Offshore News Digest for Week of March 5, 2007

GLOBAL LIVING & BUSINESS

ALLOCATING YOUR FOREIGN INVESTMENT USING FRIEDMAN’S ROAD MAPS

The freedom of capital to move across borders is what matters.

With the death of Milton Friedman in November we lost a great champion of free markets. And what does “free market” mean in the context of foreign exchange? The simplistic answer is that “free” means floating exchange rates. Yes, Friedman favored floating exchange rates. But he also favored fixed rates Are these positions not mutually exclusive?

Look more closely at what Friedman really thought about foreign exchange. The ratio of one currency to another is just what is on the surface. What matters more is the freedom of capital to move from one country to another. Such freedom is consistent with both fixed and flexible exchange rates.

Friedman’s first, and most famous, foray into the exchange-rate debate was an essay entitled “The Case for Flexible Exchange Rates” (1953), was originally written as a memorandum in 1950, when he served as a consultant to the U.S. agency administering the Marshall Plan. At the time European countries were imposing a plethora of controls on cross-border currency flows. Friedman opposed restrictions on international capital flows. He concluded that the adoption of floating exchange rates across Europe would remove the need for exchange controls and promote economic freedom.

In the 1960s Friedman turned his attention toward monetary problems in developing countries, where inflation and exchange controls were pervasive. For these countries Friedman was skeptical about floating exchange rates because he mistrusted their central banks and doubted their ability to properly manage the money supply. To rid developing countries of exchange controls he recommended fixed exchange rates, but with that major proviso that any country that adopted a fixed exchange rate must dump its central bank and adopt a currency board (or “dollarize”, as Panama did in 1904). A currency board issues notes and coins fully backed by foreign reserves and fully convertible at a fixed exchange rate into an anchor currency. A board has no monetary policy – changes in the money supply are determined by changes in a currency board’s foreign reserves.

Friedman laid great stress on the fact that a fixed exchange rate administered by a central bank is dangerous because there is always the potential for a central bank to buy and sell domestic bonds, thereby engaging in discretionary monetary policy and breaking the one-to-one link between changes in its foreign reserves and changes in the money supply. In April 1991 Argentina passed a law requiring the central bank to maintain a fixed exchange rate. But Friedman did not trust that bank. He expected that it would eventually engage in monetary mischief and the system would get into trouble. He was right. Convertibility blew up in December 2001.

I proposed a currency board and a fixed exchange rate for Estonia in early 1992. In June 1992 Estonia dumped the Russian ruble, and its currency board began exchanging kroon at a fixed rate of 8 per German deutsche mark (subsequently 15.65 per euro). The results have been spectacular. The Heritage Foundation/Wall Street Journal 2007 Index of Economic Freedom ranks Estonia 12th, the highest of any former communist country. Estonia’s GDP per capita has increased 10-fold since the currency board was installed, to a projected $12,900 for this year.

Friedman admired Hong Kong for fixing the Hong Kong dollar’s exchange rate against the U.S. dollar in 1983 – and doing without a central bank. He called Hong Kong a “showplace of free markets,” as evidenced by its #1 rank on the Index of Economic Freedom. Mainland China is a very different beast, with a managed exchange rate for the renminbi and limited freedom of movement for capital. In Beijing the managed exchange rate comes with an interventionist central bank and controls on the movement of capital in and out of the country.

We have got plenty of interventionists on these shores, too. Congressmen with a mercantilist bent want the value of the yen to be pushed up, artificially if need be. Free markets are not popular with politicians.

PANAMA’S ECONOMY BOUNDED AHEAD IN 2006

Panama’s economy grew by 8.1% last year as against 6.4% in 2005, and the government clocked up a fiscal surplus of Balboas 576 million (0.5% of GNP), according to official figures released this week. Growth was higher than had been expected. The surplus is the first since 1996. The government says that it results from its prudent handling of the public finances.

The construction sector grew by 17.4%, reflecting a continuing property boom, which also perhaps assisted growth of 12.8% in the banking sector. Improving tourism lifted the hotel and restaurant sector by 12.5%. External trade grew by 11.3%. The government says that its receipts from the all-important canal rose by Balboas 200 million by comparison with the previous year. It also received a one-off payment of B100 million from the Panama Ports Company, and additional dividends from the National Bank of Panama and the privatized telephone and electricity utilities totaling B90 million.

Panama’s finances will be dominated for years to come by the proposed expansion of the canal, expected to cost $5.25 billion, with construction expected to be completed in 2014. Under the expansion plans, two 3-chamber locks will be constructed at both ends of the canal. This will create a third lane of traffic wide enough to handle the largest of modern container ships and tankers. New approach channels will also be prepared, while existing channels will be dredged to ensure large craft can enter the system.

Canal users were shocked earlier in the year when the Authority announced substantial toll increases, which will be debated at a public hearing on March 14. However, the canal continues to be wildly successful according to figures released last week by The Panama Canal Authority for Q1 of the fiscal year 2007, showing increases in net tonnage, total transits, and transits of supers (vessels 91 feet or more in beam).

RICH VENEZUELANS HEADING TO FLORIDA

They call it “Plan B”. As Venezuelan President Hugo Chavez further tightens control of the country’s economy, wealthy Venezuelans who once thought they could live with his socialist edicts are turning to their backup plan – flight to the U.S., particularly Florida. Venezuelans have long gobbled up condos and pre-construction deals in Florida as investments, but the latest buyers want homes where they can live and business properties that will help them earn a green card.

“First the people who come are the businessmen in the highest circles, then the losing politicians, then the military and then the professionals,” said Miami-based immigration attorney Oscar Levin. “You’re beginning to see the (Venezuelan) professionals.” This latest and largest potential group of emigrants say they fear the effect Chavez’s socialist policies will have on the economy and on proposed educational reforms that could mirror the ideologically imbued education of Chavez ally and mentor Fidel Castro.

“There is so much insecurity, political insecurity, economic insecurity,” said Venezuelan Miguel Medina, a business executive who moved to the Miami in August. “You don’t know if a contract you signed today will be honored by the government in the future ... This was definitely my plan B, but it was time to do the plan B.”

Between 2000 – a year after Chavez took office – and 2005, the number of Venezuelans living in the U.S. doubled to about 160,000, according to the latest U.S. Census numbers. Nearly half live in Florida. But those numbers are deceptive. In 2005 400,000 Venezuelans came to the U.S. on business and tourism visas. It is unclear how many stayed. Colombia, with nearly twice Venezuela’s roughly 27 million residents, sent the same number that year.

Anecdotal evidence suggests even more are seeking to come here since Chavez’s recent nationalization of Venezuela’s largest telecommunications company and the electricity sector. Chavez is threatening to expropriate supermarkets, stores and other businesses caught hoarding food or speculating on prices. Medina said six family members visited him in the last two months seeking ways to relocate to the U.S. Unlike previous cycles, those seeking to leave and bring their money to the U.S. now are coming from around Venezuela, not just from Caracas, said Medina, an account executive for the credit group ExpoCredit.

About 33,000 Venezuelans received some kind of work visa to come to the U.S. in 2005. Those who come are received with open arms in Miami, where their money is welcome and the Cuban exile community views Chavez as the next Fidel Castro. But moving to the U.S., even for the wealthy, is not simple. Medina moved his family to the Miami three years ago, but it took him until last summer to tie up financial ends, obtain a visa and a job in Florida. And while Venezuelan emigrants cite the political and economic instability of the country as their main reasons for leaving, many also talk of rampant and random violence.

UK, BRITISH VIRGIN ISLANDS COMPLETE NEGOTIATIONS FOR A NEW CONSTITUTION

The UK and the British Virgin Islands successfully completed negotiations for a new constitution for the islands in London last week. Lord Triesman, FCO Minister responsible for the Overseas Territories, welcomed the successful conclusion of the BVI constitutional talks.

Lord Triesman said, “I am delighted that we have been able to work together to produce a new constitution for a modern BVI. The new BVI constitution will be an important step forward for the territory and includes provisions devolving significant new powers to the BVI Government. I particularly welcome the fact that the BVI has shown its dedication to the promotion and protection of human rights by including a Fundamental Rights Chapter in the new Constitution. I congratulate Dr Orlando Smith and his delegation on their determination to secure the best deal for their people, while retaining the links to the UK of which we are all proud.”

The constitutional review process began in 2004. The new constitution will include a chapter on fundamental rights, setting out the key human rights that will be protected for all individuals in the territory. In the field of international affairs, groundbreaking provisions will allow for the devolvement of extensive new powers to the BVI Government. On the issue of internal security, a new National Security Council will be created giving BVI Ministers a greater say in police matters.

The new constitution will also give the BVI Premier greater influence in setting the Cabinet agenda. It will also create a new role of Cabinet Secretary to facilitate the workings of the Cabinet. BVI Chief Minister Dr. Orlando Smith said the BVI’s negotiating team had achieved 95% of the proposals for a modern constitution for the people of the BVI. “We fought vigorously in the interest of the people because we knew it would be difficult, but it was the people’s wishes and we fought for their desires,” he said.

BELIZE BUDGET FORESHADOWS FURTHER TAX REFORM

Said Musa, the Belizean Prime Minister and Minister of Finance, has announced in his 2007 budget speech that the process of tax reform must continue “apace” during the coming year. Musa said that the government will soon reconvene the Tax Committee to advise on several matters.

“First,” he said, “the Tax Reform Committee will be asked to review proposals to increase the threshold of income tax to $24,000 and reintroduce tax exemptions for charitable contributions to registered organizations, schools and athletic organizations. Secondly, Government will ask the Committee to review the Excise Tax regime to remove the perverse incentives to engage in contraband activities. Although there has been some success in enforcement and interdiction, contraband activities continue to exist in flagrant contravention of the laws and at great cost to revenue. Thirdly, Government will ask the Tax Reform Committee to review the GST ...” In July 2006, Belize abolished its sales tax, replacing it with a 10% goods and services tax, or GST.

The draft budget assumes that real GDP will grow by between 1.5% and 2% in 2007 and that nominal GDP will grow by about 6%. According to Musa, on this basis, there should be natural growth in tax revenue of 6% with incremental increases accruing because of improvements in revenue administration. Musa said that emphasis will continue to be placed on expenditure control in order to achieve the targets for the primary and overall balances. “The underlying objective is to ensure that the primary surplus remains above 3% of GDP and the overall deficit declines towards 1% of GDP. And without any increases in taxes,” he stated.

Recurrent revenue is comprised of $593.9 million in tax revenue and $57 million in non-tax revenue. The strong growth in tax revenue reflects a $34.0 million increase in collections of taxes on income and profits of which $20 million is a contribution from the Petroleum Fund which is soon to be established to receive all the revenues from the petroleum industry. The remaining $14 million increase reflects natural growth in line with economic expansion.

CARIBBEAN COMMUNITY AND CENTRAL AMERICAN COUNTRIES TO FORGE TRADE LINKS

Caribbean Community (CARICOM) trade ministers met Central American counterparts in Belize recently and agreed on a number of initiatives to improve trade relations in the region. Ministers of Trade of El Salvador, Guatemala, Honduras, Nicaragua and Panama, and the countries of the CARICOM met in Belize City to discuss bilateral trade relations among their countries and their experiences in international trade negotiations, including in the multilateral trade forum.

Following the meeting, the Ministers reaffirmed their commitment to deepen relations among their countries in an effort to generate new trade and development opportunities. In addition to trade and investment, their agreements focused on human resource development, health, housing, poverty eradication and foreign police coordination. Crime, air transport, tourism, and cultural exchanges were also discussed. The Ministers reached a consensus on the accession of member states of SICA to the CARICOM/Costa Rica Free Trade Agreement. Rapid progress is now being made towards the creation of a free trade area in the region.

IMF CONCLUDES CONSULTATION WITH VANUATU

Encourages island authorities to promote bank awareness of their anti-money laundering responsibilities.

The Executive Board of the IMF has concluded its 2006 Article IV Consultation with Vanuatu. The assessment, which was concluded in late February, observed that Vanuatu has recently emerged from a long period of low growth and falling per capita incomes. Following two years of contraction, output growth recovered beginning in 2003, spurred by stronger performance in construction and a pickup in tourist arrivals.

Growth reached 7% in 2005 and an estimated 5.5% in 2006, well above the average for Pacific island countries. After peaking at 3% in 2003, inflation has since declined to 1.5% percent in 2006. The overall external balance has benefited from rising foreign direct investment, aid, and private capital inflows, with reserves increasing to over 7 months of imports. With cuts in capital spending and improved tax collection, the budget moved from a deficit of 4% of GDP in 2002 to a surplus of nearly 2% of GDP in 2005.

If good macroeconomic policies continue and political stability is maintained, the IMF predicted, near-term prospects are positive. Growth should be maintained at about 4-5% over the next few years, boosted by the direct impact of aid and private capital inflows on investment and growing tourism following the launching of new flights to Vanuatu in 2006. Loosening of fiscal policy and increased capital inflows could put upward pressure on private sector wages and prices.

Medium-term prospects will depend on the pace of structural reforms, an area where progress has been limited. On the positive side, financial sector reforms have been impressive, with the government taking steps over the last several years to substantially improve supervision of domestic banks and the offshore financial sector. At the same time, fiscal structural reforms have not advanced. The wage bill remains high, crowding out development-related spending. In addition, numerous exemptions on the value-added tax and duties have not been streamlined, and little progress has been made on reforms to address the substantial barriers to private sector development, which are key to placing Vanuatu on a higher growth path. Without stronger efforts to undertake these reforms, the IMF warned that the positive growth projected in the near term could prove temporary, with medium-term growth reverting to its historical performance and per capita income growth remaining stagnant.

Speaking with regard to the supervision of the jurisdiction’s financial sector, the Executive Board officials stated, “Directors welcomed the considerable progress in reforming the financial sector, but noted that additional steps are needed in certain areas. In particular, they urged the authorities to place the proposed agriculture development bank under strict central bank supervision from its inception to prevent the mismanagement and loan losses experienced by the previous development bank. Directors encouraged the authorities to promote commercial bank awareness of their responsibilities under the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) legislation.”

IMF PUBLISHES ARTICLE IV CONCLUDING STATEMENT ON SWITZERLAND

“Looks good, but about those tax-cutting Cantons ...”

The IMF published its 2007 Article IV Consultation Mission Concluding Statement regarding Switzerland, announcing that the Swiss economy is performing well as the expansion enters its 4th year. Growth is balanced, inflation is low, and employment is strong. These developments reflect cautious monetary and fiscal policies and structural reforms in a favorable global environment, according to the statement. The key challenges are to avoid complacency and to consolidate the good performance by continuing with structural reforms. The IMF went on to add that:

“Downside risks would emerge if external growth were to slow significantly or global imbalances unwind abruptly – thereby appreciating the exchange rate while slowing financial service exports. Upside risks would emerge if the exchange rate were to remain weak or employment accelerate further.”

Discussing the cantons, the IMF observed, “While cantons have used most of the proceeds from SNB gold sales for debt reduction, they are also taking advantage of the buoyant economy to cut tax rates. In part, the tax reductions reflect improvements in the New Financial Equalization Mechanism, which provides incentives to lower the tax burden rather than maximize it as in the previous system.

“Thus, while lower taxes partly reflect the transition to the new equalization system, and contain many positive aspects, they also reflect Switzerland’s competitive federalism which generates tax cuts during an upswing, without taking account of deficits in social security that need to be addressed.”

TURKEY TO FORGE OWN PATH TOWARDS EU ACCESSION

Turkey’s Economy Minister and chief EU negotiator, Ali Babacan, revealed that the Turkish authorities plan to set their own pace for the reforms necessary to secure the country’s accession to the EU. The EC last December froze talks on 8 of the 35 accession chapters, following Turkey’s unwillingness to budge over opening its ports and airports to Cypriot traffic. However, according to reports, the Turkish government plans to continue work on the frozen chapters regardless, in addition to continuing to progress in the other required areas.

Mr. Babacan revealed that there had been “huge disappointment” amongst Turkish citizens when the chapters were frozen over the Cyprus issue, and that the Turkish authorities had now developed their own priorities and deadlines, which will be outlined in more detail next month. The Turkish national media suggested that a January 2014 accession date was likely to be proposed by the Turkish authorities, who are adamant that they will be ready to join the EU, once political obstacles such as the Cyprus situation and the opposition of France are overcome.

U.S. BAN FAILS TO HOLD BACK PARTYGAMING PROFITS

Despite the shutting down of the U.S. market to online gambling firms last year, Gibraltar-based PartyGaming Plc has announced strong growth in revenues and profits, as its decision to focus on other markets began to pay off. In its preliminary results for the fiscal year ended December 31, 2006, the company announced that continuing revenue was up 112% vs. 2005, to $325 million, reflecting strong growth in Europe, the Middle East and Africa. Total revenues were up 13% to just over $1.1 billion, while pre-tax profits were up 158% to $50.9 million. Trading patterns since the year end have seen continued recovery in poker and casino revenue, in line with the Board’s expectations.

“We are pleased to be announcing full year results that confirm the strength of the Group’s business model," stated Mitch Garber, PartyGaming CEO. “Whilst the decision to stop accepting customers from the U.S. was a bitter blow for our business, our continuing operations have grown strongly from the lows reached in November 2006, benefiting from the rapid reorganization of our business and the acceleration of our efforts in international territories. The addition of multi-lingual and multi-currency versions of our games should further increase their market potential. While regulatory uncertainty continues in some territories, our continuing operations are in excellent shape and we have made a solid start to 2007.”

The enactment in the U.S. of the Unlawful Internet Gambling Enforcement Act (UIGEA) resulted in the immediate shut-down of all real money games to customers in the U.S. last year, fundamentally changing the shape of the business, and forcing PartyGaming to restructure the company at a cost of $250 million. This has resulted in the company shedding about 800 jobs in India on the one hand, and targeting new acquisitions of non-U.S. facing online gambling firms on the other. “It was necessary to reduce the cost base as a result of illogical, ill-conceived and inconsistent prohibition legislation in the United States,” PartyGaming spokesman John Shepherd stated last year.

CHINESE LEADER PLEDGES TO MAINTAIN HONG KONG’S PROSPERITY

Chinese Premier Wen Jiabao stated that cooperation and exchange between mainland China and Hong Kong in the economic, trade, science and education sectors will be strengthened. Delivering his Government work report at the 10th National People’s Congress annual session, Wen said the Central Government will work closely with Hong Kong and Macau to maintain long-term prosperity and stability.

Wen extended assurances that Beijing will continue to implement the principles of “One Country, Two Systems” and “Hong Kong People Running Hong Kong”, ensuring a “high degree of autonomy.” He added that the central government will, in accordance with the Basic Law, fully support the Chief Executive, Donald Tsang in developing the economy and the livelihood of Hong Kong residents. The Hong Kong government is considering a number of steps to create economic and financial synergies between the territory and the mainland.

Hong Kong Monetary Authority Chief Executive Joseph Yam has also argued that linking the financial markets of Hong Kong and mainland China would bring considerable benefits to the territory’s economy and finance center. “It is clear, at least to me, that there would be big advantages if the two markets for these instruments were linked: Overall liquidity would be increased, price discovery would be made more efficient, market discipline would be promoted, and it would be easier for market players, intermediaries and the authorities to manage risk,” he observed. “I am not talking about unification – that is not an option, at least for the foreseeable future – but rather the creation of a channel between the two markets that will allow them to function as one and enjoy the benefits of one, much larger market.”

TAXES

U.S. SENATORS PURSUE LATEST TAX AVOIDANCE TACTICS

Non-profit groups under the bright lights.

Senators Max Baucus, chairman of the Committee on Finance, and Chuck Grassley, ranking Republican member, have asked the IRS for an updated list of the newest, biggest tax avoidance scams – including those using nonprofit groups – that deserve the committee’s attention. “The IRS has an important responsibility to help honest taxpayers fulfill their obligations, and also to go after the tax cheats whose only contribution is to our country’s financial woes,” explained Baucus. “[W]e need to seek out and stop those who are hiding behind tax-exempt status for their own gain, in order to protect the vast majority of tax-exempt organizations that are doing so much good. The crisis of unpaid taxes should be totally unacceptable to the IRS, and they need to take this opportunity to lay out the scope of tax avoidance problems and get a game plan to fix them.”

Baucus and Grassley have written to both IRS Commissioner, Mark Everson, and the IRS’s Chief Counsel, Donald Korb, asking for an additional 20 issues of tax non-compliance to be identified on top of the IRS’s annual “Dirty Dozen” list, published earlier this year. “For each issue, we ask that you include the number of taxpayers involved and the cumulative tax dollars at risk in each issue, the number of cases currently under examination, and the results of cases previously examined,” the Senators wrote in the letter to Korb. They also asked Everson to produce a report detailing the extent of non-compliance in the charitable and non-profit sector.

$2.2 BILLION IN REFUNDS UNCLAIMED BY U.S. TAXPAYERS FOR 2003 TAX YEAR

To collect the money, a 2003 return must be filed no later than April 17 this year.

Unclaimed refunds totaling more than $2.2 billion are awaiting about 1.8 million people who failed to file a federal income tax return for 2003, the IRS has announced. However, in order to collect the money, a return for 2003 must be filed with an IRS office no later than Tuesday, April 17, 2007.

The IRS estimates that half of those who could claim refunds would receive more than $611. In some cases, individuals had taxes withheld from their wages, or made payments against their taxes out of self-employed earnings, but had too little income to require filing a tax return. Some taxpayers may also be eligible for the refundable Earned Income Tax Credit. “Everybody who needs to should file their tax return. But you simply can’t get the money we owe you unless you file a return,” explained IRS Commissioner Mark W. Everson.

In cases where a return was not filed, the law provides most taxpayers with a three-year window of opportunity for claiming a refund. If no return is filed to claim the refund within three years, the money becomes the property of the U.S. Treasury. There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

The IRS reminds taxpayers seeking a 2003 refund that their checks will be held if they have not filed tax returns for 2004 or 2005. In addition, the refund will be applied to any amounts still owed to the IRS, and may be used to satisfy unpaid child support or past due federal debts such as student loans.

By failing to file a return, individuals stand to lose more than refunds of taxes withheld or paid during 2003. Many low-income workers may not have claimed the Earned Income Tax Credit (EITC). Generally, unmarried individuals qualified for the EITC if in 2003 they earned less than $33,692 and had more than one qualifying child living with them, earned less than $29,666 with one qualifying child, or earned less than $11,230 and had no qualifying child. Limits are slightly higher for married individuals filing jointly.

RUSSIA MULLS CUT IN CORPORATE PROFIT TAX

Russia may cut its corporate profit tax rate to 20% from 24% as part of a 3-year tax policy plan, Deputy Finance Minister Sergei Shatalov stated last week. The government had previously been considering a further reduction in value added tax, currently 18%, to as low as 13%, but Shatalov said that a cut in corporate profit tax would be more likely to stimulate economic growth and boost levels of investment. To balance revenues lost through a cut in profit tax, Shatalov said that the government would consider raising royalty taxes on natural gas extraction in tandem with a gradual liberalization of the natural gas market, where prices are currently kept artificially low by the government.

Russia derives a substantial portion of its tax revenues from its abundant natural resources, and a cut in VAT, the only major source of revenue not connected with oil and gas prices, would probably achieve little. President Putin has called for the government’s books to be balanced in the three year budget period from 2007 to 2009, and Arkady Dvorkovich, head of the presidential expert department, was reported to have said last year that there will be “nothing revolutionary” in terms of tax policy during this budgetary cycle.

Putin has stated many times that while the government remains committed both to simplifying tax legislation and reducing the tax burden, tax reform must be balanced against needs of business, which requires certainty in the tax code. Since 2002, the Putin administration has reduced or abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax. According to Putin, in 2005 Russia’s tax burden eased to 27.4% of GDP, from 28.7% in 2004.

Russian tax amnesty begins.

A tax amnesty has gone into effect in Russia to encourage non-compliant taxpayers to regularize their tax affairs in an attempt by the government to boost tax revenues and reverse capital flight from the country. Those declaring monies to the authorities under the amnesty, which commenced on March 1, will escape prosecution in return for paying income tax at a rate of 13% on the previously hidden assets. Incomes undeclared since before January 1, 2006 will be exempt from penalties for personal income tax evasion. The amnesty will close on December 31, 2007.

In a bid to tempt more declarations, the amnesty does not require that taxpayers have any contact with tax officials, and payments can be made directly into a special Federal Tax Service bank account. According to the government, this information will not be used as evidence against individuals in criminal of administrative cases. Those previously convicted of tax evasion and other fiscal offences are barred from using the amnesty. However, tax experts are warning that the tax amnesty legislation does not afford adequate protection against possible prosecution for those considering declaring unpaid tax, especially those already guilty of related financial crimes such as money laundering, currency and customs violations. Consequently some predict that the scheme will yield little for the government in new revenues.

President Vladimir Putin is hoping that the amnesty will result in the repatriation of at least some of the $160 billion in capital which has fled the country since the collapse of the Soviet Union in the early 1990s. Surprisingly, about $41 billion was repatriated to Russia last year, but it remains to be seen whether the trend towards capital flight has been reversed.

CHINA NATIONAL PEOPLE’S CONGRESS EXAMINES CORPORATE TAX LAW

Likely to approve the equalizing of foreign and domestic company tax rates.

Chinese lawmakers began considering a key tax reform that will result in foreign-invested enterprises and domestic companies paying the same amount of corporate tax. The proposed law, which was put before the tenth NPC, China’s highest legislative body, would unify corporate tax at a rate of 25%. While this would mean a cut in tax for domestic firms, foreign-backed companies would likely see their tax bill increase.

Currently, while the rate of corporate tax is nominally the same for all firms, foreign companies can take advantage of various tax breaks and investment incentives to whittle their effective corporate tax rate in China down to as little as 10%. However, domestic companies cannot avail of such measures and must pay corporate tax on their profits at a rate of 33%, a situation that lawmakers say has become increasingly unfair.

The new law is expected to be approved by the NPC, and could go into effect by January 1, 2008. It is thought that foreign companies are in broad support of the new law, as long as it is applied on a level playing field. However, the foreign firms are still expected to benefit from certain tax breaks under the new legislation, although these are likely to be more targeted to encourage investment in certain industries such as information technology and “green” industries. Local firms could also benefit from these breaks.

While the government says it is prepared to swallow the reduction in tax revenues brought about by the unified corporate tax, the impact on revenues is expected to be relatively small. Finance Minister Jin Renqing also noted that a 25% corporate tax rate would still mean that China is competitive on tax compared with other economies in the region.

EUROPEAN COURT OF JUSTICE DELIVERS VICTORY TO TAXPAYER OVER DIVIDEND TAX CREDITS

A ruling delivered by the ECJ has stated that German legislation which allows tax credits for individuals receiving German sourced dividends, but not for overseas source dividends goes against EU rules on the free movement of capital. The ruling echoes a similar decision made with regard to Finnish laws, known as the Manninen case, but crucially does not impose the same temporal limitations on its judgement as were put in place in that instance. This could mean that many other, similar cases can be brought before the European Courts.

The ECJ stated, “A member state may not reserve the right to a tax credit to dividends received from capital companies established in that member state. ... Since that aspect of the free movement of capital was clarified earlier by the judgment in Verkooijen, the temporal effects of which the Court did not limit, it does not limit the temporal effects of its judgment of today.”

The facts in the main proceedings date from the 1990s. Under the German legislation then in force, persons fully taxable for income tax purposes in Germany were entitled to a tax credit for dividends from German companies, but not for dividends from companies established in other Member States. The ECJ continued, “In its judgment of today, the Court holds that the German tax legislation restricts the free movement of capital. In that respect, it refers to its case-law clarifying the requirements arising from the principle of free movement of capital in respect of dividends received by residents from non-resident companies.”

BRITISH INDUSTRY FOR RESTORATION OF UK TAX COMPETITIVENESS

More offshore relocations can otherwise be expected, lobby group warns.

The Chancellor of the Exchequer, Gordon Brown must insist on a tighter grip on public spending and borrowing to end the slide in the UK’s tax competitiveness according to one of Britain’s largest business lobby groups. In its submission to the Treasury ahead of the 2007 Budget, the Confederation of British Industry (CBI) argued that even a slight restraint in the pace of spending growth need not impact on frontline services, and would be enough to halt the steady decline in the UK’s tax competitiveness, paving the way for much needed reductions in business taxes in future years. The CBI said that with a number of companies having relocated from the UK and others considering doing so, this would be the signal that the business community has been waiting for.

Constraining real term public spending growth to 2.3% rather than 2.7% in 2007-8 and 1.6% rather than 1.9% thereafter would permit a significant across-the-board cut in one or more major business tax rates by 201–11, the CBI says. Commenting, John Cridland, Deputy Director-General of the CBI, stated, “Government spending has risen substantially over the past decade, and borrowing has doubled that predicted by the Treasury in 2001. We now need to see restraint on both counts, and the Chancellor’s decision last week to hold down public sector pay growth was a positive start. ... As the UK’s tax competitiveness continues to slide, companies are waiting for a signal from Government that it is prepared to act and will create the necessary financial headroom.”

Ian McCafferty, the CBI’s Chief Economic Adviser, added, “A cut in business taxes would also benefit individuals through lower consumer prices, higher affordable wages and greater returns for shareholders. In addition, the immediate improvement in business competitiveness would protect jobs, with long-term earnings also boosted by the added incentive for firms to invest in capital and skills here in the UK.”

The CBI’s submission repeats its warning that the UK’s increasingly uncompetitive tax regime is holding back the economy and leading to companies relocating overseas. In the November 2006 CBI/MORI tax survey, 22% of companies had already relocated one or more activities abroad, and a further 17% were considering relocation for the first time. Almost all of these firms cited the tax regime as a key factor in their decisions. Since then, more companies from a range of sectors have announced decisions to relocate. The submission says that, “while the majority of these decisions have not led to immediate heavy job losses in the UK, the shift to re-domicile headquarters overseas could see firms less inclined to continue their existing operations here, or expand them in future. And regardless of the effect on employment, the impact of firms re-domiciling is unambiguously negative for the public finances.”

The CBI document confirms that while many other countries have cut their corporation tax rate in recent years, the UK’s has remained unchanged at 30% since 2000. Within the EU-15, the UK rate was the 3rd lowest in 1997, while it is now the 6th highest. Moreover, the CBI noted that the UK’s overall business tax burden – at 10.2% of GDP – is higher than four of the country’s top five trading partners, including Germany.

The business tax reduction the CBI proposes must not be funded simply by raising other taxes, it says, as the overall tax burden is already high by historical and global standards. The UK’s tax-to-GDP ratio increased from 34.6% in 1996 to 37.2% in 2005, above the OECD average, moving from 12th to 18th (of 30) in the OECD tax “league table”. Key competitors have been moving in the opposite direction. On current plans the UK burden would rise further, to 38.1% of GDP – the highest on record aside from 1981-85.

The submission to the Treasury also cautions against any “back-door” increases in the tax burden on business, such as a “Planning Gain Supplement” on property development or the return of business rates to local authority control, and urges the Government to cushion the impact on smaller firms of compulsory pensions contributions from 2012. The CBI also urges the Government to push forward the Better Regulation Agenda, and improve both the reporting and delivery of the promised £21 billion “Gershon” efficiency improvements.

U.K. closes certain corporate tax loopholes.

The U.K. government has announced that it plans to introduce legislation to tackle avoidance of corporation tax through use of certain financial instruments. The legislation, which would take immediate effect, is designed to stop companies circumventing existing anti-avoidance legislation. The laws close a number of loopholes that allow companies to avoid corporate tax by methods such as treating shares as debt, artificially reducing the value of shares and using options to transfer value between connected parties. Banks and financial traders will also be prevented from using authorized investment funds to get around rules that require foreign tax to be paid on trading profits.

U.K. to improve tax treatment of offshore funds.

HM Revenue and Customs has confirmed that changes will be introduced in Finance Bill 2007 which will improve the tax treatment of certain investment trust companies (ITCs) investing in offshore funds. ITCs offer a way for investors to gain exposure to a portfolio of diversified investments. If they meet certain conditions, they are approved by HMRC, and are eligible for particular tax treatment.

BRITONS OVERPAYING TAXES BY £8 BILLION

More than eight in ten of UK adults will together waste £7.9 billion in unnecessary tax in 2007, a massive £00 million increase on last year, according to a new report. According to Unbiased.co.uk’s annual TaxAction report, this is the highest ever level since the organization, which promotes independent financial advice, began its campaign 15 years ago.

The report finds that personal tax levels have soared from a collective £40.5 billion to £149 billion over the past 20 years for all UK adults. Although 27 million (62%) people resent this rising tax bill, 74% admit to not taking steps to reduce their tax. This means UK adults are threw away an average of £160 each on tax in 2007, a rise of 68% in five years.

The report states that inheritance tax (IHT) continues to be an area where Britons are needlessly squandering money. More than £1.5 billion is likely to be paid in death taxes in 2007, a 16% increase on the amount lost to IHT in 2006. Of the total amount of IHT collected by the Government in 2006-7, 43% was provided by cash that could have remained in taxpayers’ pockets, the study found.

CANADA COMMONS COMMITTEE CALLS FOR REDUCTION IN INCOME TRUST TAX

Canada’s Conservative government must immediately follow the House of Commons Finance Committee’s recommendations to implement a fully-refundable 10% tax on income trusts in place of its destructive 31.5% tax, Liberal Finance Critic John McCallum said. “The 10% plan is good public policy that would help investors hurt by the Conservatives’ broken promise, level the tax playing field, protect an income stream that seniors have come to depend on, and help to prevent the decimated income trust sector from being bought up by foreign interests,” McCallum stated following the tabling of a report by the Standing Committee on Finance, which urges the government to drop its proposal for a 31.5% tax on income trusts beginning in 2011.

The report advocates the implementation of a 10% tax – fully refundable to Canadian investors – in place of the Conservative plan. This follows a similar recommendation put forward by Liberal Leader Stephane Dion on February 13. According to the Liberals, the 10% plan has received support from both the Canadian Association of Retired Persons and the Canadian Retired & Income Investors’ Association. McCallum also noted that the center-left New Democratic Party has supported the Conservative government’s policy on income trusts, despite the number of low- and middle-income Canadians who depend on these investments for income.

ASSET PROTECTION / LEGAL STRUCTURES

HOW TO AVOID THE TRAPS WHEN SETTING UP YOUR OFFSHORE BUSINESS

“Imagine your own offshore company: doing business, tax-free, and anonymously, on a palm-shaded island. This can all be yours ...” At least, that is what less-than-fully-honest offshore promoters may tell you. The reality, especially if you live in a high-tax country like the United States, is somewhat different. Offshore companies can give you some significant benefits, but reducing your taxes is not usually one of them. So what is the point of having an offshore company? They are used for many reasons:

• To hold an investment portfolio producing passive income. Increasingly, offshore banks will not open accounts in the name of U.S. residents. But, in most cases, they will open an account in the name of an offshore company. This can provide for greater privacy and asset protection.
• To operate an offshore business. Offshore companies can be used to operate businesses ranging from websites to hotels and everything in-between. You may want to take your business offshore for greater asset protection, financial privacy, and possibly lower labor costs.
• To own real estate. Some countries do not allow foreigners to buy real estate. Other countries subject real estate owned by foreigners to probate proceedings at the owner’s death. Owning foreign property through an offshore company could avoid this restriction. Moreover, if you sell the property you can simply sell the company to the buyer. You also can avoid capital gains and inheritance tax in foreign jurisdictions (although not the U.S.).
• In conjunction with other structures or contracts. Offshore companies are often used to run a business, hold a portfolio or for other purposes in conjunction with an offshore trust, an offshore insurance policy, etc. Some foreign banks will not open an account for an offshore trust, but they will open one for an offshore company.

A cautionary tale for IBCs.

The most commonly used structure for an offshore company is an international business company (IBC). IBCs may issue shares in registered or, in some jurisdictions, in bearer form. There is no requirement that accounts be audited, and meetings can be held anywhere in the world, if they are held at all. It is not necessary for the IBC’s directors or officers to reside in the jurisdiction where it is formed. Generally, there is no information publicly available on beneficial owners or managers. Most countries with IBC legislation are in low or no-tax jurisdictions and income from the IBC, particularly if earned outside the country of formation, generally is not taxed in that jurisdiction.

But for U.S. persons doing business overseas, IBCs usually are not the best choice. IBCs came under attack in the 1990s by high-tax countries because of their use as a vehicle for tax evasion and money laundering. Today, U.S. citizen or resident shareholders are required to comply with extensive reporting obligations:

• The transfer of assets to the IBC is reportable on IRS Form 926.
• If you acquire more than a 10% interest in the IBC (by vote or value), you must file IRS Form 5471. This form requires an income statement and balance sheet calculated in accordance with U.S. accounting standards. You must file the form annually if you own 50% or more of the IBC’s stock.
• If you have signature or “other” authority over the IBC’s bank account, you must file Treasury Form TD F 90-22.1 each year and separately acknowledge this authority each year on Schedule B of Form 1040.

That is just for starters. If you own 50% or more of the IBC’s shares, the IRS will categorize it as a “controlled foreign corporation” (CFC). And if a CFC earns passive income, U.S. shareholders of the IBC cannot defer tax on the income. Even if you find a way to overcome the CFC rules, if more than 50% of your IBC’s assets are considered passive investments, or 75% or more of its income comes from passive sources, the IRS has another trap. It is called the “passive foreign investment company” (PFIC) rules. That means more paperwork, more forms to file, and very unpleasant tax consequences for the shareholders. You can read about these tax consequences here.

The shortcomings do not end there. The low 15% income tax rate on long-term capital gains and dividends is not available. Losses on investments cannot be allocated against gains until the IBC is liquidated. Any U.S. investments result in double taxation. Plus, the basis of the stock does not step-up to its fair market value at the death of a shareholder for estate tax purposes. So it is highly problematic for U.S. persons to defer tax on income from passive investments using an offshore structure without using a variable annuity or life insurance policy. IBC’s do not even provide much in the way of asset protection. Creditors can simply seize the stock you own in the IBC, and even liquidate it. That is not exactly “bulletproof”.

Offshore limited liability companies (LLCs) provide a better way.

Offshore LLCs are taxed as partnerships, if there are multiple owners, or disregarded entities, if there is one owner, under U.S. tax rules. In both cases, the profits or losses of the LLC simply “flow through” to the individual owners (members) in proportion to their ownership interests. LLCs have three major advantages over an IBC:

1. Fewer tax traps than in an IBC, if you elect to have the LLC taxed as a “disregarded entity” (for one owner) or a partnership (for two or more owners). However, U.S. members of offshore LLCs are subject to similar reporting requirements as shareholders in foreign corporations. And, neither IBCs or LLCs help you avoid the disastrous tax consequences if you invest in offshore funds. That is why U.S. persons should ONLY purchase offshore funds through an IRS-qualified life insurance policy, variable annuity, or a retirement plan.
2. Estate planning options, similar to limited partnerships. If the LLC is properly structured, LLC interests should be discounted for estate and gift tax purposes for lack of marketability and lack of control.
3. Much more asset protection against the debts of the owners, due to the charging order concept (again similar to LPs), which generally prohibits creditors from seizing a debtor’s interest in a LLC. A creditor is only entitled to future distributions from the LLC. Nor can the creditor demand a distribution or dissolve the LLC.

It is best if the LLC is managed by a non-U.S. resident manager. That makes it virtually impossible for a U.S. court to obtain jurisdiction over the LLC’s management. Also, beware of using single-member LLCs for asset protection. The primary purpose of the charging order is to protect non-debtor members from being forced into a partnership with the creditor of a debtor member. If there is only one member in a single-member LLC, then there are not non-debtor members to protect.

There are some situations where an IBC may be a more suitable entity than a LLC, with respect to its U.S. owners. For example: (1) If your company is engaged in a non-passive business like manufacturing, then both tax deferral and asset protection could be achieved via an IBC or electing to have an LLC taxed as a foreign corporation. (2) If foreign legislation requires the use of a corporation or does not recognize LLCs. (3) If you need free transferability of ownership interests, which an LLC inherently lacks.

LAST RETIREE STANDING

Annuity most foul?

Created in 17th-century France, the tontine is part investment pool, part annuity and part motive for murder. Participants contribute to an investment kitty and share the dividends. As members die off, the survivors’ payouts increase. The last one alive gets the principal. Tontines have been outlawed by most states out of a fear they would incite the sort of criminal conniving. But now Mellon Financial has taken a step toward getting a patent on a “hybrid tontine” aimed at the legion of 401(k) savers who do not have traditional pensions giving them fixed monthly stipends.

Like any annuity, the Mellon product would convert a lump sum into monthly payments, protecting the retiree from outliving his assets. With the usual annuity an insurance company absorbs the risk that buyers will turn out to be unexpectedly long-lived. Here the retirees absorb that risk. Payments vary according to the mortality experience of a pool of buyers who join the tontine together. If a group turns out to be excessively healthy, everyone’s payout suffers. But if you bought alongside some sickly types who keel over early, your retirement checks would get fatter.

Mellon’s tontine allegedly snuffs out the murder motive by using a large employee pool and paying out both interest and principal, so the last one alive does not get a huge windfall. And supposedly tontine payouts would be higher than those from normal annuities because the insurance company middleman is cut out. The biggest hurdle will be changing state laws that ban tontines. And getting past the laugh factor.

MIDDLE EAST SET FOR ASSET MANAGEMENT BOOM

Dr. Omar Bin Sulaiman, the Governor of the Dubai International Financial Center (DIFC), has told a high-level audience of international and regional financial services professionals that the Middle East is poised for an asset management boom. According to Bin Sulaiman, the DIFC has encouraged fund registration and administration by providing the regulatory and professional framework for their development.

In his address, the DIFC Governor said, “Today, as regional wealth is increasingly repatriated from overseas back to the Middle East, regional fund management has likewise assumed an increasingly prominent role. The wealth generated in the region is now more than ever being reinvested in the region, which is good news for asset management firms, private banks, fund administrators and other ancillary service providers.”

He continued, “More important, that’s good news for the people of the region. For the people of the Middle East, the ability to self-manage – and self-regulate – our economic affairs is vital to our shared future. The rise of a regional asset management sector, then, is an extremely positive step in that direction.”

PRIVACY

U.S. JUSTICE DEPARTMENT TAKES AIM AT IMAGE-SHARING SITES

Internet surveillance push accelerates.

The Bush administration has accelerated its Internet surveillance push by proposing that Web sites must keep records of who uploads photographs or videos in case police determine the content is illegal and choose to investigate. That proposal surfaced last week in a private meeting during which U.S. DoJ officials, including Assistant Attorney General Rachel Brand, tried to convince industry representatives such as AOL and Comcast that data retention would be valuable in investigating terrorism, child pornography and other crimes. The discussions were described by several people who attended the meeting.

A second purpose of the meeting in Washington, D.C., according to the sources, was to ask ISPs how much it would cost to record details on their subscribers for two years. At the very least, the companies would be required to keep logs for police of which customer is assigned a specific Internet address. Only universities and libraries would be excluded, one participant said.

Attorney General Alberto Gonzales has been lobbying Congress for mandatory data retention, calling it a “national problem that requires federal legislation.” Gonzales has convened earlier private meetings to pressure industry representatives. And last month, Republicans introduced a mandatory data retention bill in the U.S. House of Representatives that would let the attorney general dictate what must be stored and for how long. Supporters of the data retention proposal say it is necessary to help track criminals if police do not immediately discover illegal activity, such as child abuse. Industry representatives respond by saying major Internet providers have a strong track record of responding to subpoenas from law enforcement.

Last week’s meeting represents the latest effort by the Bush administration to increase the ability of law enforcement and intelligence agencies to monitor Internet users. Since 2001, the administration has repeatedly pushed for more surveillance capabilities in the form of the Patriot Act and a follow-up proposal that – if it had been enacted – would have given the FBI online eavesdropping powers without a court order for up to 48 hours. Often invoking terrorism and child pornography as justifications, the administration has argued that ISPs must install backdoors for surveillance and has called for routers to be redesigned for easier eavesdropping.

In practice, some Web businesses already make it a practice to store personal information forever. Google stores search terms indefinitely, for instance, while AOL says it deletes them after 30 days. David Weekly, a San Francisco-area entrepreneur who founded popular Wiki-creation site PBWiki.com, said the Justice Department’s proposal would be routinely evaded by people who use overseas sites to upload images. If the proposal were to become law, PBWiki would already be in compliance, Weekly said. “We already keep all that data pretty much indefinitely because it is invaluable for us to mine and figure out how people use services.”

MORE ILLEGALITIES IN THE “AUTOMATED TARGETING SYSTEM”

Even while trying to defend the ATS that is being used to deny travelers their rights on the basis of secret “risk assessments” that give each of us a terror score from secret databases of third-party and government information about us, the USA Department of Homeland Security has admitted to more and more violations of Federal laws, the U.S. Constitution, and international human rights treaties.

Today I filed supplemental comments with the DHS on behalf of the Identity Project (IDP), pointing out the additional legal problems – including criminal violations of the Privacy Act by DHS officials – revealed by DHS statements since I filed the initial IDP comments on the ATS scheme and how it violates an explicit Congressional prohibition on assigning risk to airline passengers whose names are not on government watch lists.

I do not expect the DHS, especially its Privacy (invasion) Ofiice, to police itself. Keep asking questions and demand answers and action from Congress and EU officials. If you are in the EU, request your travel records so that we can find out what has really been happening, and how they have really been used.

LAW

S.E.C. ORDERS RECORD ASSET FREEZE IN ONLINE BROKERAGE ACCOUNT INTRUSION CASE

Claim Latvian bank’s online trading account was being used to conduct a hi-tech market manipulation scheme.

The U.S. Securities and Exchange Commission has revealed that it had won an emergency court order freezing assets in a Latvian-based bank’s trading account, which were being used to conduct a hi-tech market manipulation scheme. The SEC’s enforcement action is the third filed in as many months involving market manipulation schemes conducted through online account intrusions.

In an emergency federal court action, the Commission alleged that the account, maintained by relief defendant JSC Parex Bank based in Riga, Latvia, had been used by one or more unknown offshore sub-account holders to launch a “pump and dump” manipulation scheme involving the stocks of 15 different public companies. As part of the scheme, the unknown traders hacked into unsuspecting investors’ online brokerage accounts at seven different brokerage firms, selling off investors’ prior positions and using the proceeds to pump up the market for the stocks subject to the scheme. Through this technique, the unknown traders generated at least $732,941 in illicit profits and cost U.S. brokerages some $2 million in losses.

The Court issued a temporary restraining order freezing the defendants’ fraudulent profits, which were held in JSC Parex’s omnibus trading account. SEC Office of Internet Enforcement Chief, John Reed Stark observed, “Using sophisticated computer hacking and identity theft techniques to break into the accounts of innocent online brokerage customers, these perpetrators effectively cut out the middleman of the old fashioned pump-and-dump scheme, eliminating phony stock promotions, creating their own artificial trading demand, and consummating their frauds in as little time as a couple of hours.”

THE MYTH OF CHECKS AND BALANCES

One of the most pernicious myths about democracies, and it pains me to say, even constitutional republics, is the Myth of Checks and Balances. Most of us were indoctrinated with this myth in junior high school and high school social studies class. According to this myth, also known as the Doctrine of the Separation of Powers, distributing the powers of a government among several branches prevents the undue concentration of power in any single branch.

A Google Images search for “Separation of Powers” yields dozens of diagrams purporting to explain how the Doctrine of the Separation of Powers protects us from government tyranny. Unfortunately political systems in the real world do not function as illustrated in these diagrams. Unfortunately the division of the functions of government into legislative, executive, and judicial branches does not prevent arbitrary excesses by government. Unfortunately “separating the powers” does not really separate the powers, and does not really result in “separate and independent bodies checking and balancing each other.”

The reason why is not mysterious. The reason why is quite simple. The separation is not real. The separation is illusory. The separation is nothing more than wishful thinking. In fact the “separate and independent bodies” remain inseparable parts of the same government, the one government, the only government that the limited government, “minarchist” paradigm permits within any given territorial jurisdiction. This government perpetuates its existence by robbing individuals at gunpoint. It refers to these acts of armed robbery as “taxation”, as if calling its crime by some other name absolved it of guilt. As an old joke has it, “The only difference between the Mafia and the government is a flag.” The joke is funny because it is true.

In what sense can the bosses, underbosses, consiglieri, and soldiers of the same crime family be considered “separate and independent” from each other? By the same token, every official of a monopolistic state lives off the same tax revenues extorted at gunpoint from hapless taxpayers unfortunate enough to live within the government’s reach. Can we really expect officials who are part of such a criminal enterprise to perceive each other as natural enemies and therefore “check and balance” each other? Can we really expect officials who are part of such a criminal enterprise not to perceive each other as fellow predators, and us, the taxpayers, as their common prey?

Resistance against such a monolithic “crime family with a flag” is virtually impossible. The proximate reason is that it has more goons with guns. But the ultimate reason is that the overwhelming majority of citizens in “advanced nations” believe they cannot live without a monopolistic state, and their collective behavior perpetuates its existence. Citizens who believe they cannot live without a monopolistic state are the political counterpart of battered wives, who believe they cannot live without their abusive husbands, and who insist that “deep down” their abusers “really love them.”

A battered wife who rationalizes away her husband’s abusive treatment of her victimizes only herself. Citizens who believe in and demand the perpetuation of monopolistic states victimize not only themselves, but also fellow citizens who know better.

In theory, a democratically elected president is merely the highest ranking official in one of three or more coequal branches of government, the executive branch. In reality, in any monopolistic state with a presidential system, the president is an elective dictator, the legislature is a debating society, and the judiciary is a rubber stamp. Real world experience has demonstrated that over time, the executive invariably co-opts the judiciary and marginalizes the legislature. Because the executive is the branch that has been delegated the power to “execute” policy (pun intended), it invariably usurps any and all powers delegated to the other branches of a monopolistic state. Real world experience has shown that “limited government” inevitably morphs into unlimited government, and that the executive is always the branch that winds up monopolizing that limitless power. It makes no difference whether the executive was popularly elected, self-appointed, or hereditary. As George W. Bush put it, “I’m the decider and I decide what’s best.”

WHOSE LIFE IS IT ANYWAY?

The Food and Drug Administration versus dying cancer patients.

University of Virginia student Abigail Burroughs died of head and neck cancer at age 21 on June 9, 2001. She died while fighting to gain access to promising experimental anti-cancer drugs recommended by her oncologist at Johns Hopkins University Hospital. Her father, Frank Burroughs, founded the Abigail Alliance for Better Access to Developmental Drugs and sued the FDA, arguing that terminal cancer patients have a constitutional right to try to gain access to developmental medicines that the agency has not yet approved.

In May 2006, the Alliance won its case before the U.S. Court of Appeals for the District of Columbia which ruled that “barring a terminally ill patient from the use of a potentially lifesaving treatment impinges on this right of self-preservation.” The Appeals Court sent the case back to District Court to consider if the protected liberty interests of terminally patients outweigh the FDA’s interest in insuring the provision of safe and effective drugs. Last week, the full Appeals Court reheard the case at the request of the FDA.

Earlier in the week, the Food and Drug Law Institute held a colloquium, “Whose Life Is It Anyway?”, on the issue. Scott Ballenger, the lawyer who is representing the Abigail Alliance before the Appeals Court, noted that the legal question before the court is what standard should apply to the case. Is trying to gain access to potentially life-saving medicines unapproved by the FDA a fundamental right or merely an economic right subject to regulations established by political authorities? Can the government properly assert that it has a compelling interest to deny dying patients access to potentially life-saving drugs? Ballenger compared the situation to self-defense. “Self defense is the most obvious and self-evident rights of men,” he asserted. “No state can deny someone self-defense in the face of an attack.” Ballenger argued that if the law recognizes that people have the right to defend themselves from attack by a bear or infectious bacteria, then surely they have the right to defend themselves against a rogue cancer cell.

At the colloquium, FDA lawyer Richard Cooper agreed that the issue is whether some rights are so fundamental that we do not entrust them to decisions made by elected officials. Until recently, establishing agencies to regulate the safety and efficacy of drugs was thought to be within the purview of Congress. If people want to change the way the FDA regulates patient access to investigational drugs, Cooper argued, they can petition the FDA and Congress and eventually vote out members of Congress who refuse to change the regulations.

Ballenger continued that federal courts have recognized a number of fundamental rights and not all of them deal with life and death issues, including the right to teach your children German, educate them in private school, live with family members under one roof, view pornography at home, and engage in homosexual sodomy. Some other fundamental rights recognized by federal courts are the right to interracial marriage, to use contraception, to worship, and to obtain abortions.

Scott Gottlieb, who has just stepped down as deputy commissioner at the FDA, noted that FDA bureaucrats are concerned that opening access to investigational drugs to terminal patients might imperil the agency’s ability to collect good data on drug safety and efficacy. They think that they are balancing individuals’ interests in getting cutting edge treatments now against society’s interest in obtaining more information in order to get more drugs to more people eventually. Gottlieb told the colloquium that many inside the FDA believe that it is more important and better for society in the long run to gain good clinical data about a drug than it is to try to save the lives of individual patients. “I don’t think the choice is that stark,” said Gottlieb. He asserted that the FDA is failing to use its authority to strike a balance on this issue. The agency fears that patients would trade off a higher risk of dying for fewer side effects. Why mentally competent people in consultation with their physicians should not be allowed to make such tradeoffs is not at all clear.

Frank Burroughs wrapped up the presentation for the colloquium participants. “Every drug that we have pushed for early access to over the past six years – all are now approved by the FDA.” Thousands died waiting for the FDA bureaucracy to let cancer drugs that would have lengthened and perhaps even saved their lives onto the market. Perhaps finding that mentally competent terminal cancer patients do have a fundamental right to access investigational drugs will finally spur the FDA to stop clinging to an outdated mid-20th century cancer clinical trial system and embrace one more suited to the 21st century science. The millions of us who will one day develop cancer had better hope so.

Idaho parents regain custody of baby lost due to a doctor’s orders.

In 2002, Corissa Mueller was afraid her 5-week-old daughter was seriously sick. An emergency room doctor insisted on giving the baby a spinal tap, but Corissa wanted less-invasive tests, before allowing the riskier procedure. Police took little Taige from the Muellers and they had to go to court to regain custody. In a 62-page document, U.S. District Court Judge B. Lynn Winmill ruled against city and state officials saying, “A choice that poses risks either way should never trigger intervention by the state.” A civil trial in this case is still in the works.

ALLEGED MADAM THREATENS TO SELL LIST OF CLIENTS TO FINANCE HER LEGAL DEFENSE

Says her hand is forced after feds confiscated her assets.

Working out of her California home, Deborah J. Palfrey, 50, did business in Washington, D.C. under the name Pamela Martin and Associates. On a Web site seeking donations to her legal defense fund, the company is described as “a high-end adult fantasy firm which offered legal sexual and erotic services across the spectrum of adult sexual behavior.”

But federal authorities say it was a thriving call-girl service, begun in 1993, that dispatched college-educated women in their 20s to male clients in the Washington area who paid $275 to $300 per sexual encounter. The prostitutes kept half of the fees and mailed the rest to Palfrey in money orders, authorities allege. The indictment says that in 13 years, the service employed 132 women and generated about $2 million in income “through prostitution related activities.”

“Ms. Palfrey adamantly disputes the government’s claims of illegal behavior,” according to her legal defense Web site, where she began seeking donations after the government took her assets. “It is an unfortunate fact of life that funds will need to be generated to counteract the present injustice,” the site says. As a result, “consideration is being given” to selling Palfrey’s phone records dating to 1993, including the phone numbers of about 10,000 clients in the Washington area who used what Palfrey asserts was her legal escort service. Palfrey sent an e-mail to prosecutors this year that warned of the disclosure. “I can state with unequivocal certainty this situation will be a very long and unpleasant one,” she wrote.

OPINION & ANALYSIS

AMERICANS HAVE LOST THEIR COUNTRY

The Bush-Cheney regime is America’s first neoconservative regime. In a few short years, the regime has destroyed the Bill of Rights, the separation of powers, the Geneva Conventions, and the remains of America’s moral reputation along with the infrastructures of two Muslim countries and countless thousands of Islamic civilians. Plans have been prepared, and forces moved into place, for an attack on a third Islamic country, Iran, and perhaps Syria and Hezbollah in Lebanon as well.

This extraordinary aggressiveness toward the U.S. Constitution, international law, and the Islamic world is the work, not of a vast movement, but of a handful of ideologues – principally Dick Cheney, Donald Rumsfeld, Lewis Libby, Douglas Feith, Paul Wolfowitz, Richard Perle, Elliott Abrams, Zalmay Khalilzad, John Bolton, Philip Zelikow, and Attorney General Gonzales. These are the main operatives who have controlled policy. They have been supported by their media shills at the Weekly Standard, National Review, Fox News, New York Times, CNN, and the Wall Street Journal editorial page and by “scholars” in assorted think tanks such as the American Enterprise Institute.

The entirety of their success in miring the U.S. in what could become permanent conflict in the Middle East is based on the power of propaganda and the big lie. Initially, the 9-11 attack was blamed on Osama bin Laden, but after an American puppet was installed in Afghanistan, the blame for 9-11 was shifted to Saddam Hussein. Having conned the UN, Congress, and the American people, the regime invaded Iraq under totally false pretenses and with totally false expectations. The regime’s occupation of Iraq has failed in a military sense, but the neoconservatives are turning their failure into a strategic advantage.

Bush accuses Iran of arming the Iraqi insurgents, a charge that experts regard as improbable. The Iraqi insurgents are Sunni. They inflict casualties on our troops, but spend most of their energy killing Iraqi Shi’ites, who are closely allied with Iran. Bush’s accusation requires us to believe that Iran is arming the enemies of its allies. On the basis of this absurd accusation, Bush has ordered a heavy concentration of aircraft carrier attack forces off Iran’s coast, and he has moved U.S. attack planes to Turkish bases and other U.S. bases in countries bordering Iran. Former National Security Adviser Zbigniew Brzezinski said that he expected the regime to orchestrate a “head-on conflict with Iran and with much of the world of Islam at large.”

Why is the U.S. spending $1 trillion on wars, the reasons for which are patently false. What is going on? There are several parts to the answer. Like their forebears among the Jacobins of the French Revolution, the Bolsheviks, and the Nazis, neoconservatives believe that they have a monopoly on virtue and the right to impose hegemony on the rest of the world. Neoconservative conquests began in the Middle East because oil and Israel, with which neocons are closely allied, are both in the Middle East.

In 1996 Richard Perle and the usual collection of neocons proposed that all of Israel’s enemies in the Middle East be overthrown. “Israel’s enemies” consist of the Muslim countries not in the hands of U.S. puppets or allies. The U.S. and Israeli governments blame Iran, Iraq, and Syria for aiding and abetting Palestinian resistance to Israel’s theft of Palestine. The Bush-Cheney regime came to power with the plans drawn to attack the remaining independent countries in the Middle East and with neoconservatives in office to implement the plans. However, an excuse was required. Neoconservatives had called for “a new Pearl Harbor,” and 9-11 provided the propaganda event needed in order to stampede the public and Congress into war. Neoconservative Philip Zelikow was put in charge of the 9/11 Commission Report to make certain no uncomfortable facts emerged.

The neoconservatives have had enormous help from the corporate media, from Christian evangelicals, particularly from the “Rapture Evangelicals”, from flag-waving superpatriots, and from the military-industrial complex whose profits have prospered. But the fact remains that the dozen men named above were able to overthrow the U.S. Constitution and launch military aggression under the guise of a preventive/preemptive “war against terrorism.” When the American people caught on that this “war” was a cloak for wars of aggression, they put Democrats in control of Congress in order to apply a brake to the regime’s warmongering. However, the Democrats have proven to be impotent to stop the neoconservative drive to wider war and, perhaps, world conflagration.

We are witnessing the triumph of a dozen evil men over American democracy and a free press.

America on its knees before tyranny.

The Star-Spangled Banner painted the United States in 1814 as “The Land of the Free and the Home of the Brave.” These words, though still mumbled by apathetic consumers at sporting events, amount to a cruel satire of the American people in 2007.

The war in Iraq is not merely “the most serious foreign policy blunder in American history,” as even members of the political establishment have conceded. It represents, rather, a crisis derived from the decaying framework of the U.S. political system, posing the most fundamental question about the relationship between the rulers and ruled in this country. Though the Bush regime led the way, the war is the joint product of both parties and the corporate media – that is, of the entire political establishment – with each part playing its own supporting role.

It is not a question of “Well, if only Gore had won in 2000, we would not be in this mess.” The mess springs from the very structure of US society – the unequal distribution of power among its social classes, its economic and political relations with the rest of the world, its ruling ideology. There is an immense qualitative difference between a system malfunctioning because its framework is rotting and the more limited type of error due to a component glitch within an otherwise healthy framework. The war in Iraq is a systemic malfunction.

The official forms of discourse in U.S. society have degenerated to the point that they no longer permit acknowledgement – or even mention – of the main issues confronting us. The problems run too deep. They are too threatening to the powers controlling the system. The crises facing our society are like those an individual must confront, when events force upon him a choice of either internally acknowledging a dark and terrible truth about himself, or continuing in denial. The truth seems too terrible to bear – so the denial continues, and the pressure of the crisis intensifies.

If we were to attempt a genuine discussion of the Bush regime, one might formulate the main issues as these: (1) Is the regime legitimate? (2) Is the regime guilty of massive war crimes? (3) Is the regime guilty of high crimes against the Constitution? (4) Is the regime a de facto dictatorship? The mainstream media are unwilling to even recognize the existence of such questions. Their comfort zones and expertise are better suited to “reporting” on the astronaut/love-triangle/diaper story, or the intriguing battles raging over Anna Nicole’s corpse.

The Democrats gained control of Congress only by virtue of the fact that they are not Republicans, under conditions where the electorate instructed them to oppose Bush’s deranged warmongering. Though “victorious”, they immediately surrendered to the Republicans, taking “off the table” the only two measures which could possibly stop the U.S. war drive – impeachment and cutting off funding for the war. It should be clear that the Democrats, like the media, are terminally corrupt, and are in effect collaborating with the Bush regime against the voters who put them in office. We have before us the spectacle of the Bush administration committing crimes which, if attempted by any foreign power, would rightly be met by torrential denunciation from Congress and the U.S. media. But when the Bush administration commits these crimes, the media is basically supportive, while the Democrats make cynical pretenses of opposition.

Corruption is present to some degree in all governments, but the critical test of whether a government is beyond all salvation is whether it has the capacity to acknowledge great crimes committed by the leadership, and to rectify them. In today’s Washington, however, the Democrats function as a buffer between the Bush regime and the increasingly angry population.

Rectifying the corruption should include restoration of the staggering wealth that in effect has been stolen from the American people, when Bush and Cheney ladled it out to their friends at Enron, Bechtel, Halliburton, the oil companies, and the other defense industries. The $400 million CEO severance packages, the billions in non-bid government contracts to defense companies and mercenaries, Cheney’s own Halliburton stock options – all this and more should be confiscated, and returned to the rightful possessors of that wealth. It should be clear that the Democrats would scarcely be able to comprehend what is being spoken of, here, let alone act as honorable advocates of its implementation.

Today’s America is no democracy. It is a degenerating tyranny, disfigured by its military-industrial-governmental cancer. Our people are increasingly ashamed and terrified of their government, and rightly so, because we have no control over it, and it has become a deceitful monstrous danger to us and to the health of the planet. We are not “The Land of the Free and the Home of the Brave.” To the contrary. We, the people, are on our knees, cringing and whimpering in dismay and confusion, prostrate before the forces that have betrayed us.

RON QUIXOTE

Ron Paul for President gives many people hope that the system can work. If only the right man could take the reins, then this beast would be controlled and used for good purposes. The long years of conditioning and indoctrination are difficult to get past. As a naïve young man, I voted for him because I thought that capital “L” Libertarianism could really work to reform the democratic-corporate-state system. A Libertarian President would surely be an improvement in the short run, but it would not change the system in the long run. I hope that a valuable lesson can be learned from this exercise.

The romanticism of an old-college-try is inspired by the genuine good-nature of Dr. Paul. His sincerity, intelligence, knowledge of economics and dedication to the ideals of liberty elevate this humble man to a very special status among those who would wear The Ring. He is the only politician alive with whom I have a hard time finding disagreement with. Of the 535 members of Congress, Ron Paul is the only person who truly deserves the title Honorable. The man has followed his oath to uphold the Constitution like no other. He is definitely for real. If a successful internet campaign can generate the needed support to have his campaign be taken seriously by the media-ocracy, then he can win. But if he wins, can he dismantle the behemoth Federal Government? Or would he just make it look more acceptable?

I believe that Ron Paul will scare the living daylights out of the powers-that-be and has a better chance of winning than most pundits think. The amusement factor alone from an 18-month spectacle of political debate between a principled man committed to liberty and the other fakes and frauds is likely to be worth the price of admission. This will be a media event of the highest entertainment order for sure.

The self-delusion is not that he could maybe win the election. It is that he could do anything of substance if he actually did win. After Leviathan steamrolls him like, say, it did another President Ron (if you believed his act) along with every good man who ever went to Washington, D.C. on a white horse, then President Ron Paul being “in-charge” (of the continuing expansion of state control and intervention leading to said collapse) should prove once and for all to anybody with a smidgen of analytical ability that our political problems are systemic and not due to personnel issues.

So I do hope he runs and wins. Not because I think that he will strike through the root of evil, but because I know that he cannot. The naïve notion that the Constitution is a cage for politicians, and that a brave politician-tamer can just push them back into that cage and close the door makes windmills look like giants. This illusion should be shattered by a President Ron Paul Administration. George Will was right. Ron Paul is an anachronism. Will knows exactly how the system works, with or without Ron Paul.

A President Ron Paul will either (1) be thwarted by the vested interests that have so much influence over the existing political system or (2) liquidate those interests. The smart money is on the bet that he is thwarted, even if this breaks my heart to say. I do pray that this wonderful man is not crushed by this process. I am sure this thought weighs heavy on his indecision to run. It should.

Does anybody remember the promises of how wonderful the Federal government would be if only we had a Republican House, Republican Senate and a Republican President choosing the members of the Supreme Court? That worked out just great, eh? What will it take for “the people” to see that the system itself just plain sucks?

I would love to be proved wrong this one time and see a President Paul liquidate the corrupt, bankrupt U.S. Federal Government. But if I am right and he doesn’t affect substantial change, then never vote again and spread the word. This will allow the relic of a political system we inherited upon birth to wash away so that we can finally move on to the next level of social organization. Authority is not liberty and democracy is not freedom, no matter who you vote for.

It looks like a win-win situation for lovers of liberty. Either a President Ron Paul is the elected dictator that fulfills the dream of setting all the slaves free, or he proves that the system is a scam and must be completely scrapped. At the very least, it should be a spectacular show watching the puppeteers squirm and the puppets panic at the sight of a man running towards them with scissors. I would hate to miss that show. Someone might even make it into a musical someday about how democracy almost worked once. Maybe, just maybe, then enough people will finally realize that, after all, it’s just a show folks ... it’s just a show.

THE REPRODUCTION OF DAILY LIFE

The everyday practical activity of tribesmen reproduces, or perpetuates, a tribe. This reproduction is not merely physical, but social as well. Through their daily activities the tribesmen do not just reproduce a group of human beings. They reproduce a tribe, namely a particular social form within which this group of human beings performs specific activities in a specific manner. The specific activities of the tribesmen are not the outcome of “natural” characteristics of the men who perform them, the way the production of honey is an outcome of the “nature” of a bee. The daily life enacted and perpetuated by the tribesman is a specific social response to particular material and historical conditions.

The everyday activity of slaves reproduces slavery. Through their daily activities, slaves do not merely reproduce themselves and their masters physically. They also reproduce the instruments with which the master represses them, and their own habits of submission to the master’s authority. To men who live in a slave society, the master-slave relation seems like a natural and eternal relation. However, men are not born masters or slaves. Slavery is a specific social form, and men submit to it only in very particular material and historical conditions.

The practical everyday activity of wage-workers reproduces wage labor and capital. Through their daily activities, “modern” men, like tribesmen and slaves, reproduce the inhabitants, the social relations and the ideas of their society. They reproduce the social form of daily life. Like the tribe and the slave system, the capitalist system is neither the natural nor the final form of human society. Like the earlier social forms, capitalism is a specific response to material and historical conditions.

Unlike earlier forms of social activity, everyday life in capitalist society systematically transforms the material conditions to which capitalism originally responded. Some of the material limits to human activity come gradually under human control. At a high level of industrialization, practical activity creates its own material conditions as well as its social form. Thus the subject of this analysis is not only how practical activity in capitalist society reproduces capitalist society, but also how this activity itself eliminates the material conditions to which capitalism is a response.

PLANNED TO DEATH

A strange culture of emergency has taken over this country, and the slightest provocation triggers it. It could be an expected terrorist or just an old-fashioned weather warning. The officials are quick to swing into action, and tell you what to do. The problem is that these demands are often based on nothing other than government plans that are not in your best interest. It behooves all of us to think carefully about genuine preparedness, which might often involve bucking the system and telling the emergency nazis to mind their own business.

A case in point is the disastrous weather emergency that befell Enterprise, Alabama, last week. The first warnings about a tornado came at 10:30am, and that is when the disastrous “preparations” began. The school could have permitted the students to leave. After all, we are talking about a High School here, and most students could drive. Those who could not might have gotten a ride. Parents would have been glad to pick of their kids, and many tried but were turned away. At least some choice in the matter should have been allowed. But, if you know anything about disaster plans, you know that choice and human rights are the last things on the decision-makers minds. They treat people like cattle to be herded, bark orders, and threaten everyone in the most awful way for having the most normal impulses to seek a safe way out.

So instead of just letting the kids go, the officials herded them all in hallways, where it was said that they would be “safe”. There they sat in crowded conditions for hours and hours, just waiting for the moment of death to come. It finally did, at 1:30pm. The twister slammed into the building, the walls caved in, and eight kids were killed, with many more injured. Parents who had come to pick up their kids at the earliest possible moment (the school announced that this was 1:00pm) sat helplessly by. They were not allowed in before, and when they showed up, the police demanded that they come inside and still would not let the kids go.

And did the officials in charge express regret about their stupid decision to force everyone to stay? On the contrary, they claim that if they had let the kids go, there might have been hundreds of deaths. First, we do not know that for sure. The main spot of death was the school, and it was precisely because so many were crowded into just a small area. A point of common sense – very much lacking in emergency management – is that wherever you are hiding, you need room to move so that you can dodge falling concrete. They were given no such room. Second, there is a big difference between dying at the hands of the Plan and dying because of your own bad choices. When you die because of the decisions of the officials, your blood is on their hands.

And this brings us to the second response of the officials, and this applies to the school, the local police, and all the way up to the governor. Instead of expressing regret, they congratulated each other for adhering so closely to the plan, and for following through with the emergency preparedness. Yes, they are sorry people died, but for the emergency bureaucrat, the far more important consideration is that everyone obeyed orders and that the orders were clear and decisive. Some parents have spoken out against the decision of the school to keep the kids corralled in a trap of death. But their complaints have been shot down by the “responsible” voices of the officials in charge. Meanwhile, news has slowly leaked out that other schools in Alabama have a different policy. They shut down the school and tell the kids to get the heck out.

This is an unusual approach. The whole culture of emergency in this country seems to be predicated on the notion that people do no know what is best for them. They need authorities to tell them what to do. And whatever they do, they must do it in concert.

The best approach to an emergency is simply to let people make their own judgments about how to stay safe. Instead, we have developed a system whereby a central plan goes into effect that applies to everyone. This is why evacuations tend to be mandatory these days, and why you are not allowed to rescue your own children from danger.

This brings us to the final presupposition of emergency management in this country. Officials assume that you are their property. You have no rights, no freedom of choice, and no volition of your own that should be respected. Your one job is to obey them, and at least if you are killed, they can have bragging rights that they got everyone to go along.

At some point in the coming years, you will probably face this problem. There will be some emergency in which you will be told to put your life or that of your children in the hands of experts, who pretend as if they know what is best for you. Chances are that they do not, and this emergency will be the time when you need to think seriously about fundamental values. Is obedience to authority more important than life itself?