a recovery in tourism, and increased construction activity ahead of the 2007 Cricket World Cup. While inflationary pressures have emerged due to the strong economic activity and higher world oil prices, inflation has remained in the low single digits, anchored by the regional monetary arrangement at the ECCB. Fiscal positions also improved, with the central government primary balance (the overall balance of the government minus interest payments) recording a small surplus for the first time in nearly a decade.

“Buoyed by continued growth in the region’s main tourism markets … as well as the ongoing high level of construction activity, near-term growth prospects remain strong in most countries. This supportive environment provides a window to enhance the flexibility of the region’s economies that will be important to enable the region to take advantage of the new opportunities provided by the CSME (Caribbean Single Market and Economy) and the increasing globalization of the world economy, as well as to adjust to the further decline of trade preferences for bananas and sugar. …

“Despite the improvement in fiscal outcomes seen in 2005 and restructuring agreements reached with creditors in three countries – Antigua and Barbuda, Dominica, and Grenada – debt burdens remain high throughout the region. … Important reforms to place the fiscal balances on a firmer footing are underway in many countries – including through the introduction of value added taxes – and it is essential that improved fiscal positions are sustained. In this context, care will be needed to ensure that public sector investments are yielding adequate social rates of return and that tax incentives are not unduly eroding tax bases.”

CYPRUS OVERWHELMED BY EXODUS OF FOREIGN NATIONALS ARRIVING FROM LEBANON

Cyprus has exceeded its limits, is asking for practical assistance from the international community and especially the EU to handle the great humanitarian problems created with the mass exodus of foreign nationals arriving from Lebanon. Deputy Minister to the President and Government Spokesman Christodoulos Pashiardis pointed out Tuesday that “Cyprus does not need more credits and congratulations for the deed it has carried out so far alone and helpless, it needs practical and immediate contribution and assistance from all European countries.

“Cyprus has not only reached its limits, it has surpassed them with the danger of not being able to bear the influx of foreign nationals from third countries”, he pointed out, noting that “the problem cannot solely concern Cyprus just because it neighbors the battlefront.” Pashiardis remarked that the problem also concerns Europe and the international community which cannot distance itself from the obligation and responsibility towards thousands of people seeking refuge.”

The Spokesman said Cyprus will continue “until its limits are exhausted” to accept refugees and to offer every possible humanitarian assistance, anticipating however assistance promptly and practically and not late and merely verbally. He reiterated that Cyprus has asked for an opening of borders of other European countries in the event refugees from third countries begin to pour in, as well as more planes to Cyprus to promptly transfer foreign nationals to their homelands so that there is no gap between arrivals and departures and the creation of crisis groups at every European country. Pashiardis noted the issue is not financial at this time.

GIBRALTAR AIRPORT DEAL TO EASE LIFE ON THE ROCK

Spain, Britain and Gibraltar have reached a preliminary agreement on the disputed British colony’s airport and on speeding up border controls to make life easier for the rock’s inhabitants. The deal came during talks which began in late 2004, sidestepping the dispute over the colony’s sovereignty that for decades has dogged ties between Britain and Spain. A communique gave few details but said an understanding had been reached in talks which dealt with sharing Gibraltar’s airport to allow flights to Madrid and cutting delays at border controls which locals say can be a form of harassment by Spain.

Talks also dealt with Spanish requests for Britain to pay pensions to workers expelled from the colony when Spain’s former dictator General Francisco Franco closed the border in 1969. The final issue was Gibraltar’s call for Spain to recognise its international dialling code, which should cut phone costs for the rock’s 28,000 inhabitants.

The talks began when Madrid’s Socialist government dropped Spain’s long-standing refusal to talk directly to colony representatives. It says Gibraltar should be its territory. Spain hopes that by dealing with everyday concerns of the Gibraltarians, it will eventually be able to start talks addressing sovereignty over the colony, which was ceded to Britain in the Treaty of Utrecht in 1713. While Gibraltar’s ethnically mixed population mainly speak Spanish as well as English, and some live in the Spanish region of Andalusia, ties turned sour when Franco closed the border. In 2002, almost 99% of Gibraltarians voted against Britain giving Spain a share of sovereignty of the rock, which holds a British naval base as well as supporting tourism, offshore finance and gambling industries.

IRELAND’S ECONOMIC AND SOCIAL RESEARCH INSTITUTE PREDICTS CONTINUED STRONG GROWTH

The ESRI has published its Quarterly Economic Commentary (QEC) Summer 2006. Some of the main findings identified by the report’s authors include that strong economic growth will continue in 2006 with both GNP and GDP forecast to grow by 5.6% in 2006. For 2007, GNP growth of 5.1% and 5.2% for GDP has been forecast. Consumption is expected to continue to grow strongly over the forecast horizon, driven by a very robust labor market, healthy incomes growth and a contribution from the maturing of the SSIAs. Investment demand will also remain strong with growth rates forecast of 8.3% in 2006 and 6.5% in 2007. An acceleration in the pace of government spending growth in the run up to the election is anticipated.

In contract to the domestic sources of demand, net exports will make a negative contribution to GNP growth, with imports growing more strongly than exports. Employment increases of 85,000 in 2006 and 74,000 are expected in 2007. These increases imply a continuing strong rate of immigration with gross inflows forecast of 69,000 in 2006 and 62,000 in 2007. A number of trends and prospects point to slower growth beyond the forecast horizon of the QEC.

TAXES

HALTING GLOBAL TAX TYRANNY

Should the U.N. be able to tax you? Over the last several years, officials at the U.N. and other international organizations have been hatching schemes to directly tax the world’s people. Traditionally, only sovereign governments have the right to tax. The U.N. and other international organizations have largely depended on their ability to extract dues or other payments from their sovereign members.

Naturally, officials at the U.N., the O.E.C.D. and other organizations hate the present system because it limits their ability to spend other people’s money on themselves and their various schemes. The U.N. crowd has proposed an international tax on aviation fuel, a tax on airline tickets, taxes on international currency transactions, carbon use taxes, including a 4.8 cent tax on each gallon of gasoline, and other taxes on an extensive range of transactions, goods and services.

Properly concerned about these proposals, the U.S. House of Representatives passed a bill last month, crafted by Rep. Ron Paul, R-Texas, which prohibits the Treasury from paying dues to the U.N. if it attempts to implement or impose any kind of tax on U.S. citizens. The action has now shifted to the Senate. Sens. James Inhofe, R-Oklahoma, and Ben Nelson, D-Nebraska, also seeing the threat to national sovereignty and global economic prosperity, have introduced a bipartisan bill known as the “Protection Against United Nations Taxation Act of 2006” (S.3633). When enacted, the bill will require the U.S. government to withhold 20% of its subsidy to the U.N., the O.E.C.D. and other international organizations if those organizations develop, advocate, endorse, promote, or publicize any proposal “concerning the imposition of a tax or fee on any United States national or any income earned in the United States in order to raise revenue for the United Nations, any foreign government, or any international organization.”

A broad coalition of public policy and taxpayer groups has arisen to support the legislation. On the other side, the normal group of apologists for the U.N. and international organizations, who remain forever blind to the endless U.N. corruption and waste of taxpayer dollars, has emerged to resist restrictions on U.N. funding. Under U.S. law, it is illegal for a government agency to use taxpayer funds to lobby for more money for the agency. Yet, the U.N. and O.E.C.D. are doing so. Their spokespersons (paid by taxpayers from sovereign nations) are “lobbying” for more funds for their international institutions. In effect, we have the bizarre situation where the world’s taxpayers pay people to advocate higher taxes on themselves – and even worse, without any sovereign protection for the taxpayers. If this is not tyranny, what is?

If the U.N. and the other international organizations obtain the right to directly tax, you can be assured most of the world’s productive people will grow relatively poorer and less free, while the international bureaucratic class will become relatively richer.

CONSERVATIVE PARTY THINK TANK BACKS RADICAL SHAKE-UP OF UK TAX SYSTEM

An influential group of MPs in the UK Conservative Party is proposing to sweep away a number of levies that it says contribute to the complexity and inequity of the British tax system, and replace them with a simple property-based levy tilted towards the wealthy. A paper authored by chartered tax advisor Mark Wadsworth for the Conservative Bow Group proposes to abolish council tax, inheritance tax (IHT), capital gains tax on property sales and the TV licence fee and replace them with a 1% tax based on the value of all residential property, otherwise known as the “Land Value Tax”.

The system would mean the tax burden increasing in the wealthy areas of London and the South East, where the average house price is in excess of £300,000, while reducing the tax burden on the poorer areas in the north of England, where the average house price is £129,000. Under the proposal, the first £70,000 will be exempt from the tax, meaning that residential property in London would see an average annual tax bill of £2,370, slightly more than the current average council tax bill. In the north, the average property would see a tax bill of £590 – substantially less than the current average council tax bill.

According to the report, this system would help distribute the tax burden more fairly, whilst also reducing the complexity of the tax system by eliminating “stealth taxes” and replacing them with a single transparent levy. For instance, IHT, a tax traditionally associated with the well-to-do, is now paid by 1.5 million estates, a figure set to rise to 4.2 million by 2020 as house prices continue to accelerate away from the annually adjusted IHT threshold. The proposal also includes a 38% “flat tax” on all incomes above £11,000 per year. This would greatly reduce the amount of tax paid by those on low incomes, while a single worker earning £40,000 would pay the same amount of tax as under the current income tax system.

Wadsworth claims that his taxation proposals would be revenue neutral.

UK inheritance revenue up 13% in record first half on rising property values.

New Halifax research, based on data from HM Revenue And Customs, shows that inheritance tax (IHT) revenue hit a record £1.7 billion in first half of 2006, up £200 million or 13% from the first half of 2005. The amount of IHT revenue collected in the first half of 2006 matches total IHT revenue collected over the full financial year 1997-98. Last financial year (2005-06) the government collected £3.3 billion in inheritance tax revenue and projects £3.6 billion in revenue in the current financial year (2006-07).

Halifax estimated that the number of properties in the UK valued at more than the 2006-07 inheritance tax (IHT) threshold of £285,000 now stands at 1.5 million, or 8% of all owner-occupied properties. It projected this will nearly triple to 4.2 million properties by 2020 if the threshold is only increased in line with retail price inflation. The building society went on to predict that the revenue collected by the Exchequer from IHT could rise to £5.5 billion a year in today’s money by 2020.

PricewaterhouseCoopers survey questions effectiveness of UK tax incentives.

Many tax reliefs and incentives need to be reassessed if they are to genuinely help stimulate enterprise and encourage businesses to grow, findings from a survey conducted by PricewaterhouseCoopers LLP among UK privately owned businesses indicate. As part of the survey, interviews were carried out among just over 350 privately owned businesses, with the aim of testing awareness of fiscal incentives and other tax measures and how they were used.

According to PwC, the findings showed, (1) Limited awareness, with an average awareness across nine named incentive schemes of 41%. (2) Low usage, with an 11% average usage across the nine named schemes. (3) Limited impact, with a large proportion of respondents that did use the incentives reporting that their commercial behavior was unaffected, suggesting that these incentives may not be a motivation for behavioral change, but a form of reward or concession for what these businesses were doing anyway.

UK’S taxation of foreign sports stars sparks row with Pakistan.

HMRC’s determination to tax foreign sportsmen has sparked a dispute between the tax authorities of the UK and Pakistan on the interpretation of the double taxation avoidance agreement between the two countries. HMRC announced its intention to tax the members of the Pakistan international cricket team – currently touring in the UK – because they are not exempted by the bilateral DTAA which has been in force since 1980.

The dispute centers on the definition of an “athlete”. HMRC is treating the Pakistan team as individual athletes and therefore liable for tax. The Pakistan Central Board of Revenue says this interpretation is wrong. The PCB has also pointed out that England’s players were not taxed by Pakistan during the test and one-day international series between the two teams there last November.

HMRC’s latest attempt to tax foreign athletes follows the recent House of Lords decision that former Wimbledon tennis champion Andre Agassi is liable to pay UK tax on all sponsorship income accrued at the British tournament. According to experts, this extra-territorial taxation, which will threaten many foreign stars with higher tax rates, may discourage top athletes from competing in the UK.

VERIZON CARIBBEAN AND LATIN AMERICAN TELECOM UNITS SALE DELAYED BY DOMINICAN TAX BILL

Verizon’s planned sale of its Caribbean and Latin American units is being held up because the government of the Dominican Republic is demanding half a billion dollars in tax from the company. In April, Verizon, the telecommunications firm and internet service provider, announced its intention to sell the three telecommunications operations for $3.7 billion. Two of these units, including its Dominican and Puerto Rican operations, are being sold to Mexico’s America Movil SA. However, before the sale can be legally cleared, the government of the Dominican Republic is demanding $500 million in a compulsory tax stemming from the $2.6 billion sale of Verizon Dominica to America Movil. Representatives of the government were said last week to be engaged in talks with Verizon to resolve the dispute out of court.

IRS TO HALVE ESTATE TAX COMPLIANCE PERSONNEL, REINVEST SAVINGS IN INCOME TAX AUDITS

The IRS is planning substantial cuts in the number of estate tax lawyers and audit staff it employs, as a result of the Bush administration’s efforts to reduce the number of people liable for estate tax. The IRS plans to cut the jobs of 157 of the agency’s 345 estate tax lawyers, plus 17 support personnel, in little more than two months. IRS Deputy Commissioner Kevin Brown explained that the cuts have been brought about because there are now far fewer taxpayers subject to estate tax.

Currently, estates worth more than $2 million for singles and $4 million for couples are taxed at a maximum 46% rate. Under tax legislation passed in 2001, the exemption level will rise to $3.5 million (and $7 million for couples) in 2009, while rates are set to decline to 45% in that year, before being repealed for one year. However, the tax will then be resurrected at the pre-2001 rate of 55%.

Some tax lawyers affected by the staff cuts have suggested that the staff cutbacks in the area of estate tax and gift tax are less to do with saving money and more to do with protecting wealthy individuals with political links to the Bush administration from answering awkward questions about their tax affairs. These lawyers have claimed that the agency has become increasingly reluctant to pursue cases involving the use of complex schemes to understate the value of assets. Another tax lawyer suggested that the move is an effort by the Bush administration to bypass Congress and eliminate the estate tax by the back door. However, Brown said the IRS has no intention of letting its guard down where wealthy taxpayers are concerned, and that the money saved by reducing the estate and gift tax compliance department will be used to hire extra staff to audit the tax returns of those with annual earnings of more than $1 million.

EC ALLOWS REDUCED VAT RATES ON SOME LABOR-INTENSIVE SERVICES UNTIL END OF 2010

The European Commission has announced a proposal to allow 17 member states to continue to apply reduced rates of value added tax on certain labor-intensive services until the end of 2010. The application of a reduced VAT rate to certain specified services, such as renovation of private dwellings, hairdressing, window-cleaning, domestic cares and small repairs, will be allowed in principle. Member States are authorized to apply these reduced rates from 1 January 2006 until 31 December 2010.

The EC will allow member states that have already applied reduced rates under an earlier directive to continue to do so. These countries include Belgium, France, Italy, Luxemburg, the Netherlands, Portugal, Spain and the UK. Meanwhile, member states wishing to apply a reduced rate for the first time to some labor-intensive services, or wanting to modify their previous authorization are also being permitted to do so by the EC. These include Cyprus, the Czech Republic, Finland, Hungary, Malta, Latvia, Poland and Slovenia. Greece has requested for an extension of the scope of its previous request.

The lower VAT rates on labor-intensive services have been a source of much friction between member states, particularly between the new and old EU members. In January, Cyprus, the Czech Republic and Poland angered their fellow EU members by refusing to accept a compromise on extending reduced VAT rates, which expired at the end of 2005. The Commission had threatened to take legal action against countries still imposing the lower rate, if an agreement could be not reached. However, a deal supported by the majority of EU members in January meant that reduced rates would be extended until 2010, albeit on the same services as before, much to France’s disappointment.

BARBADOS TO CUT CORPORATE TAX AGAIN

The Barbadian Minister of Economic Affairs, Mia Mottley, has announced that the government is seeking to bring about a further cut in the island’s rate of corporate tax. Under proposed legislation, the corporate tax rate will fall by 5 percentage points to 20%. In addition, the new laws will widen the scope of duty-free imports to include raw materials as well as machinery and capital equipment in a measure designed to benefit small businesses.

Barbados has lowered its corporate tax rate several times in recent years as it gears up for a more competitive economic environment in its region following the launch of the Caricom Single Market Economy (CSME). International pressure to dismantle the jurisdiction’s dual regime for onshore and offshore entities has also forced the government to consider more radical corporate tax options, including a tax rate as low as 7%, but paid by all companies. Barbados’s standard rate of corporate tax rate was as high as 40% as recently as 2003.

No need to reduce public sector size, says Barbados MP.

There is no need for Barbados to reduce the size of its public sector, and the adoption of e-government will not result in any such reduction. That assessment from economist and former opposition leader Clyde Mascoll, MP for St. Michael North-West, and Minister of State in the Ministry of Finance, as he spoke in Parliament on a resolution to take note of the draft e-government strategy.

“There is no evidence whatsoever that there will be any decline as a result of the adoption of e-government, of the size of the public sector. In fact, I have argued for years that there is no need for any reduction in workers within the public service of Barbados. What is required is that the private sector becomes the engine of growth, such that over time, the public sector as a proportion of the economy gets smaller,” Mascoll stated. Noting that life was not about absolutes but about relativity, Mascoll said the environment for positive evolution of the public sector was already being created.

FOREIGN INVESTORS WILL BENEFIT FROM REVISED AUSTRALIAN TAXATION OFFICE RULING

Foreign investors stand to gain the most from the ATO’s revised stance on interest deductibility, according to accounting firm PricewaterhouseCoopers. Under the new rulings, issued on July 26, there will be more situations in which businesses can claim a tax deduction for interest costs. These new circumstances include debt arising from internal group reorganizations and refinancing transactions. The new ruling replaces drafts released in August last year which sought to limit interest deductions under the corporate tax consolidation rules.

“As a general principle, all funding costs of a business should be tax deductible provided thin capitalization requirements are satisfied. The August 2005 draft rulings challenged this principle,” noted PwC International Tax Partner Peter Collins. “All foreign owned and operated businesses will welcome this change. Many of them would have been planning to comply with the conditions of the draft ruling as it unusual for a draft ruling to be revised.” The ATO has accepted the refinancing principle, meaning that interest on loans will be fully tax deductible provided the head company of the consolidated tax group can show that all of the interest expense is related to business activity.

PANAMA: TAXES, TAXES AND MORE STINKING TAXES!

We all dislike taxes and we have seen more and more of them in Panama the last few years. When we began developing in 2000 there were few taxes. Now we have ITBM, ITBMS, sales taxes, and taxes on top of taxes. The expansion of the canal is partly to blame because to get their credit rating up, Panama had to be more aggressive enforcing existing tax laws and implementing new ones. Where will it all end? It probably will not and will cost everyone a lot more to live and do business here as the increase in taxes filters into the cost of all goods and services.

One of our concerns is that home costs are increasing dramatically due to higher prices of materials, fuel and labor. This makes us less competitive in the world market place, which has been our main attraction. Of course higher prices also mean higher sales taxes which are a percent of the gross. Couple this with increased permit fees, labor, social security and it really adds up. Now we have a new spin on an old capital gains tax. Some believe this is a better alternative to the existing 30% corporate tax on profits, but I am not so sure. Below is a translation of the new tax law from June 20th and examples of what it costs on the sale of a home.

U.S. HOUSE POSTPONES VOTE ON INTERSTATE COMPANY TAXATION

The U.S. House of Representatives has postponed a vote on a piece of tax legislation that would simplify and clarify state tax procedures for firms doing business across state lines, amid opposition from state governments. The Business Activity Tax Simplification Act attempted to resolve the issue of states seeking to collect business activity taxes from businesses headquartered in other states, by setting out specific guidelines for when an out-of-state business may be charged a tax for doing business in a state.

Over the past several years, a growing number of states have sought to collect business activity taxes from businesses in other states. The problem is that different states use different standards for determining what constitutes sufficient contacts with a state to justify taxation. To accomplish this, the bill would create a “physical presence” test to determine when an out-of-state business would be obliged to pay taxes to a jurisdiction. A physical presence is defined as leasing or owning real or tangible property in the state or assigning one or more employees in the state for more than 21 days.

However, the bill aroused opposition from the states, which feared that if approved, the law would lead to a drain on their coffers. The bill’s sponsor, Bob Goodlatte (R-Virginia), believes that the current system is flawed and acts as a barrier to interstate trade and commerce, particularly with regards to e-commerce where the traditional physical boundaries are not easily defined. “This legislation focuses on allowing the Internet and the commerce that it facilitates to expand, by eliminating excessive taxes that harm on-line growth,” he has stated.

ASSET PROTECTION / LEGAL STRUCTURES

LIVING WELL IS THE BEST REVENGE

I have had it with the rat race. I am tired of scrambling to make a buck, tired of working for The Man. America is the unending hamster wheel to oblivion, where apparently you win if you die while in possession of a plasma TV, the fattest mortgage or the bitchinest Beemer ever. There has got to be a place left in the world where a man can be reflective rather than reactive, where mellow is the coin of the realm. Like Blake, I would like to kiss a little of the joy as it flies before shuffling off this mortal coil. And I do not want to have to be laden like a Spanish galleon to do it.

I used to believe that my salvation lay in France. Ah, the French … now they know how to live. Those wonderful cafes, those enticingly short work weeks, their joie de vivre. Wie Gott in Frankreich, “like God in France,” is no empty German phrase. Or, maybe, if France did not work out, I could transform myself into an indolent Spaniard or a drowsy Italian. A friend of mine, recently returned from Croatia, tells me the Dalmatian Coast is a bastion of easy living just now. But these are just foolish, romantic notions. If the European idyll ever existed at all, it exists no longer. The imperatives of the global economy, extolled and fueled by amped-up capitalists everywhere, put the kibosh on that.

So, where to go? Vanuatu. This South Pacific archipelago, lying due west of Fiji, is, according to the Happy Planet Index, the happiest country on Earth. The criteria used for determining happiness are what appeal to those of us with a normal human heart rate and relatively modest expectations in life. The index, compiled by the progressive New Economics Foundation (sort of an anti-Cato Institute), established its criteria for ranking 178 countries using classic economics – the ratio of benefits to costs. Nations were ranked by their general satisfaction with life, life expectancy and their environmental footprint. The latter refers to the amount of land required to sustain the population while adequately handling the attendant energy consumption. By that measuring stick, says the NEF, Vanuatu comes out on top. The U.S., leaving a size-16 environmental footprint wherever it treads, ranked 150th. And La Belle France fared little better, coming in at 129th. (Germany, interestingly enough, placed 81st, so perhaps they should consider redrafting the phrase.)

The index is a call for re-evaluating the way we live, for a reassessment of our core values. It is an indictment of mindless consumerism, and high time for that. Asked why he thought Vanuatu is the happiest country on Earth, Marke Lowen of Vanuatu Online said, “People are generally happy here because they are very satisfied with very little. This is not a consumer-driven society. Life here is about community and family and goodwill to other people. It’s a place where you don’t worry too much.” It sounds a little bit like Gauguin’s Tahiti, before the tourists swarmed in. We can all decamp to Vanuatu, which would no doubt thrill the islanders and totally screw up paradise. Or we can heed the words of Lowen, stay where we are, and learn to be satisfied with a little bit less.

NEW ZEALAND SEMINAR TO EXPLORE COUNTRY’S ADVANTAGES AS OFFSHORE CENTER

A 3-day symposium in New Zealand for North American legal and financial professionals, investors and entrepreneurs in December will explore investment opportunities, living and retiring, doing business, global asset protection and international taxation planning in New Zealand and the Pacific Rim countries. Offshore Press, Inc. and David A. Tanzer & Associates, PC are co-hosting the symposium on December 4, 5 and 6 at the Hyatt Regency Auckland.

Say the organizers, “When North Americans are shivering in December, the delegates at the Escape to New Zealand Symposium in Auckland, NZ will be enjoying summer time down under and learning about the many advantages of New Zealand for retirees, for investors, for the self employed and for business entrepreneurs. They will also enjoy luxurious accommodations at bargain prices and will be treated to a cocktail reception and a formal dinner at the end of the symposium.

“New Zealand is one of the most highly rated travel destinations by Americans. For those in the know, it is a popular, and very profitable, location for operating a business, investing and for retirement. And, just next door, the Cook Islands is one of the most favored locations for asset protection trusts worldwide.”

Speakers will include David A. Tanzer, JD, author of How to Legally Protect Your Assets and Vernon K. Jacobs, CPA, author of the popular newsletter The Jacobs Report on International Financial Planning. Twelve other speakers include New Zealand attorneys, tax experts, real estate experts, bankers and trust officers as well as the Director of the American Chamber of Commerce in New Zealand, the Director of the New Zealand Association for Migration and Investments, and the Relationship Manager for the New Zealand Immigration Service.

New Zealand proposes company tax cut in order to enhance international competitiveness.

The government of New Zealand has proposed a cut in the rate of company tax as one of a number of options designed to make the country’s business tax regime more internationally competitive. “The government’s goal … is to help transform the New Zealand economy through internationally competitive business tax rules,” announced Finance Minister Michael Cullen and Revenue Minister Peter Dunne in a statement. “If we are to build a high wage, high skill, knowledge-based economy we need business tax rules that encourage innovation, support business investment, encourage exporters to break in to new markets and help to build a more skilled workforce,” they added.

A number of potential initiatives that have been published in a discussion document. “As it will not be possible to go ahead with all of the options, we need businesses to tell us what they see as their priorities in relation to the options identified,” the ministers stated. Businesses have been given until September 8 to contribute to the discussion. “Best practice also suggests changes should apply from the start of a tax year, in this case, from 1 April 2008,” the ministers concluded.

THREE SNARED IN AUSTRALIA OFFSHORE PROBE

The Australian Tax Office announced a major breakthrough in the campaign to thwart offshore tax avoidance schemes, after three company directors were arrested on charges of tax evasion. Adam and Glenn Hargraves and business partner Daniel Stoten were arrested on the Gold Coast in the state of Queensland last week, and charged with Conspiracy to Defraud the Commonwealth. It is alleged that between 1999 and 2005 the trio defrauded the Australian government to the tune of A$6.6 million by siphoning money deposited in Swiss bank accounts back to Australia through bank debit cards in the names of associates and girlfriends.

The arrests were heralded by Treasurer Peter Costello as a “significant step” in the multi-agency investigation into users and promoters of offshore tax evasion schemes, known as Operation Wickenby. The A$300 million 7-year project encompasses the collective resources of five agencies. When fully resourced, well over 350 officers from these agencies will be working on Project Wickenby, the majority from the Tax Office. Costello added that investigations are continuing into a number of similar complex cases, with a view to laying criminal charges and taking proceeds of crime recovery action.

MONACO OPENS UP FINANCES

Decades after becoming Europe’s number one tax haven, Monaco is to start collating and publishing figures showing its GDP for the first time. YourMonaco.com, who produce an independent travel guide for Monaco and Monte Carlo, say that those who are considering moving to Monaco because of her zero income tax policy have nothing to worry about. “This is much more about Prince Albert pushing ahead with his agenda on the environment and world affairs than it is Monaco’s tax policy,” they claim. Prince Albert became ruler of Monaco just over a year ago, after the passing of his father Prince Rainier, who transformed the Principality into the world’s best known tax haven in the 50 years he was in charge.

“Prince Albert is much more interested in world affairs as he knows the future of Monaco as a tax haven is safe,” Henri Boulanger, YourMonaco’s spokesman, adds. “The last year has seen him going to the North Pole to try to show other world leaders that the environment is one of the top issues they should be addressing, and the publishing of Monaco’s GDP and Gross National Income statistics will allow him to have Monaco play a full and active role at the United Nations. For example Monaco will know how much they should be contributing to the United Nations Millennium for Development project, and other overseas projects.”

Recognizing that collecting financial information could put off wealthy individuals moving to Monaco, the government has told those businessmen taking part that all information will be kept confidential, and will not be used for fiscal purposes. Political analysts might see the beginning of information gathering in Monaco as the start of a process to join the EU. “This is highly unlikely,” contend YourMonaco.com, “There are influential figures in the EU who have been pushing for tax harmonization across EU countries for some time now … [which] would kill the goose that lays the golden egg for Monaco, and far from leading Monaco to the world stage on important issues like the environment and the Third World, it would lead Monaco to being little more than a European backwater with the Grand Prix and casino as her main attractions.” Due to her tax status property prices in Monaco are among the highest in the world.

PRIVACY

VOICE ENCRYPTION MAY DRAW U.S. SCRUTINY

Philip R. Zimmermann wants to protect online privacy. Who could object to that? He has found out once already. Trained as a computer scientist, he developed a program in 1991 called Pretty Good Privacy, or PGP, for scrambling and unscrambling e-mail messages. It won a following among privacy rights advocates and human rights groups working overseas – and a 3-year federal criminal investigation into whether he had violated export restrictions on cryptographic software. The case was dropped in 1996, and Mr. Zimmermann, who lives in Menlo Park, California, started PGP Inc. to sell his software commercially.

Now he is again inviting government scrutiny. In May he released a free Windows software program, Zfone, that encrypts a computer-to-computer voice conversation so both parties can be confident that no one is listening in. It became available earlier to Macintosh and Linux users of the system known as Voice-over-Internet protocol, or VoIP. What sets Zfone apart from comparable systems is that it does not require a web of computers to hold the keys, or long numbers, used in most encryption schemes. Instead, it performs the key exchange inside the digital voice channel while the call is being set up, so no third party has the keys.

In the wake of 9-11, there were calls for the government to institute new barriers to cryptography, to avoid its use in communications by enemies of the U.S. Easily accessible cryptography for Internet calling may intensify that debate. “I’m afraid it will put front and center an issue that had been resolved in the individual’s favor in the 1990’s,” said James X. Dempsey, policy director for the Center for Democracy and Technology, a Washington-based public policy group. The Federal Communications Commission has begun adopting regulations that would force Internet service providers and VoIP companies to adopt the technology that permits law enforcement officials to monitor conventional telephone calls. But for now, at least, F.C.C. regulation exempts programs that operate directly between computers, not through a hub.

Zfone can automatically encrypt any call between users of freely available VoIP software programs like X-Lite, Gizmo or SJphone. It can be downloaded at philzimmermann.com. The system does not work with Skype, which uses its own encryption scheme. German officials have claimed they had technology for intercepting and decrypting Skype phone calls, according to Anthony M. Rutkowski, vice president for regulatory affairs and standards for VeriSign, a company that offers security for Internet and phone operations.

SECURE INSTANT MESSENGER GUARDS AGAINST GOVERNMENT SNOOPING

Aged geeks should remember the Cult of the Dead Cow (CDC) well. The hacker group was particularly famous for its easy-to-use Back Orifice spyware trojan released in 1998, which was as good for corporate espionage as it was for humorous office pranks. So it is with some irony that CDC has released an open source client that secures your instant messenger communications over the Internet.

Since 2000, CDC has been a proponent of what it calls “hacktivism” – hacking for what it feels is a just cause. In this case, the secure instant messenger, called ScatterChat, is designed for “non-technical human rights activists and political dissidents operating behind oppressive national firewalls,” according to the press release. “The anonymity and encryption that ScatterChat provides ensures that both the identities and messages of activists remain a mystery, even to well-funded totalitarian governments,” says lead developer J Salvatore Testa II.

The instant messenger client is based on the Gaim IM client, but uses the anonymous Tor network and offers end-to-end encryption for both chat and file transfers. For each new conversation, ScatterChat generates new encryption keys. It is immune to replay attacks, supports Perfect Forward Secrecy, and features limited message deniability properties. It is available for Windows and Linux, with a Mac OSX version expected soon.

JUDGE: CASE AGAINST AT&T’S COMPLICITY IN NSA’S WARRANTLESS EAVESDROPPING CAN PROCEED

In a landmark ruling, a federal judge forcefully refused to dismiss a civil liberties group’s lawsuit against AT&T for its alleged complicity in widespread warrantless government surveillance, despite the government’s argument that the suit could reveal state secrets – a rarely used claim that nearly always terminates a lawsuit. In a 72-page written ruling, U.S. District Court Chief Judge Vaughn Walker rejected the government’s argument that merely allowing the case to proceed would cause critical harm to U.S. national security. The decision marks a significant victory for the Electronic Frontier Foundation, and puts a rare limitation on the reach of the president’s “state secrets privilege” to sweep alleged illegal government activities under the cloak of national security.

Walker found that the program was not a secret since “public disclosures by the government and AT&T indicate that AT&T is assisting the government to implement some kind of surveillance program.“ … “Dismissing this case at the outset would sacrifice liberty for no apparent enhancement of security,” Walker wrote. Under the ruling, the lawsuit will continue, allowing the EFF to begin obtaining documents through discovery from AT&T. In a legally unprecedented move, the judge also wants to appoint an outside expert with a high-level clearance who can review such evidence to evaluate whether its release would compromise national security. Walker also denied AT&T’s motions to dismiss the case on the grounds that the plaintiffs cannot prove they were monitored by the program, and that the company cannot be sued for helping the government in good faith.

Recognizing that his ruling would be controversial, the judge is allowing both AT&T and the government to immediately appeal his ruling to the 9th U.S. Circuit Court of Appeals. While both are widely expected to do so, neither announced such plans immediately. The ruling was not a complete defeat for the Bush administration. Noting that the government has not confirmed stories in the Los Angeles Times and USA Today reporting that AT&T has allowed the NSA to troll through its trillion-record call detail database, the judge ruled that AT&T cannot confirm or deny that it received a letter directing such access, nor can the EFF ask for documents about that program.

LAW

CRAVEN IMAGE: THE SENATE BOWS TO IMPERIAL POWER

Well, that did not take long. Two weeks ago we wrote here that the “lockstep, lickspittle” U.S. Congress would scurry to give their approval to the dictatorial powers asserted by President George W. Bush after the Supreme Court struck down those claims in the Hamdan case earlier this month. And lo and behold, last week Republican Senator Arlen Specter introduced a bill that would not only confirm Bush’s unrestrained, unconstitutional one-man rule – it would augment it, exalting the Dear Leader to even greater authoritarian heights.

A more slavish piece of work – and a more abject surrender of Congressional authority – can scarcely be imagined. And the implications are profound. Besides providing what amount to ex post facto cover for Bush’s clearly criminal domestic surveillance programs, the measure is a stinging confirmation that there is no crime the Bushists can commit that the craven rubberstamps in Congress will not countenance. Aggressive war, torture, rendition, indefinite detention, “extrajudicial killing” (i.e., murder), monumental corruption, spying on citizens, megalomaniacal assertions of tyrannical power – it is all good for the corporate bagmen, gormless goobers and extremist cranks now polluting the chambers on Capitol Hill.

But the reverberations go even further. Specter’s bill also represents a message from the American Establishment, giving its imprimatur to the codification of presidential dictatorship as the new form of government in the United States, replacing the constitutional republic established in 1789. The bill explicitly embraces the core of Bush’s claim to authoritarian rule: that the president cannot be restrained by any law or court ruling in his arbitrary actions on any “matters pertaining” to national security – and of course it is the president who will decide, in secret, what pertains to national security and what does not. Whatever the Leader does is lawful and right, no matter what the legal statutes say.

Specter has jumped to do the Regime’s bidding. But you would expect that from a man who has been toting Establishment lumber since his days as assistant counsel to the Warren Commission. It was Specter who devised the ludicrous “magic bullet” theory, claiming that a single shot from the enchanted rifle of Lee Harvey Oswald cut a merry, zig-zagging caper in several conflicting directions as it plowed through the body of John F. Kennedy and Texas Governor John Connally. The Commission’s closing of every avenue of investigation that led away from its pre-ordained conclusion – the usual lone nut, bad apple, etc. – has poisoned American political life for generations, sealing one of the nation’s greatest traumas in impenetrable murk, breeding suspicion, mistrust, fear and anger. (Not unlike the Bush-appointed 9/11 Commission, in fact.)

Specter later popped up as one of the chief inquisitors of Anita Hill, whose forthright testimony of her sexual harassment at the hands (or rather, the hubba-hubba voice) of Clarence Thomas threatened to sink one of the many sinister pranks the Bush Family have played on the American people – in this case, elevating a clearly unqualified, emotionally unstable, hard-right crank to the Supreme Court. Employing the traditional Bushist tactic of muddying the waters with smear and innuendo aimed at anyone who stands athwart the Family’s ruthless agenda, Specter helped plant doubts about Hill’s credibility in enough senators to ensure a razor-thin majority for Thomas’s confirmation. Thus Specter was instrumental in placing a loyal factotum – and reliable supporter of authoritarianism – on the nation’s highest court, for decades to come. Thomas later repaid the favor with a decisive vote in the judicial coup d’état known as Bush v. Gore – despite the fact that Thomas’s wife was working with the Bush camp, vetting potential courtiers for the coming imperium. A more blatant conflict of interest is hard to imagine, short of Thomas himself pocketing Bush cash under the transom. (A possibility not to be lightly dismissed, of course, given the pervasive criminality of Bush Family and its retainers.)

Now this good and faithful servant has once again delivered the goods for the high and mighty – with the help, as always, of the mainstream media. All the initial stories portrayed Specter’s bill as a “grand compromise”, a “retreat by Bush” to sensible, moderate, middle ground. By reporting the precise opposite of what the bill actually does, the pliant press has established a comforting storyline in the public mind. “The system of checks and balances still works, everything is fine, nothing to see here, move along folks.”

Of course, none of this repressive machinery would be necessary – if your actual intention was to track terrorists and uncover potential threats. Presidents in need of domestic surveillance have long had access to the secret FISA court that greenlights eavesdropping whenever there is even the remotest hint of possible danger. Since 1978, the court has approved more than 18,700 such requests and rejected only four. It even has an emergency provision that allows presidents to start wiretapping without prior approval. But these vast powers are not enough for Bush. In fact, he apparently began circumventing the court with warrantless phone record spying seven months before the 9-11 attacks. (One measure in Specter’s bill will allow Bush to quash the lawsuit from which this revelation emerged.) Whatever he is really doing with his warrantless spy programs – whatever he is trying desperately to keep hidden from independent oversight – it has little or nothing to do with “fighting terrorism”.

Naturally, Specter’s kowtowing concoction is larded with pious claptrap about “protecting civil liberties.” But it is all just the proverbial lipstick on a pig, a cynical attempt to gussy up the ugly reality of raw, blunt, brutal power that has cowed – if not quelled – the once-proud spirit of American freedom.

THE MYTH OF THE RULE OF LAW

In his novel 1984, George Orwell created a nightmare vision of the future in which an all-powerful Party exerts totalitarian control over society by forcing the citizens to master the technique of “doublethink”, which requires them “to hold simultaneously two opinions which cancel out, knowing them to be contradictory and believing in both of them.” Doublethink is usually regarded as a wonderful literary device, but, of course, one with no referent in reality since it is obviously impossible to believe both halves of a contradiction. In my opinion, this assessment is quite mistaken. Not only is it possible for people to believe both halves of a contradiction, it is something they do every day with no apparent difficulty.

Consider, for example, people’s beliefs about the legal system. They are obviously aware that the law is inherently political. The common complaint that members of Congress are corrupt, or are legislating for their own political benefit or for that of special interest groups demonstrates that citizens understand that the laws under which they live are a product of political forces rather than the embodiment of the ideal of justice. Further, as evidenced by the political battles fought over the recent nominations to the Supreme Court, the public obviously believes that the ideology of the people who serve as judges influences the way the law is interpreted.

This, however, in no way prevents people from simultaneously regarding the law as a body of definite, politically neutral rules amenable to an impartial application which all citizens have a moral obligation to obey. Thus, they seem both surprised and dismayed to learn that the Clean Air Act might have been written, not to produce the cleanest air possible, but to favor the economic interests of the miners of dirty-burning West Virginia coal (West Virginia coincidentally being the home of Robert Byrd, who was then chairman of the Senate Appropriations Committee) over those of the miners of cleaner-burning western coal. And, when the Supreme Court hands down a controversial ruling on a subject such as abortion, civil rights, or capital punishment, then, like Louis in Casablanca, the public is shocked, shocked, to find that the Court may have let political considerations influence its decision. The frequent condemnation of the judiciary for “undemocratic judicial activism” or “unprincipled social engineering” is merely a reflection of the public’s belief that the law consists of a set of definite and consistent “neutral principles” which the judge is obligated to apply in an objective manner, free from the influence of his or her personal political and moral beliefs.

I believe that, much as Orwell suggested, it is the public’s ability to engage in this type of doublethink, to be aware that the law is inherently political in character and yet believe it to be an objective embodiment of justice, that accounts for the amazing degree to which the federal government is able to exert its control over a supposedly free people. I would argue that this ability to maintain the belief that the law is a body of consistent, politically neutral rules that can be objectively applied by judges in the face of overwhelming evidence to the contrary, goes a long way toward explaining citizens’ acquiescence in the steady erosion of their fundamental freedoms. To show that this is, in fact, the case, I would like to direct your attention to the fiction which resides at the heart of this incongruity and allows the public to engage in the requisite doublethink without cognitive discomfort: the myth of the rule of law.

I refer to the myth of the rule of law because, to the extent this phrase suggests a society in which all are governed by neutral rules that are objectively applied by judges, there is no such thing. As a myth, however, the concept of the rule of law is both powerful and dangerous. Its power derives from its great emotive appeal. The rule of law suggests an absence of arbitrariness, an absence of the worst abuses of tyranny. The slogan “America is a government of laws and not people” suggests fair and impartial rule rather than subjugation to human whim. This is an image that can command both the allegiance and affection of the citizenry. After all, who would not be in favor of the rule of law if the only alternative were arbitrary rule? And if citizens really believe that they are being governed by fair and impartial rules and that the only alternative is subjection to personal rule, they will be much more likely to support the state as it progressively curtails their freedom.

In this Article, I will argue that this is a false dichotomy. Specifically, I intend to establish three points: 1) there is no such thing as a government of law and not people, 2) the belief that there is serves to maintain public support for society’s power structure, and 3) the establishment of a truly free society requires the abandonment of the myth of the rule of law.

U.S. GAMBLING CRACKDOWN CATCHES DIRECT MARKETERS

A well-known Internet gambling company and several direct marketers were the target of a federal grand jury indictment last week that is part of the U.S. government’s attempted crackdown on the multibillion-dollar online gambling industry. Meanwhile, a bill to ban Internet gambling faces some opposition in the U.S. Senate and will not come up for a vote before the chamber takes its August recess, according to reports. The Senate bill is virtually identical to legislation overwhelmingly approved earlier in July by the U.S. House of Representatives. It would prohibit most forms of Internet gambling and make it illegal for banks and credit card companies to make payments to online gambling sites. Supporters of a crackdown on Internet gambling say legislation is needed to clarify that a 1961 federal law banning sports betting also covers an array of online gambling.

BetOnSports PLC, a prominent Internet gambling company that is publicly traded in Britain and that owns several Internet sports books and casinos, was among 11 individuals and four companies charged in a federal grand jury indictment. The site allows people to place bets on sporting events and play casino games like blackjack from their computers. The Eastern District of Missouri returned a 22-count indictment charging the group on various counts of racketeering, conspiracy and fraud, the U.S. Department of Justice said. The indictment was returned June 1 and unsealed July 17. The founder of BetOnSports.com, Gary Stephen Kaplan, was charged with 20 felony violations of federal laws including the Wire Act, Racketeer Influenced and Corrupt Organizations Conspiracy (RICO), interstate transportation of gambling paraphernalia, interference with the administration of Internal Revenue laws and tax evasion, the DoJ said. Other defendants in the racketeering conspiracy case include David Carruthers, CEO of BetOnSports.com, and Peter Wilson, media director for BetOnSports.com. The three Florida-based companies were also charged.

The indictment alleges that Kaplan started his gambling enterprise via operation of a sports book in New York City in the early 1990s. After Mr. Kaplan was arrested on New York state gambling charges in May 1993, he moved his betting operation to Florida and eventually offshore to Costa Rica. According to the indictment, BetOnSports.com, the most visible outgrowth of Mr. Kaplan’s sports bookmaking enterprise, misleadingly advertised itself as the “World’s Largest Legal and Licensed Sportsbook.” The indictment also alleges that Mr. Kaplan failed to pay federal wagering excise taxes on more than $3.3 billion in wagers taken from the U.S. and seeks forfeiture of $4.5 billion from Mr. Kaplan and his co-defendants, as well as various properties.

In conjunction with the indictment, the U.S. has filed a civil complaint in federal court to obtain an order requiring BetOnSports PLC to stop taking sports bets from the U.S. and to return money held in wagering accounts to account holders in the U.S. The charges are the result of a joint investigation by the IRS Criminal Investigation and the FBI. Some industry executives have said the offshore casinos cannot be prosecuted because while they take wagers from American bettors, their physical operations are outside U.S. jurisdiction. BetOnSports, for example, has its computer servers in Costa Rica, and the company is based in Britain. But prosecutors assert that under the Federal Wire Act of 1961, the providers and promoters of Internet sports books and casinos are participants in a criminal enterprise.

Gambling firm sacks director held in the U.S.

The online betting executive arrested in the U.S. on racketeering charges has been removed as chief executive and director of his company. Betonsports, one of Britain’s biggest gambling websites, said it was terminating the contract of Edinburgh-born David Carruthers and had removed him as a director. The move was made to distance the firm from the controversy. It was also forced to deny its controversial founder, Gary Kaplan, had taken part in orgies at the firm’s offshore base in San Pedro, Costa Rica.

Mr. Carruthers, who started his career as a Ladbrokes betting shop manager in Edinburgh, was arrested last week at Dallas-Fort Worth International Airport, Texas, while trying to make a connecting flight from the UK to Costa Rica with his wife Carol. The company suspended trading of its shares two days later and its main website remains shut. The 49-year-old’s bail hearing in Fort Worth was adjourned last week so the case could be referred to Missouri, where the charges were laid.

The London-listed company, which has been forced to shut down 85% of its business because of the case against it, said, “Clearly, while he remains in the custody of the US government, he is unable to perform his duties.” The company stressed that the former Edinburgh College of Art pupil who has a home in Bromsgrove, Worcestershire, was the only surviving member of the pre-stock market flotation board.

World Trade Organization sets up dispute resolution panel for Antigua and Barbuda.

Antigua and Barbuda requested the formation of a compliance panel at the WTO last week in connection with its on-line gaming dispute with the U.S. Antigua told the WTO’s Dispute Settlement Body (DSB) that the U.S. had been busy passing legislation that was directly and unequivocally contrary to the DSB rulings. Out of the entire universe of remote gaming offered to Americans, in the past months the U.S. Department of Justice had chosen to indict the principals of two Antiguan licences, it argued.

The U.S. expressed disappointment. However pursuant to a procedural agreement with Antigua and Barbuda, it accepted the establishment of the compliance panel. The U.S. said that the issue of compliance was limited, clear and straightforward. It explained that the DSB found that the U.S. had not shown that the U.S. legal prohibitions applied to both foreign and domestic suppliers of remote betting services for horse racing. The U.S. concluded by stating that it was now in position to show that the U.S. prohibitions apply not only to foreign but also to domestic suppliers. The DSB agreed to establish the compliance panel.

U.S. Congressman To lead e-gaming fact-finding mission to Isle of Man.

Congressman Jon Porter, R-Nevada, who is opposing moves to ban online gaming in the U.S. is planning a visit to the Isle of Man to study the jurisdiction’s e-gaming regulations in operation. The Isle of Man, where many big-name internet gaming firms such as Microgaming, Neteller and PokerStars are based, is an emerging force as an e-gaming domicile, and the authorities pride themselves on the quality of the island’s e-gaming regulations.

Porter, who voted against the Internet Gambling Prohibition and Enforcement Act, which was recently approved by the House, is attempting to establish a bipartisan commission to study the impact of online gaming. “The impact of Internet gambling reaches far and wide, which is why we need to have a comprehensive understanding of its effects, both socially and economically, before making any rash decisions about its future,” said Porter.

Opponents of online gaming, such as the bill’s chief sponsor, fellow Republican Bob Goodlatte, charge that the industry sucks money out of the U.S. and acts as a facilitator for money laundering. The Christian right also contends that there are inadequate safeguards to prevent minors from accessing internet gaming websites. However, according to Porter, too many lawmakers proceeded to approve the prohibition bill without having a sufficient understanding of the e-gaming industry.

BANK OF BERMUDA ALERTED AUTHORITIES OVER SUSPICIOUS ACCOUNT ACTIVITIES

The Bank of Bermuda alerted local financial authorities when it detected unusual transactions involving an account which was – according to allegations made in court this year – involved in a money laundering operation. The account, in the name of Bellwood and controlled by Antigua Opposition MP Asot Michael, was closed down in March 2003, less than two months after the Bank filed a Suspicious Activity Report on it.

As a report on the OffShore Alert web site of KYC News highlighted last week, the Government of Antigua is alleging in court proceedings that it lost millions of dollars through the corruption of the Caribbean island’s former Prime Minister Lester Bird and his associates. And the Antigua High Court was told that that some of that money passed through two Bermuda accounts – a Butterfield Bank account controlled by banker Bruce Rappaport and the Bank of Bermuda account controlled by Mr. Michael, Mr. Bird’s former chief of staff.

A Bank of Bermuda spokesman said, “We have no comment to make on the Offshore Alert article. We can confirm, however, that the Bank of Bermuda fully complies with local anti-money laundering legislative and regulatory requirements and adheres to international standards in this area.” In an action filed on February 20 this year, the Antigua Government is seeking $41.4 million in damages from a group of defendants including principal targets Mr. Bird, Mr. Rappaport and Mr. Michael.

OPINION & ANALYSIS

THE LINCOLN CULT’S LATEST COVER-UP

On July 19 the AP and Reuter’s reported an “amazing find” at a museum in Allentown, Pennsylvania – a copy of a letter dated March 16, 1861, and signed by Abraham Lincoln imploring the governor of Florida to rally political support for a constitutional amendment that would have legally enshrined slavery in the U.S. Constitution. Actually, the letter is not at all “amazing” to anyone familiar with the real Lincoln. It was a copy of a letter that was sent to the governor of every state urging them all to support the amendment, which had already passed the U.S. Senate and House of Representatives, that would have made southern slavery constitutionally “irrevocable”, to use the word that Lincoln used in his first inaugural address. The amendment passed after the lower South had seceded, suggesting that it was passed with almost exclusively Northern votes. Lincoln and the entire North were perfectly willing to enshrine slavery forever in the Constitution. This is one reason why the great Massachusetts libertarian abolitionist Lysander Spooner, author of The Unconstitutionality of Slavery, hated and despised Lincoln and his entire gang.

The Lincoln cult knows about all of this, but works diligently to keep it out of view of the general public. The fact that news organizations reported the “find”, however, creates a problem for the cult. A cover-up/excuse-making campaign must commence. Joseph Garrera, described in the press as “a Lincoln scholar”, immediately announced that the document is not at all important, since such documents are “a dime a dozen.” Well, not really. Most of these kinds of documents have been meticulously whitewashed from the historical record. When they do surface and are made public, the Lincoln cult gets to work burying them in an avalanche of excuses designed to fog the real meaning of the documents in the minds of the average American. Garrerra’s statement is the first attempt at this.

Every once in a while, though, a cult member (or an aspiring cult member) slips up and spills the beans. A recent example is the “political biography” of Lincoln recently published by the confessed plagiarist Doris Kearns-Goodwin entitled Team of Rivals. This is Goodwin’s first publication on Lincoln, and she has apparently not been filled in on the standard modus operandi of cover-up and obfuscation that is the hallmark of “Lincoln scholarship.” She discusses the above-mentioned “first thirteenth amendment” in some detail. Goodwin dug into the same original sources that all Lincoln scholars are familiar with, but unlike most others, she includes the information in her book. Not only did Lincoln support this slavery forever amendment, but the amendment was his idea from the very beginning. He was the secret author of it, orchestrating the politics of its passage from Springfield before he was even inaugurated. Not only that, but he also instructed his political compatriot, William Seward, to work on federal legislation that would outlaw the various personal liberty laws that existed in some of the Northern states These laws were used to attempt to nullify the federal Fugitive Slave Act.

Goodwin reveals all of this because the theme of her book is what a great political conniver and manipulator Lincoln was and this, of course, is a good example of such deceitfulness. In the eyes of a lifelong statist like Goodwin, lying, deception and fakery are praiseworthy traits for a politician. Lincoln’s efforts in this regard were enormously popular in the North, and especially in Boston. A thoroughly racist society, the vast majority of northerners wanted slavery to persist in the South because that would keep black people in the South. They opposed the personal liberty laws for the same reason. They wanted any escaped slaves to be eliminated from their midst. Thus, Goodwin writes of how, when Seward made a speech announcing these two proposals (the constitutional amendment and the abolition of personal liberty laws) in Boston, “the galleries erupted in thunderous applause.”

Lincoln was not an abolitionist and, unlike Lysander Spooner, he believed that slavery was already constitutional. Nevertheless, he also favored making it “express and irrevocable.” Joseph Garrer made a feeble attempt to dismiss this entire episode as unimportant by saying that Lincoln was only being “pragmatic”. Lincoln, Seward, and the rest never came up with any kind of pragmatic plan to end slavery peacefully, as the real pragmatists – the British, Spanish, Dutch, French, and Danes – had done. Indeed, the political leaders of these countries could have provided the Lincoln regime with a detailed roadmap regarding how to go about it. But as Lincoln repeatedly said, his agenda was always, first and foremost, to destroy the secession movement, not to interfere with slavery. And as this episode reveals, for once his actions matched his words.

MORALITY AND FOURTH GENERATION WAR

Anyone who is anti-war will benefit from understanding the theory of war – why wars are fought, how they are fought, and how the peace is made and kept. The field manual of Fourth Generation war found here helps us understand many of the conflicts occurring around the world today and helps us glimpse the possible outcomes of these struggles. It applies to the war Israel is now fighting in Gaza and Lebanon. It sheds light on the difficulties that the American State and its soldiers face in fighting today in Iraq. Expect to find a document with many illustrations that explains how American soldiers should be trained to fight Fourth Generation war. But also expect a surprising emphasis on the moral level of war that connects directly to libertarian theory.

William S. Lind and other experienced soldiers co-authored the Fourth Generation war field manual, which is a work in progress. He invites comment. Using the Fourth Generation model, Lind accurately assessed events in Iraq early on and predicted the current civil strife occurring there now. In his article of November 26, 2003, for example, he forecasted that “non-state forces will come to dominate” in both Iraq and Afghanistan because of basic American blunders. In his words, “In Iraq, the two fatal early errors were outlawing the Baath Party and disbanding the Iraqi army. Outlawing the Baath deprived the Sunni community of its only political vehicle, which meant it had no choice but to fight us. Disbanding the Iraqi army left us with no native force that could maintain order, and also provided the resistance with a large pool of armed and trained fighters.” Lind has continued with many insightful articles that are archived on LRC.

Fourth generation wars are currently defined as wars fought by non-state forces against states. The states have greater resources if one simply counts armed forces, matériel, and money. The non-state forces are weaker, yet they can win as Fidel Castro showed in Cuba. They tend to be guerillas and use guerilla tactics, so that Fourth Generation warfare is virtually guerilla warfare. Guerilla warfare is not terrorism. “Terrorism is an enemy special operation, a single tactical action designed to have direct operational or strategic effect. Because targets that have such direct operational or strategic effect are few and are usually well-protected, terrorism normally plays a minor role in Fourth Generation conflicts – though when it does occur the effects can be wide-ranging.”

We can apply the teachings of the Fourth Generation war model to the current Israel-Lebanon war. It is Fourth Generation war because Hezbollah is a non-State group with some State participation and pretensions. But it is not Lebanon. Hezbollah is very weak compared to Israel. The total number of its core armed fighters is variously estimated at 300 to 3,000, although Hezbollah itself says 5,000 to 10,000. By Fourth Generation precepts, Israel has already lost by applying too much force too widely and too indiscriminately against Lebanese targets and not Hezbollah. It has killed and wounded hundreds of civilians and displaced hundreds of thousands. Israel is using Third Generation war against a Fourth Generation enemy. Hezbollah wins simply by drawing out the battle while maintaining intact most of its fighters and leadership, who fade away into the countryside or hide in cities. It wins by gaining political support both in Lebanon proper and beyond its borders. It wins if after the war is over it engages an occupying force with guerilla tactics. The United States loses because of its crystal-clear alignment with Israel.

U.S. complicit in destruction of Lebanon.

There never was any doubt of the Bush regime’s complicity in Israel’s naked aggression against the Lebanese civilian population. Bush has protected Israel from world condemnation. Bush has blocked those who attempted to bring a stop to Israel’s bombing of residential neighborhoods and civilian infrastructure, and now Bush rushes more bombs for Israel to drop on Lebanon. Obviously, Bush and his government do not think Israel has yet murdered enough Lebanese. Bush denounces Syria and Iran for allegedly arming Hezbollah, while he rushes more deadly weapons to Israel. The entire world is appalled at the Bush regime’s support for Israel’s policy of expanding its borders through naked aggression.

Every Arab and Muslim now knows that the U.S. is Israel’s enabler. Arab hopes are dead that the U.S. will pressure Israel to behave more humanely toward people not armed with American fighter planes, tanks, and high explosives. America’s complicity in Israel’s war crimes is more than even America’s UK lapdog can stand. The American people need to understand what everyone else in the world understands – the Bush regime is empowering the Israeli state to push out its borders by stealing land from other people. This Israeli policy is the source of the Middle East conflict. It is ignorant and immoral to blame the conflict on Hamas and Hezbollah. These organizations were created by Israeli aggression.

Israel is an artificial state created in Arab lands by European colonial powers after World War II. Instead of working to win acceptance and overcoming Arab hostility to Europe shipping off “the Jewish problem” to the Middle East, Israel has antagonized its Middle East neighbors. Israel can play the bully-boy role because the U.S. acts as Israel’s big brother. With its policy of fang and claw, Israel endangers its own right to exist. Many distinguished Israelis came to this conclusion long before I did. I am only repeating what can be read in more eloquent writings of distinguished Israelis.

Israel’s greatest friends are its own peace movement and those few in America who dare to criticize Israel’s self-destructive policies. It is not anti-Semitic to hold Israel to the same standards as other civilized countries or to report facts instead of Israeli propaganda. Israel’s greatest enemies are the American neoconservatives, who hold the power in the Bush regime. Can 5 million Israelis, even when backed by the U.S., forever suppress hundreds of millions of humiliated Muslims stewing in their humiliation? This is a recipe for perpetual conflict and the eventual destruction of Israel. Bush’s war is not on terror. It is on Muslim states not ruled by American puppets.