W.I.L. Offshore News Digest for Week of July 2, 2007

In September 1997, at the height of the Asian crisis, Robert Rubin visited China’s Great Wall. It was a brief respite from the tense talks in which the former U.S. Treasury secretary was embroiled in Beijing. As we walked along, he paused for a moment, pulled at one of the wall’s stones and deadpanned, “Yep, pretty solid. Hopefully we can say the same about the yuan.”

The reference was to the first of two missions back in the Chinese capital: encouraging China not to devalue its currency. The concern was that China would join Thailand in weakening its exchange rate. Even though Indonesia and South Korea did it too, investors predicted disaster if China were to do so. July 2 marks the 10th anniversary of the start of the Asian crisis, and China’s currency is still effectively pegged. China formally severed the yuan’s link to the dollar in 2005, though it has amassed more than $1 trillion of reserves to hold the exchange rate in place. Even so, getting China to keep the yuan steady was a big coup for Rubin at the time.

Ten years on, Rubin’s other mission in Beijing that week – nudging China toward democracy – is not looking so good. At the time, U.S. President Bill Clinton felt Rubin, a Goldman Sachs alumnus, would have more success than his State Department in making the case for more openness. The pitch: Democracy leads to prosperity. Given China’s 11% growth and rising global stature, it is doubtful many officials in Beijing regret ignoring the U.S.’s democracy-is-best message. What may be surprising, though, is how China’s un-American views on democracy are gaining favor in Asia.

One of President George W. Bush’s most consistent philosophies is that democracy is a necessary ingredient to economic success. It is well-known that China, Russia and Venezuela see things differently. Less recognized is how Asia is not embracing political openness the way officials in Washington expected in the late 1990s. Thailand is one example. In September 2006, popularly elected Prime Minister Thaksin Shinawatra was removed by a coup. Prior to that, Thailand’s post-crisis recovery made it an investment darling. Since September, three years of economic gains and wealth creation have been squandered. Singapore’s politics, meanwhile, have not changed much since the late 1990s. Hong Kong residents still do not have universal suffrage.

Asia does have its democracy success stories. India is one example, of course. Japan, South Korea, Malaysia, Indonesia and the Philippines are others. Taiwan gets little attention because the world does not want to lock horns with China over the issue. Yet there are a couple of reasons to be disappointed about the state of democracy in Asia. One is weak government institutions, which hold democracies together more than national leaders do. The Philippines is a case in point. Democracy has not been the panacea that was supposed to reduce poverty. The country was never one of the Asian tigers, and corruption remains rampant.

Across Asia, strong ministries, independent courts, a free press, credible central banks and outside watchdog agencies would not only enhance democracy, but also the forces of capitalism. The other reason democracy is not thriving in many parts of Asia is disillusionment with the process, coupled with the example offered by China. Instead of U.S.-style government, Asia may be moving toward “illiberal democracy” – referring to a model in which leaders are elected to some extent, but civil liberties and press freedom are kept under tight watch in the name of stability. Some call such leaders “elected autocrats”.

In the age of globalization, capitalism often widens the gap between rich and poor, and even undermines the push toward democracy. If political freedom does not quickly translate into riches, populations will question its utility. Meeting with Indian businesspeople, one often hears some variation of “it is so hard for us to get things done, but China’s top-down system can do what it wants, when it wants.” It is not that Indians want to live in a China-like system that censors the Internet. It is more a recognition that democracy can have its limits when it comes to economic policy making.

Rumblings in Asia may increasingly shift toward economic growth first, full-blown democracy second. It does not mean openness and capitalism are incompatible in the long run. It is just that Asia needs more convincing in the short run.

The good news for investors and foreigners is you can own property in Mexico, free and clear. Having lived here for 6 years, I am amazed at the changes and modern times that seem to have flooded into this area – small fishing villages now evolving into modern cities with American-style life and mega-shopping centers.

When I arrived by boat with my family in 2001, life was slow and easy. The Mexicans still live the old way but life has become an extension of Miami – with a booming real estate market. As little as 4 years ago, the growth began. Skyscrapers climbed to the sky. Condos began selling for $300-$500,000 dollars. Houses with oceanfront that could be bought 6 years ago for $60k, climbed into the $150K range. Bare jungle that used to sell for $1000 a hectare (1 hectare = apx. 2.2 acres) is now going for over $50K, depending on location. Brand new houses in American style suburbs began mushrooming and Mexicans lined up to buy them, along with a few smart foreigners. Four years ago a new 2 bedroom, 2 bath house with sunroof and garden went for $40,000, now they are in the $90,000 region and climbing fast.

The good news is its only half way. Yes, you should have been here 4 years ago, but it is not too late. The word among the realtors is 2-3 more good years before saturation and full market value is reached. Bottom line, buy a new house or condo now and watch your investment probably double in 3 years while you rent it out, or live here in winter while your neighbors freeze back home.

Developers have been pouring in from Spain, the USA, Canada and Mexico city. Why? Low cost land + high demand + low construction costs = profit. In the small city of Playa Del Carmen I have seen over 50 new condo building projects in the last year alone. About 45 miles South of Cancun a condo here is not likely to be found for less than $130k. Oceanfront condos move in the $250 to the $500k+ range. Developers are opening large American-style shopping malls as populations are expanding. This area is predicted to go from 100,000 people to 600,000 in the next 6 years. Wal-Mart is here, so is MacDonald’s, Sam’s Club, etc.

Mexicans love the new wave. They want American or fancy European taste goods, restaurants fast food and slow, the lifestyle. Over a million foreigners live in Mexico today, many in this region. Canadians, American, Britons and Europeans are moving in and fueling the boom. In addition the wealthy families from Mexico City – with its rat race of 30 million people, pollution and a high crime rate – want to retire here.

If you want to retire or live in a new country consider Mexico. It is changing faster than you or I can blink. Be willing to learn Spanish and live in tranquility with the locals, who are wonderful people. If you have been coming down to Mexico on vacation for years and thinking about buying, do it soon or it will be over, I kid you not.

The leading telecommunications providers in the Caribbean Region have been told that the social and economic advantages that internet communications technology are offering to the territories can be maximized only if the costs of high speed internet and broadband technology are dramatically reduced. Speaking in Bridgetown, Barbados, Edmond Mansoor, Antigua & Barbuda’s Minister of State in the Office of the Prime Minister with responsibility for Information, Broadcasting and Telecommunications, said that bringing broadband technology to the masses at an affordable price is a major challenge facing the Caribbean Community.

“Providing broadband technology must be at the very center of ICT development today. It cannot be simply about the connectivity of the elite where some people walk around the town with their GSM phones and Blackberries,” Mansoor told the conference. According to Mansoor, the information that is available to Telecommunications Ministers of the region shows that the people at the lower end of the socio-economic scale are not just paying more for their broadband technology but they are in fact receiving less bandwidth. This, he indicated, translates into the poor paying more for technology.

Minister Mansoor also told the gathering that there was a direct relationship between the rate of broadband connectivity and the rate of growth of the GDP of any country. He also indicated that there was a direct relationship between access to broadband technology and a reduction in poverty. History was made recently in Antigua and Barbuda with the landing of a new submarine fiber optic cable. The cable is providing Antigua and Barbuda with access to inexpensive broadband technology, Manossor said.

The government of Costa Rica has granted another automatic one-year extension for foreign nationals holding temporary and permanent residency permits, as the immigration department struggles to cope with its workload amid changes to the country’s immigration laws. In a decree signed by President Oscar Arias, “pensionado” or “rentista” residents whose permits were due to expire on August 15, 2007 were given an extra year on their permits, which will now expire on August 15, 2008. The decree follows a similar move last year, when permits expiring on August 15, 2006 were automatically extended for 12 months.

According to the decree, the extension has come about because the immigration office has been swamped by a high volume of renewals. The immigration department is currently busy working on a new computer system that will issue credit card-like “cédula de residencia” or the carnet for pensionados, regardless of the type of residency. However, the backlog has also caused delays in the approval of new applicants for Costa Rican residency, with A.M. Costa Rica reporting that some applicants have been told that they must wait 15 months for an appointment with immigration officials.

Costa Rica’s immigration laws have been in a state of flux since lawmakers approved new legislation to control the rate of immigration under the administration of former president Abel Pacheco in 2005. The General Law of Immigration attempts to modernize Costa Rica’s outdated immigration codes. It seeks to impose tough new sanctions on businesses which employ, or individuals that harbor, illegal immigrants in a bid to stem the flow of economic migrants from neighboring countries, particularly Nicaragua. The law also allows the police greater freedom in their attempts to discover and remove illegal immigrants. However, to work effectively, the new law will necessitate a huge expansion in the number of officers employed by the under-resourced immigration police department.

Supporters of Costa Rica’s involvement in the Central American and Dominican Republic Free Trade Agreement (CAFTA-DR) were given a boost when the country’s constitutional court voted 5 to 2 that the treaty did not breach Costa Rica’s constitution. While Costa Rica’s ratification of the treaty remains an uncertainty, the court’s decision clears the way for a referendum to take place on whether the country should participate in CAFTA, which is scheduled for October.

While all the other signatories of CAFTA-DR, including the U.S., the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua, have signed and ratified the agreement, Costa Rica remains divided over the measures contained in the treaty, and is the only country to waver on its commitments. Opponents of the deal, such as trade unions, argue that by opening up the country to more foreign competition, wages will be driven down and unemployment will rise. Other opponents fear that the agreement could lead to a loss of sovereignty, as Costa Rica would be required to defer to a multinational arbitration panel in the event of a trade dispute. In May, 19 legislators presented a 130-page document explaining why CAFTA-DR would be bad for Costa Rica.

President Oscar Arias and his government however, argue to the contrary and believe that CAFTA-DR will increase foreign investment in Costa Rica, thus spurring economic growth. Last month, Standard & Poor’s supported this view, and said that ratification of CAFTA-DR would boost the prospects for the Costa Rican economy. Opinion polls earlier this year suggested that the majority of the public do not share the government’s view, with only 40% expressing support for the trade deal.

CAFTA would immediately eliminate duties on more than half the value of U.S. farm exports to the region, expand intellectual property protections, and open telecommunications and other markets. It would also eliminate tariffs on 80% of U.S. exports of consumer and industrial goods in signatory countries, with the remaining tariffs phased out over 10 years.

Despite protestations by Nevis’s governing Reformation Party that it seeks closer ties with federation partner St. Kitts, government legal advisor Patrice Nisbett has publicly called on members of the legal fraternity to assist the administration in its efforts to move towards greater autonomy. He claimed that the initiative – the devolution of power – was in keeping with a campaign promise by the NRP one year ago. “We are encouraging the lawyers to write papers, do whatever so that they can be made available to us in our deliberations and assist us so that we can achieve a more reasonable and equitable solution to the situation that exists between St. Kitts and Nevis.”

Mr. Nisbett said that that a committee set up by the Administration had already met and arrived at a plan of action as to how best the desired objectives could be achieved. “For example we would want to give the Nevis Island Legislature legislative competence over matters such as education. We would want to be in a position to vote in our local Parliament and be in a position to pass laws governing our education system in Nevis and at present you cannot do that. This is a matter that can be achieved by a two thirds majority in the Federal Parliament all you will be doing is adding to the specified matters,"”he explained.

Mr. Nisbett said that there were other sensitive areas which included immigration, the police and taxation on which the administration hoped to negotiate a different arrangement with the Federal Government. The opening of the Caribbean Single Market and Economy (CSME) is pushing the two islands towards a more cooperative arrangement. Under the CSME regional firms will have the right of establishment in both St. Kitts and Nevis. Dr Douglas called for consultation and collaboration between the Federal Government of St. Kitts and Nevis and the Nevis Island Administration on the issue of business licences, which he said ought to apply on both islands.

TAXES

U.S. APPEALS COURT REVERSES DECISION ON TAXATION OF EMOTIONAL DISTRESS AWARDS

Ruling “stands reality on its head,” says attorney who argued against IRS.

The U.S. Court of Appeals for the District of Columbia Circuit has held that the IRS can tax damages awards based solely on compensating victims who suffer emotional injuries. The decision reverses a previous ruling by the same panel of judges last year in the case of Marrita Murphy, who was awarded $70,000 by the U.S. Labor Administrative Review Board for emotional distress after complaining about environmental hazards at the New York Air National Guard base.

Murphy took the government to court after the IRS demanded $20,665 in tax from the damages, and in August 2006 was successful in persuading the judges that the award was not taxable income under the U.S. Constitution’s 16th Amendment because it did not compensate for lost wages or earnings. However, the IRS challenged the verdict, and the same judges reversed their original decision.

“Murphy no doubt suffered from certain physical manifestations of emotional distress,” wrote the appeals court’s chief judge, Douglas Ginsburg. However, the judgment concluded that the award was based upon mental pain and anguish and for injury to professional reputation. While legal compensation for physical injuries is tax-free under a 1996 statute, monies awarded for mental anguish and injury to reputation are not. The judges also said that "Murphy’s situation was “akin to an involuntary conversion of assets; she was forced to surrender some part of her mental health and reputation in return for monetary damages.”

David K. Colapinto, who argued on behalf of Murphy, stated that the court’s new verdict “stands reality on its head. ... When whistleblowers suffer retaliation, they do not ‘sell’ their mental health. If people are injured in a car accident, they do not ‘sell’ their arms and legs. These are real human losses, and compensation to restore that human loss was never intended to be ‘income’ under our Constitution or the tax code.”

Stephen M. Kohn, the President of the National Whistleblower Center and co-counsel for Murphy, added that the decision was a setback for victims of civil rights abuses. “It permits Congress to enact retaliatory taxes, stripping people from the Constitutional protections afforded property. Damages to whistleblowers are not part of a business transaction – forced or otherwise. They are part of harm caused by illegal conduct. This decision threatens fundamental human rights,” he argued.

Canada’s energy trusts have formed a coalition to demand that the federal government rethink its controversial decision to impose a distribution tax on income trusts. “When the Conservatives broke their promise not to tax trusts, it came as a total surprise to millions of hard working Canadians – and it will have severe negative economic impacts for all of them,” argued John Dielwart, Co-Chair of the Coalition of Canadian Energy Trusts and President and CEO of ARC Energy Trust. “The government continues to ignore their concerns and has advanced their broken promise into Budget 2007.”

Finance Minister Jim Flaherty included the distribution tax on income trusts in the Budget Implementation Bill, which was passed by the House of Commons last month. The tax is, in Flaherty’s words, designed to tackle a “growing trend toward corporate tax avoidance” caused by the vehicle’s more favorable tax treatment compared with the conventional company structure. According to Flaherty, the estimated federal revenue loss due to the special tax advantage for income trusts would unfairly be shifted to ordinary taxpayers and other tax-paying corporations.

The new tax, which was devised largely without consultation and announced without warning, caused consternation in Canada’s business and investment sector, and several corporations with well-advanced plans towards converting to trust status were forced to rethink their strategies. “Our Coalition has made every attempt to understand how government arrived at their tax leakage calculation,” continued Mr. Dielwart. “The Committee’s previous investigation into the trust decision has revealed that the government has intentionally prevented this information from coming to light. ... In the absence of information, Canadians have no alternative but to believe the government’s decision was ill-informed and not well thought out.”

Dielwart previously argued that energy trusts do not cause tax leakage and that far from being avoided, taxes are transferred to unit holders. He said that small oil and gas companies have reduced access to capital as a result of the trust tax announcement, and the increased cost of capital imposed on the energy trust sector has negatively impacted the economics of important projects including those utilizing carbon dioxide capture and storage.

The coalition, which represents 30 energy trusts headquartered in Canada, claims that unit holders have seen the value of their investments drop by C$35 billion since Flaherty announced the new tax on October 31 last year.

The UK’s new Chancellor of the Exchequer Alistair Darling, has ruled out any immediate changes to the tax system aimed at making the private equity industry pay more tax, saying that to do so would send out all the wrong signals to the City. In his first interview with the press since being appointed Chancellor in Prime Minister Gordon Brown’s new-look cabinet, Darling said that the government should not bow to pressure from unions, the public and from within the ruling Labour Party to end the tax privileges currently enjoyed by private equity firms operating in the UK, even though such a move would be a popular one.

“I think we should be very, very wary indeed of a knee-jerk reaction or a reaction to a day’s headlines into making a tax change that could result in unintended consequences and undesirable consequences,” he said. “If any tax changes need to be made in this or any other area, they ought to be made in the proper context of considering what is best for the economy overall. Once you get yourself into a situation where you make economic policy up on the trot, then you get into huge difficulties.”

On Wednesday, private equity bosses faced their second grilling in as many weeks on the tax issue from MPs in the Treasury Select Committee, but once again the industry failed to mount a consistent defence. Indeed, Jon Moulton, managing partner of the British private equity house Alchemy Partners, suggested that the activities of some private equity firms are bringing the industry a bad name, telling the committee that, “In some cases people are abusing what is already a generous tax regime.”

Labour unions charge that private equity groups are effectively rewarded for sacking staff and stripping a company’s assets with a tax system which lets them take advantage capital gains rates as low as 10%. Private equity firms have also come under fire for loading up on debt to finance their take-overs and using interest payments to offset corporate tax in the companies they buy. In one example of this, the BBC revealed earlier this week that vehicle recovery firm, AA and holiday company Saga, both owned by private equity firms, paid no corporate tax on their collective £430 million ($868 million) profits last year. The BBC also reported that the firms will pay no corporate tax when they merge later this year, since the £4.8 billion debt of the combined firm will be significantly higher than the £3.3 billion in borrowings of the individual companies.

Controversial new powers being considered by HMRC could result in monies owed to the tax man being taken directly out of taxpayer bank accounts. HMRC is seeking the new powers to reduce the cost and effort of chasing 200,000 people who have not paid all of their tax through the courts each year, even though it says that the majority of these cases go undefended. A consultation paper looking at payments and debts states, “Taxpayers who owe money to HMRC frequently have sufficient funds or assets to pay their debts, but choose to delay doing so. HMRC currently lacks the full range of powers to ensure prompt payment.”

The proposals, if approved, would allow HMRC to freeze an amount held in an individuals’s bank account equal to their tax debt. This would be paid to the department by the bank or building society in question only after other methods of collecting the money had failed. The consultation document also asks for views on whether it should be allowed to demand cash from the sale of land or property, including homes, if people do not pay up.

HMRC says that the consultation paper forms part its work to modernise its powers and deterrents. The proposals have however, provoked criticism from tax experts, who are warning that the measures would represent an unacceptable extension of HMRC’s powers. PricewaterhouseCoopers tax partner John Whiting asked, “The taxpayer’s got some rights of appeal because if you suddenly find some money disappearing from your bank account and it is a mistake, well, how do you get it back?”

Mike Warburton of Grant Thornton told the Financial Times that: “It seems a pretty serious extension of their (HMRC’s) powers.” The proposals come as HMRC begins sifting through hundreds of thousands of bank accounts held by those believed to be hiding money offshore, following the passing of the deadline for the Offshore Disclosure Facility last month.

Irish Finance Minister Brian Cowen has said that an unexpected deficit in the government budget will not affect plans to continue tax reform. Exchequer figures revealed a budget deficit of €1.7 billion for the first half of 2007. This compares with a €1 billion surplus for the same period in 2006.

When asked in the Dail whether the worsening fiscal conditions would affect the government’s pre-election pledge to cut income tax for low and high earners, Cowen responded, “Over the period of Government we have an intention to continue tax reforms, moderate current spending growth, increase capital spending and hopefully continue with the unprecedented economic performance we have seen in the past decade.” Cowen said that tax receipts in the first six months of the year are close to expectations, and that predicted strong economic growth will help to keep the government’s finances on track. Irish GDP is set for 5% growth in 2007, the government has estimated – twice the rate of economic growth predicted for Europe generally.

Tax revenue, at €20.813 billion was €130 million below target at the end of June. Year-on-year, tax receipts were up 6.3% compared to the predicted increase for the first six months of 6.9%. The best performer was corporation tax (€173 million above target). Income tax was €27 million ahead of target. Excise duties, capital gains tax, stamp duties and VAT were all behind target.

Acknowledging Gibraltar’s relatively high headline rates of income tax, Chief Minister Peter Caruana has announced a dual income tax system and changes to the high-net-worth individual (HNWI) scheme, designed to make the tax system more attractive to expat workers employed in the jurisdiction’s finance industry.

“Our tax system has very high ‘headline’ rates of taxation, but these are reduced to lower ‘effective’ rates by a generous system of tax allowances, the main ones of which are mortgage interest relief, life insurance premium relief, child allowances, etc. This is all very well, but taxpayers who cannot benefit from these allowances because they are single, have no mortgage, no children or no life insurance are left to pay the very high ‘headline’ rates” Caruana told parliament in his budget speech last week. “This is harsh on affected local residents, as well as being a disincentive for location in Gibraltar for companies that need to recruit specialist skills from abroad.”

To remedy this, Caruana announced that from 1 July 2007, every taxpayer will be able to choose for each tax year between two systems to pay tax, and to choose the one that results in the lower tax payment. The first system is the existing Allowance Based System under current tax rates, which were reduced in this year’s budget. The alternative system is a new Gross Income Based system, in which the taxpayer will receive no allowances, but will pay tax on gross income at the following rates: 20% on the first £25,000, 30% on the next £75,000, 40% above £100,000.

Caruana said that the new Gross Income Based alternative will “very significantly” reduce the tax payments of around 6,500 local taxpayers, and will substantially redress the balance of taxation between those who enjoy certain allowances and those who do not. Access to the Gross Income Based alternative will be subject to rules to prevent married couples and others living together from benefiting from both alternatives.

Caruana also announced some amendments to the jurisdiction’s high-net-worth individual (HNWI) scheme. For HNWIs this scheme will remain largely intact, except that with effect from 1 July 2007 the minimum tax payable is increased from £14,000 per annum to £18,000 per annum and the taxable income level is increased from £50,000 to £60,000.

ompany director Yeung Kwong-kei has been jailed for two years by the Hong Kong District Court for evading profits tax, the longest jail term ever imposed for tax evasion in the territory. The 46-year-old was the shareholder and director of Hang Hing Computer Label. The company issued two types of sales invoices, one computer-generated and issued in the company’s name, and the other handwritten and issued in name of a sole-proprietary business formerly operated by the defendant. The sole-proprietary business ceased operation in 1994.

For the 1997-98 to 2000-2001 years of assessment, the company omitted from its profits tax returns proceeds of sales in respect of all those handwritten invoices. The total amount of sales omitted was HK$3,171,040 (US$406,000). The defendant also used false invoices to claim purchases and other expenses in the company’s accounts, thereby reducing its assessable profits. The total amount of expenses falsely claimed was HK$2,782,580. The total amount of profits understated was HK$5,953,620, and the total tax evaded was HK$961,978 (US$123,165).

Tax treaty does not apply, says tribunal, because foreign subsidiary lacked a legitimate business purpose.

A South Korean tax tribunal has upheld the right of the National Tax Service (NTS) to impose $110 million in tax on Lone Star relating to the sale of an office building in Seoul. The tribunal unanimously rejected Lone Star’s appeal against a 101.7 billion won tax bill imposed after the sale of the 45-storey Star Tower in the South Korean capital.

The case centerd on the double taxation avoidance agreement in force between South Korea and Belgium. Lone Star had argued that since the building, which was bought from the Government of Singapore for an undisclosed sum in 2001, was purchased by its Belgian subsidiary, the company was only liable for Belgian taxes under the bilateral tax treaty. However, the tribunal decided that, “Star Holdings in Belgium is a conduit company established for tax evasion, without regular business activities or the right to manage and have control over earnings.”

A Finance Ministry statement added, “When it comes to Lone Star, which is based in the United States, capital gains from property and stock trading can be taxable in the country where it happens, according to the tax treaty between South Korea and the United States.”

A statement from Lone Star, countered that, “Lone Star’s affiliate in Belgium that sold the shares in Star Tower Corp. is not obliged to pay taxes in Korea, but instead is subject to tax only in Belgium.” Lone Star has said it intends to appeal the decision. The latest case is one of 25 disputes currently being contested by the company and the tax authorities, three of which relate to the sale of the Star Tower.

ASSET PROTECTION / LEGAL STRUCTURES

As a national political issue, expatriation is hardly new. In the Foreign Investors Tax Act of 1966, Congress decided to make an issue of expatriation. Lawmakers tried to impose onerous taxes on exiting wealthy Americans who relinquished their U.S. citizenship “with the principal purpose of avoiding” U.S. taxes, a highly subjective intention that was virtually impossible to prove. The IRS could not prove such “intent” and very rarely even tried.

A 1996 anti-expatriation law inspired by a Forbes article asserts limited U.S. tax jurisdiction for a period of 10 years over persons who renounce their U.S. citizenship “with the principal purpose of avoiding U.S. taxes.” Also covered by this law are permanent resident aliens (“green card” holders) or anyone else who has resided in the U.S. for any eight of the preceding 15 years. Tax avoidance is presumed to be the true purpose if, at the time of expatriation, an expatriate’s net worth exceeds $2 million or he or she paid an annual tax bill exceeding $124,000 annually for the past five years. The figures that are indexed for inflation. However, with proper planning, it is relatively easy to avoid U.S. taxes during this 10-year period.

The lengths to which politicians will go to penalize expatriates is demonstrated by a never enforced provision of U.S. law, also enacted in 1996 that permits the Attorney General to bar from returning to the U.S. anyone who renounces their U.S. citizenship to avoid U.S. taxes. In this manner, Congress barred individuals exercising their legal right to avoid taxes along with narcotics traffickers, terrorists and those suffering communicable diseases. These Draconian laws not only involve retaliatory government acts against resistance to high taxes, but poses possible human rights violations guaranteed by others laws and even the U.N. Human Rights Charter. It is worth noting that the U.S. Supreme Court repeatedly has affirmed the right of U.S. citizens to end their citizenship as well as the right to enjoy dual citizenship.

In reality, this political frenzy probably reflects collective envy more than any sense of patriotism by Americans or their congressional representatives. Expatriation is not as serious a problem as some pretend. Fewer than 800 Americans, rich or poor, have formally given up their citizenship in recent years. Most expatriates surrender their U.S. citizenship because they are returning to their native land or marrying a non-U.S. citizen.

Long before you formally give up your U.S. citizenship, you should reorder your financial affairs in such a way as to remove from possible government control and taxation most, if not all, of your assets. Here are the steps you must take:

Tax expatriation – it is complicated, but it could save you millions in taxes.

TAX BREAKS, LOW SETUP COSTS, INFRASTRUCTURE LURE HEDGE FUND MANAGERS TO CAYMANS

William Grayson, the president of EGM Capital, a hedge fund firm in San Francisco, has never set foot on the Cayman Islands, but he knows that sun-baked Caribbean haven quite well. That is because he set up one of his funds in the Caymans, where lucrative tax breaks and fabled financial secrecy have made this British territory a magnet for hedge fund managers. “All of the offshore jurisdictions are competing against each other to provide the most hospitable regulatory landscape, and the Caymans are really coming on strong,” Mr. Grayson says. “As a hedge fund manager, you just might be deciding whether you want to golf or scuba-dive more.”

In as little as two weeks, and for about $35,000 in fees, hedge funds can set up shop in the Caymans – just a fraction of the time and up to 1/10th the price of incorporating a fund in drearier climes like Delaware. While speed and bargain prices are big attractions, the real draw, say analysts and Congressional investigators, are Caymans-based corporations and partnerships that allow major investors to avoid taxes of up to 35% that the IRS levies on unearned business income. Cayman tax laws also help American fund managers legally defer domestic taxes on their personal profits by channeling them offshore through their funds.

The biggest of the three islands that make up the Caymans, Grand Cayman, is only 22 miles long and, at its widest, 8 miles across. But the territory’s tax advantages have turned it into one of the linchpins of the estimated $1.5 trillion global hedge fund business. As recently as a decade ago, regulators and law enforcement officials regarded the Caymans, 480 miles south of Miami, as a hotbed for money laundering and other dubious financial schemes. Today, it is the corporate home for what the Cayman Islands Monetary Authority estimates to be three out of every four of the world’s hedge funds. “The thing that’s different about Cayman is that the regulators realize that hedge funds are a business, rather than just something to regulate,” says Michelle Kline, a principal at Genesee Investments, a hedge fund based in Bellevue, Washington.

For their part, Cayman officials, regulators and private-sector lawyers, bankers and accountants say that there is nothing illegitimate about how the territory supports offshore finance, and that it is a system that is unfairly tarred and much misunderstood by its critics.

The Caymans’ ascent as a hedge fund haven coincides with recent calls by American legislators for greater oversight and taxation of hedge funds as well as greater scrutiny of the tax status of private equity firms. As legislators like Senators Carl M. Levin, Democrat of Michigan, Charles E. Grassley, Republican of Iowa, and Max S. Baucus, Democrat of Montana, also make renewed calls for a broader crackdown on financial abuses in offshore tax havens, the Cayman government has continued spending heavily on high-profile lobbyists, public relations firms and well-connected lawyers to persuade the world’s senior financial officials and regulators that the Caymans has outgrown its past as a center of financial high jinks.

A Treasury Department spokesman declined to comment on specifics, but said that the agency “is concerned about abuses offshore and in keeping open channels of communication.” While much of the hedge-fund rush to the Caymans involves taking advantage of tax structures that are well within the law, some veteran financial experts say they worry that the number of hedge-fund entrants there may tempt some to operate outside the law.

The daily nuts-and-bolts investment activities of most hedge funds still occur, of course, in places like Manhattan and Greenwich, Connecticut – the manicured enclave that is home to “hedgies” earning up to hundreds of millions, sometimes billions, of dollars a year – or in the upscale Belgravia and Mayfair sections of London. But the legal home of many of the world’s hedge funds, the place where they often choose to incorporate for tax purposes, is the Caymans.

Most American individual investors are not able to play the Cayman tax game. Such investments are taxable to American investors under U.S. tax laws, so investors typically put their money in a section of hedge funds that are set up as Delaware partnerships or LLCs. That means that they will pay taxes of anywhere from 15% for capital gains or up to 35% for ordinary income taxes when they cash in their investments.

But foreign individual investors and tax-exempt American investors – like pension plans, hospitals and university endowments — are allowed to put their money into another section of the fund that is registered offshore, in the Caymans. The American institutions have that option because, while they are tax-exempt under American tax law, a U.S. tax on unearned business income would apply if they invested in a domestic fund. In that regard, lawyers in the Caymans say that they are providing a legal service to hedge funds, and nothing more. “The real question is, how much financial engineering is done by a Cayman lawyer in relation to a hedge fund, and the answer is, not much,” says Anthony B. Travers, the chairman of the Cayman Islands Stock Exchange and the former managing partner of Maples & Calder, a leading law firm in the Caymans that caters to offshore funds and companies.

Maples & Calder has its offices in Ugland House, a 5-story building on Grand Cayman that is the legal address of thousands of Cayman entities enjoying the territory’s tax benefits, according to the Senate Finance Committee. “It’s no different from Delaware,” Mr. Travers says.

Hedge funds are garnering attention from tax policy experts and American legislators because their rapid proliferation, burgeoning assets and big returns are part of a major shift in the financial landscape, away from public ownership and supervision and toward a private club of financial supertitans that can take advantage of big tax breaks and minimal oversight. The club’s biggest investors these days are not wealthy individuals but big institutions like pension plans, hospitals and university endowments, says Timothy Ridley, chairman of the Cayman Islands Monetary Authority, a regulatory body that has what Mr. Ridley describes as a “special relationship” with the hedge funds it regulates.

Some 8,500 investment funds are registered in the Cayman Islands, according to the agency – a near-tripling since 2001. The 1993 Cayman Islands law governing hedge funds does not distinguish between mutual funds and hedge funds, but Mr. Ridley says the vast majority of registered funds in the territory are hedge funds. He estimates that about 75% of the world’s hedge funds are registered in the Caymans. Some attribute the rise to such arcane corporate devices as so-called blocker companies, which allow institutional investors to avoid paying taxes on certain types of heavy borrowing that hedge funds typically use to make their investment bets.

In May, the Senate Finance Committee harshly criticized Cayman blockers. It said that while they are legal under Cayman law, they potentially allowed American investors to skirt domestic taxes. The committee is conducting a broad review of the tax benefits available to hedge funds and private equity firms, in part through offshore havens like the Caymans. The committee is looking at the possibility of legislation that would make it illegal for tax-exempt organizations to use blocker companies. “If they knock that out, it would make us less attractive,” Mr. Ridley says.

Despite the Cayman officials’ insistence on propriety, many high-profile financial debacles have washed up on its shores. Enron, the energy company that collapsed amid a huge fraud, used 700 secret, Cayman-based partnerships and entities to carry out financial sleight of hand. High-profile hedge funds that collapsed more recently – including Bayou Group and Wood River Capital Management – were registered in the Cayman Islands. Both of those funds took advantage of the island’s secrecy and lax regulations to cheat investors and avoid more transparent financial disclosures, according to Cayman court documents and S.E.C. lawsuits.

Philadelphia Alternative Asset Management, a Cayman-based hedge fund that collapsed last year, was able through its broker, a unit of the Man Group, the London hedge fund giant, to use a Cayman-based bank account to hide trading losses, according to allegations by the court-appointed receiver in proceedings in a federal court in Philadelphia.

Roger D. Lorence, a tax lawyer based in New York who specializes in hedge funds, says I.R.S. agents are seeing a “very new trend” of schemes in which tax shelters masquerade as Cayman-registered hedge funds or partnerships engaging in complex financial transactions. Bogus hedge funds in the Caymans, he says, are used to artificially generate tax losses that are then claimed in the U.S., an illegal tax-evasion gimmick similar to questionable tax shelters of recent vintage that have been the focus of a wide-ranging criminal investigation by federal prosecutors in Manhattan.

Hedge funds doing business in the Caymans can find an ample supply of accountants, lawyers, bankers and consultants offering legal and accounting advice. Major American accounting firms like Ernst & Young, KPMG and Deloitte Touche Tohmatsu all have units in the Caymans (and all declined to be interviewed about their operations there).

One business ally of the Caymans is Sidley Austin, a Chicago law firm that is a longtime lobbyist on international tax issues for the government, according to lobbying records. In May, Sidley agreed to pay a fine of $39.4 million to the I.R.S. for improprieties regarding tax shelter work it had performed for KPMG clients, but federal prosecutors said that they decided not to file criminal charges against the entire firm for that work. Prosecutors said they made that decision because a single Sidley lawyer, Raymond J. Ruble, was primarily involved with the shelters. Part of the tax shelter work that Sidley performed in the Caymans involved registering entities there that were used to carry out what prosecutors describe as bogus shelter transactions, according to internal documents in the federal criminal case against Mr. Ruble and former KPMG employees.

Since the fall of 2001, as the number of hedge fund registrations there began rising sharply, the Caymans has worked to burnish its reputation abroad. The year before, in 2000, the FATF, an independent international body intended to combat money laundering and terrorist financing, placed the Caymans on an international blacklist of uncooperative money-laundering nations, alongside Russia, the Philippines and various small Pacific territories. In 2001, when the Caymans dropped off the blacklist, the government there paid a well-connected Washington lawyer, Fred F. Fielding, to help persuade American officials to lean on the FATF to remove the Caymans from the list, said a White House official who requested anonymity. Mr. Fielding is now the White House’s chief counsel and a spokesman said that Mr. Fielding’s work for the Cayman government was twofold: to “get them off” the money laundering blacklist and “to assist them in discussions with the U.S. government to make appropriate changes.”

Around 2000, the Caymans also hired Robert L. Livingston, a former Louisiana Republican congressman turned K Street lobbyist, to help erase a lingering American perception of the Cayman Islands as a hotbed of money laundering, said W. McKeeva Bush, the former head of government, the territory’s top elected post. Mr. Livingston and his associates declined to be interviewed. From 2002 to 2005, the Caymans paid Mr. Livingston’s company at least $1.5 million in fees, according to lobbying records.

“If you know Washington, once lawmakers have their minds made up, it doesn’t mean a can of beans,” Mr. Bush said in a recent telephone interview in which he praised Mr. Livingston’s work. “What matters is who is in the know in the Washington crowd.” Others have a different view of Mr. Livingston’s work. “He didn’t really do anything in five years,” says Mr. Travers, the Cayman Islands Stock Exchange official. “I don’t think anybody on the outside actually understands what goes on in the financial sector here.”

Mr. Bush was voted out of office in 2005. His successors ended the government’s relationship with Mr. Livingston’s company, replacing it with Fleishman-Hillard, a leading public relations firm. In March, the firm helped to organize a public relations tour in Washington for Cayman officials that included stops at the S.E.C., the Treasury Department, the Senate and the vice president’s office, Mr. Bravakis says.

Other offshore locales have begun competing with the Caymans for hedge fund business, including the Isle of Man, Guernsey, the British Virgin Islands and Bermuda. Mr. Travers says the more, the merrier. “Unless they self-destruct, through a major exogenous event or internal explosion,” Mr. Travers says, “the offshore jurisdiction just tends to get stronger.”

The U.S. Supreme Court has agreed to hear a case involving the deductibility of fees incurred by trust managers, with the verdict promising to have widespread ramifications for the U.S. trust industry. Oral arguments in the case are scheduled for December.

The case of Knight v. Commissioner of Internal Revenue, comes to the Supreme Court on appeal from the Second Circuit U.S. Court of Appeals in New York. The outcome of the case rests on whether the court decides that trustees may deduct fees paid to outside advisors in the course of managing assets in the trust, and if so, how much. Trustees may deduct fees, known as trustees’ commissions, for managing trusts, but the lower courts have been unable to agree whether fees paid to investment advisors such as banks are deductible. The issue is complicated by the fact that the law seems to be being applied differently across the states, with some allowing the trustee to fully deduct the outside advisory fee, and others arguing that the expenses do not qualify as above-the-line deductions, and are subject to the standard 2% miscellaneous deductions limitation, as stipulated in the Internal Revenue Code.

The case was brought by Michael Knight, trustee of the Rudkin Trust, who claimed a full deduction for the trust’s investment management fees based on an earlier Court of Appeals decision. However, he subsequently lost the case in the U.S. Tax Court, and an appeal to the Second Circuit was dismissed.

While the case is not anticipated to have a great effect on the U.S. trust industry in terms of lost business, the verdict is expected to reach far and wide in terms of how trustees and their accountants approach the issue of tax. “The issue is relevant to every single trust and estate that files an income tax return,” said Jeffrey N. Pennell, a law professor at Emory University in Atlanta. “The dollar amount may not be great in any given trust, but the applicability of the issue – it is everywhere.”

Today’s market valuations are extreme. Interest rates are rising, instead of falling. And signs of inflation are everywhere, no matter what the government PR guys are saying. My wife and I counted eight restaurants that have gone out of business in the last six months. A friend of mine used to make $1 million a year in the mortgage business. That same friend recently was forced to sell his house, and he will probably have to file for bankruptcy. I have another friend who was one of eight construction managers with 12 projects under his belt. Now he is the only manager left, and he has only a single project.

And in the midst of all of this, the global markets keep climbing. The purveyors of investment pornography on T.V. keep saying how great the markets are. They are claiming that this market will be different this time. “This is not a bubble, and there is no way it can burst.” I get a really sick feeling in my stomach when I hear them say that, mostly because I know better.

So what does this have to do with your retirement plan? EVERYTHING!! Over the last few years, I have met too many individuals who lost 50%, 60% even 70% of their retirement plans when the last bubble burst. These individuals all had the best intentions, but many of them listened to their domestic brokers when it came to picking investments. That was their first mistake.

Wall Street always lobbies for your investment assets, and your retirement plan is one of their primary targets. They want you to pour your life savings into substandard equities and investment products. Quite simply, they want to control your money and make the most they can on it. Think about it. If you buy a piece of property in Panama with your IRA, how much does your stockbroker make on that deal? Not one penny. So he may tell you it is a bad investment, or you should invest your assets in “safer” investments. He may even tell you it is illegal to invest your retirement plan in offshore real estate. I have heard them all.

Last week, I heard one of the bigwigs for Merrill Lynch say “The expected 12 month return on the S&P 500 is 7%.” My first thought was, “Really – 7%? That’s it?” Not to mention, if you break down that 7%, your “expected 12 month return” is nowhere near that! Once you strip away fees, inflation and the decreased purchasing power of the dollar, you are left with miserable returns. Possibly even negative returns! Plus, you have to consider the incredibly high levels of the market, which translates to additional risk. And personally I think the market is going down, not up.

Here is blunt and harsh truth. Wall Street has its own rules. And in their game they get to control all of your money. They do not want you to invest freely anywhere in the world. They only want you investing with them. That way they can make fees on an ongoing basis. Wall Street has set up your retirement plan so you can only pick from a basket of predefined mutual funds they offer. Never mind that 80% of all mutual funds and managers underperform the market. That means even if the market does go up 7% odds are you will not make that.

But you do have some options. I am happy to report that the U.S. government just changed rules for retirement plans. You can now invest even more freely with your retirement plan and you can make dramatically higher contributions.

PRIVACY

The U.S. intelligence czar wants congress to pass a bill that would allow American spies to snoop electronically on non-Americans anywhere in the world by forcing telecommunication carriers to comply in exchange for immunity from prosecution by affected individuals.

“The law needs to be updated so that we can target foreigners, regardless of where [communications are] intercepted in the world, and at the same time, if a U.S. person is ever a subject of surveillance for any reason, it would require a warrant,” Admiral Michael McConnell, the U.S. director of national intelligence said in an interview with Council of Foreign Relation’s Eben Kaplan. “The threat has increased, the intent is stated, and the way the wording in the current law is captured inhibits or prevents us from being successful.”

He also wants Congress to grant immunity against legal action to telephone companies and ISPs who collaborate and cooperate with the U.S. The Intelligence Authorization Act for Fiscal Year 2008 would update the definition of electronic surveillance to cover all forms of telecommunications. It would both to force providers to cooperate with authorized intelligence activities, and protect those carriers when they do comply with requests under FISA. The new bill also redefines the term “agent of a foreign power” to include any non-U.S. persons whom the U.S. Government believes possess significant intelligence information, even if there is no evidence to substantiate that belief.

If the bill becomes law, the U.S. spies would be able to eavesdrop on foreigners who use U.S. servers for communications, including those who use popular email services such as Google’s Gmail and Yahoo! mail, Internet chatrooms and VoIP services.

Civil rights groups have cathe FISA “modernization” bill an attempt by Bush administration to retroactively legitamize President’s illegal wiretapping. “Amending FISA after the fact would only serve to legitimize and reward the president’s illegal actions,” said Caroline Fredrickson, Director of the ACLU Washington Legislative Office. “There is no legitimate need to expand FISA and the argument that this law cannot keep up with technology is flatly false.”

The U.S. house of representatives last month passed the Intelligence Authorization Act for Fiscal Year 2008 bill and the bill has been referred to the Senate Intelligence Committee. But the Committee is unable to proceed as the White House has repeatedly refused to hand over documents related to Administration’s illegal wiretapping.

The U.S. Senate definitively rejected President George Bush’s immigration bill last week, just hours after senators expressed deep misgivings with portions that would have expanded the use of a national ID card. Because the procedural vote was 46 to 53, with 60 votes needed to advance the immigration legislation, the proposal is likely to remain dead for the rest of the year. Privacy advocates were quick to claim that a vote against Real ID cards the previous evening doomed the bill.

The vote showed that senators were willing to delete the portion of the labyrinthine immigration bill that would require employers to demand the Real ID cards from new hires. Because some of the bill’s backers had insisted that the ID requirement remain in place – as a way to identify illegal immigrants – they were no longer as willing to support the overall bill.

“The proponents of national ID in the Senate were not getting what they wanted, so they backed away,” said Jim Harper, a policy analyst at Cato Institute who opposes Real ID. “It was a landmine that blew up in their faces.”

In a press release, the two Montana Democrats, Max Baucus and Jon Tester, said they were happy that a pro-privacy approach killed the bill. But supporters of the overall legislation, which would have created a new category of “Z” visas for currently illegal immigrants, expressed dismay at its apparent demise. Microsoft said it the vote against advancing the bill will “likely result in the collapse of comprehensive immigration reform that is desperately needed to address the shortage of highly skilled talent.”

Opponents of the bill, including Republican senator Jim DeMint of South Carolina, said derailing it was a victory. “When the U.S. Senate brought the amnesty bill back up this week, they declared war on the American people,” DeMint said. The American Civil Liberties Union said the Real ID requirements were a “poison pill that derailed this bill, and any future legislation should be written knowing the American people won’t swallow it.”

Even if the immigration bill is goes nowhere, however, the Real ID Act is still in effect. It says that, starting on May 11, 2008, Americans will need a federally approved ID card to travel on an airplane, open a bank account, collect Social Security payments or take advantage of nearly any government service. States must conduct checks of their citizens’ identification papers and driver’s licenses may have to be reissued to comply with Homeland Security requirements. (States that agree in advance to abide by the rules have until 2013 to comply.)

Nearly every physician practicing in the U.S. has sworn to uphold the 2,000-year-old Hippocratic Oath. Among other provisions, a physician taking the oath makes the pledge, “I will respect the privacy of my patients, for their problems are not disclosed to me that the world may know.” However, in the last five years, the administration of President George W. Bush systematically undermined the privacy requirements of the Hippocratic Oath, and other legal and customary measures protecting medical privacy.

It was not supposed to be this way. In 1996, Congress enacted what was purported to be an omnibus medical privacy statute, the Health Insurance Portability and Accountability Act (HIPAA). In 2001, the Department of Health and Human Services (HHS) issued preliminary regulations under HIPAA requiring patient consent for third party use of “protected health information,” including its use for such common activities as treatment, billing and “other healthcare operations.”

In 2002, however, HHS inexplicably substituted the words “regulatory permission” for “patient consent”. This tiny change in the regulations’ wording opened up the floodgates for the disclosure of previously confidential health information without a patient’s consent. As a result, according to the Privacy Rights Foundation, some 800,000 companies, government agencies and other organizations can tap into your personal medical information almost at will. And they are not required to tell you what they do with it.

The good news is you do not have to just sit back and wait for your medical privacy to disappear. You can take steps to ensure your privacy is still protected.

Today, your medical information can be given to any “covered entity”. This includes business affiliates of healthcare organizations such as data clearinghouses, accounting firms, law firms, credit bureaus, and banks. A federal rule that went into effect in 2006 allows creditors to obtain or use medical information for determining how worthy you are of credit. Credit grantors are not supposed to use medical data in determining eligibility for a loan or in setting loan terms. However, credit grantors who have such information can share it with their “affiliates”. This magically converts the data into credit information, not medical data.

This proliferation of medical data has also caused an epidemic of medical identity theft. “An insurance card is like a Visa card with a $1 million spending limit,” says Byron Hollis, national antifraud director of the Blue Cross and Blue Shield Association. Research conducted by the World Privacy Forum suggests that through mid-2006, between 250,000 and 500,000 Americans had already been victims of medical identity theft. The results can also be deadly. One woman found that her blood type had been changed in the hospital record.

What can you do to take back your right to medical privacy? The simplest suggestion is find a physician that has “opted out” of HIPAA’s requirements for electronic transmission of insurance claims. To qualify for this status, your physician must:

If your physician has not opted out of HIPAA – unfortunately, the overwhelming majority have not – there is another solution. Ask your physician for all copies of your medical records, including the originals. Keep these records in a safe place, and bring them with you when you have an appointment.

There is a third privacy option as well, but it is risky. Obtain medical treatment in a fake name, and pay cash only to the treating physician or hospital. However, if you need a prescription, and are asked for ID (as may be required for some medications, particularly those that are frequently abused), you might not be able to pick it up. Finally, you can opt for private treatment in another country. Mexico is a popular choice for lower-cost – and private – medical services.

Ridiculous? You bet. But if you value your medical privacy, these options are the only way to keep it, thanks to the Bush administration’s deliberate corruption of the HIPAA rules.

Photographs on a teenager’s Myspace.com page prompted a prosecutor to pull a plea deal that would have kept the boy out of jail for a fatal car crash last summer. The photos show 17-year-old Michael Munoz Ramirez, of Hudson, New Hampshire apparently taking part in an underage drinking party.

Police said that Ramirez caused a collision last July that killed his friend, 16-year-old Nathan Hergenhahn. Ramirez appeared in court to have a plea bargain approved, but prosecutors withdrew the deal because of photos the victim’s family found online. The plea bargain had been supported by Hergenhahn’s family, who said they were convinced that Ramirez was remorseful about the collision. Police said Ramirez was speeding when he struck a Ford Explorer.

“It’s incomprehensible,” Assistant Hillsborough County Attorney Justin Shepherd told the Nashua Telegraph. “Why he would post those pictures is just incomprehensible.” It is not clear when or where the photos were taken, but they reportedly show Munoz and other teens at a party. One photo shows Munoz preparing a “beer funnel”. Ramirez was charged with two counts of vehicular assault and would have received a suspended sentence with substantial community service under the plea agreement.

Have you heard about the iPhone? It is a wonderful new invention that lets the NSA illegally record all your phone calls, copy all your contacts, keep records of all your Web and IM activity, watch you through the camera, listen in on your household through the mic, and probably put you in a terrorist no-fly database for listening to Cynthia McKinney singing that stupid Pink song.

How does this expensive “miracle gadget” do so much domestic spying on you? Well, to use the iPhone you must sign up with AT&T, the telecom that has been tirelessly working with the National Security Agency’s warrantless wiretapping program, which has installed massive data-mining and recording machinery on AT&T Internet hubs in every major American city. Asked why Apple would only bundle the iPhone with the NSA total surveillance system, Steve Jobs laughed and said it is because AT&T has “been investing billions of dollars in the last couple of years to create a great network.” Yes, it certainly has.

In Orwell’s 1984 future, total government surveillance was a terrible thing that was forced upon the people. In reality, people literally line up all night long for the chance to be the first to pay $600 to be watched around the clock by the government.

LAW

Court rules wife’s interest in house cannot be seized because of husband’s conviction.

A Connecticut woman who has maintained that she was not aware of her husband’s hobby of raising marijuana in the basement will get to keep her half of their house, a federal appeals court has ruled. The 2nd Circuit U.S. Court of Appeals ruled that Harold von Hofe has to forfeit his interest in the home to the federal government. However, his wife does not have to because she was not actively involved in her husband’s marijuana cultivation.

“The record is devoid of any evidence indicating her use of drugs or her involvement in any criminal activity whatsoever,” the appeals court wrote. The appeals court indicated that Kathleen von Hofe did know about the presence of the plants and did nothing to stop her husband’s “horticultural hobby,” but that her culpability falls at the low end of the scale.

Von Hofe and his wife were charged in 2001 after police raided their home and found 65 marijuana plants, glass smoking pipes and other items associated with growing marijuana in the basement. Harold von Hofe, formerly a high school teacher, admitted to raising marijuana for himself and to bartering the drug for home repairs, though he did not sell it. He pleaded guilty to manufacture or distribution of a controlled substance. Kathleen von Hofe, a nurse, pleaded guilty to possession of a controlled substance, though she told a jury that she only pleaded guilty to the misdemeanor to save her two sons, claiming local authorities had threatened to press charges against her sons if she did not enter a plea. Both avoided prison time and received suspended sentences and probation.

The federal government then moved to seize their property, a ranch home they have lived in since 1979 that is valued at $248,000. After a federal judge cleared the way for the house to be forfeited, the von Hofes appealed the decision, saying the forfeiture violated the Excessive Fines Clause of the Eighth Amendment to the Constitution. While affirming the forfeiture of Mr. von Hofe’s interest in the house, the Appeals Court vacated the forfeiture of Ms. von Hofe’s interest. “Not only would forfeiture extinguish her substantial equity,” the court wrote, “it would amount to an eviction, destroying her right to maintain control over [her] home, and to be free from governmental interference, ... a private interest of historic and continuing importance.”

The von Hofes’ attorney, Jonathan J. Einhorn, said a possible result is that Kathleen von Hofe will have to secure a mortgage for the government’s half-interest in her home. “We won the appeal for Kathleen, so she ends up owning half-interest with the government,” Einhorn said.

And more surveillance of Muslim populations across North America, and an end to counter-terrorism efforts being “hog-tied” by the U.S. constitution, as well.

A top-ranking U.S. judge has stunned a conference of Australian judges and barristers in Chicago by advocating secret trials for terrorists, more surveillance of Muslim populations across North America and an end to counter-terrorism efforts being “hog-tied” by the U.S. constitution. Judge Richard Posner, a supposedly liberal-leaning jurist regarded by many as a future U.S. Supreme Court candidate, said traditional concepts of criminal justice were inadequate to deal with the terrorist threat and the U.S. had “over-invested” in them.

His proposed “Big Brother” solutions flabbergasted delegates at the Australian Bar Association’s biennial conference. “We have to fight terrorism with our strengths, and our strengths evolve around technology, including the technology of surveillance,” said Justice Posner, a prolific legal scholar who sits on the U.S. Court of Appeals for the Seventh Circuit. “Are there terrorist plots that are at a formative stage among the large U.S. Muslim community of two to three million people? In the 600,000 Canadian Muslim population, are there people planning attacks on the US? What we have to do is discover the extent of the terrorist threat to the U.S. There is a danger, and it demands a rethinking of some of our conventional views on the limits of national security measures.”

He continued, “We should think of surveillance as preventative, not punitive. We should think of controls that have nothing to do with warrants or traditional criminal justice to prevent abuses.” Posner said the U.S. temper and culture could not sustain repeated terrorist attacks. He raised the prospect of secret trials as a “tailored regime” to prosecute terrorists in cases where there was a concern about classified information going public.

Queensland SC Glenn Martin said he had been “jolted” by the address. “I hope we never have secret trials in Australia.”

Posner said the U.S. was “a law-saturated society where even non-lawyers tend to think ofproblems in terms of legal categories. ... Criminal justice and war are the two responses we have to terrorism. Each comes with its own legal institutions and doctrines and regimes but the struggle against international terrorism doesn’t fit either very well.”

He said it was “quite misplaced” to suggest national security measures in force or contemplated in the U.S. could endanger liberty and undermine the political system. This was because governments could no longer conceal what they did: “We have a very aggressive media and a huge and complex government where many people in the government are quite willing to talk to the press.”

“The purpose of the civil remedial fees imposed in this section is to generate revenue,” the new law states.

Virginia motorists convicted of minor traffic violations will face a new, multi-year tax beginning July 1. Led by state Delegate David B. Albo, lawmakers slipped a driver responsibility tax into a larger transportation funding bill signed by Governor Tim Kaine in April. Albo, a senior partner in the Albo & Oblon traffic law firm, can expect to see a significant increase in business as motorists seek to protect their wallet from traffic tickets that come with assessments of up to $3000 in addition to an annual point tax that tops out at $700 a year for as long as the points remain.

Driving as little as 15 MPH over the limit on an interstate highway now brings six license demerit points, a fine of up to $2500, up to one year in jail, and a new mandatory $1050 tax. The law also imposes an additional annual fee of up to $100 if a prior conviction leaves the motorist with a balance of 8 demerit points, plus $75 for each additional point (up to $700 a year). The conviction in this example remains on the record for five years. Other 6-point convictions include “failing to give a proper signal”, “passing a school bus”, or “driving with an obstructed view”. The same $1050 assessment applies, but the conviction remains on the record for 11 years.

Although the amount of the tax can add up quickly, the law forbids judges from reducing or suspending it in any way. The tax applies only to Virginia residents, so that out-of-state motorists only need to pay the regular ticket amount. Michigan, New Jersey, New York and Texas also impose a somewhat more modest driver responsibility tax which they apply to out-of-state residents.

President Bush has pushed the envelope of every aspect of executive power, except for two that might ease the burden of government, the veto and the pardon. Now he is threatening to protect the taxpayers with his veto pen, and he has just discovered his power to pardon or commute the sentences of people convicted of crimes. Whether Scooter Libby was an appropriate recipient of a commutation is subject to much debate. But there are plenty of other people who deserve presidential pardons or commutations. Families Against Mandatory Minimums has highlighted a number of good cases here:

A compassionate conservative should also use the pardon power to head off the DEA’s war against doctors who help patients alleviate pain. He could start by pardoning Dr. Ronald McIver, sentenced to 30 years for prescribing Oxycontin and other drugs to patients in severe pain. Or Dr. William Hurwitz of Virginia, sentenced to 25 years but then granted a retrial, convicted again, and awaiting sentencing, which could still be 10 years.

OPINION & ANALYSIS

I have no love for Islam. None at all. As bad as Islam is, however, it is not a “threat” in any meaningful sense. The Islamic cultures are to a greater or lesser degree, barbaric, misogynist, and fundamentally intellectually bankrupt. The only possible exception is Turkey with an explicitly secular, non-Islamic government. Even in Turkey, though, Islam has a negative effect on its national culture. Islam, unlike Christianity and Judaism, has not yet engaged in sufficient sophistry and bullsh*t to even partially insulate the daily life of individual believers from the absurd, barbaric and misogynist elements of its scripture.

I am opposed to Islam primarily because of the suffering endured by its believers, especially women. They suffer not because they actually believe the Islamic way is a good way of living, but because they falsely believe they will go to Hell if they do not sacrifice their happiness and well-being in this life. Only the threat of hell could possibly justify the human cost of Islam.

All this being said, Islam is not much of a threat to the West. Precisely because Islam is so horrific, so intellectually bankrupt, Islam has neither the political, social, technological or military power to directly threaten the West in any substantial way. The “threat” of Islam is indirect – authoritarian, anti-democratic elements in the West are promulgating fear of Islam, as opposed to justified disgust and disapproval, to undermine the West’s liberal, Enlightenment and democratic values. But there is little to fear, and what there is to fear is relatively easy to deal with.

The idea that Islam could use military power to invade and overthrow even a single Western nation is risible. Even if the Islamic nations were able to cooperate (and sectarian and nationalistic differences prevent such cooperation) it is doubtful that they could militarily defeat even tiny Israel. It is not enough to simply buy high-tech weaponry. You have to have a pervasive pro-technology attitude in the soldiery to effectively employ such weapons. The very nature of Islam excludes a pro-technology attitude. Fanaticism, too, is greatly overrated. Fanatics make great suicide bombers, but poor soldiers. The whole point of war is not to die for your country, it is to make the enemy die for his.

Nuclear weapons do not serve any offensive military purpose. They are useful only as a deterrent. It is instructive to note that there have been conflicts with almost every possible nuclear match-up, from the U.S. vs. Iraq to Britain vs. Argentina, and India vs. Pakistan. Nuclear weapons have never provided an offensive advantage. A nuclear armed Iran, for instance, does not in any way plausibly increase the military threat to the West, even Israel. Iran knows that if it were to use nuclear weapons against Israel, it would face certain retaliation and complete destruction. Not even an Islamic government would be so blatantly suicidal.

Terrorism and other forms of guerrilla action are very limited tactics, useful only for narrow political purposes. And the political targets that terrorism can actually affect are primarily those – such as imperialism and colonialism – which are ethically indefensible in the first place. Islamist terrorism (or even Christianist terrorism) is still, of course, a matter of considerable concern. But the threat is not “existential”. Terrorist activity does not have the power to destroy governments or democratic institutions. Terrorist activity can be effectively countered by modifying ethically indefensible foreign policy in conjunction with ordinary police work subject to traditional democratic, liberal constraints.

The only meaningful threat posed by Islam is indirect. By promulgating fear that is entirely rationally unjustified, authoritarian elements – especially Christian Dominionists – in Western cultures can scare the population into abandoning the liberal, democratic institutions and ideologies that are the basis of the West’s scientific, technological, social and humanitarian success. Such fear can justify only authoritarianism and imperialism and bring out the worst elements of our own national character.

Islam is, in this respect, merely a decoy. The authoritarian measures “justified” by a response to Islam and Islamist terrorism will be immediately employed to suppress local, democratic dissent and impose ideological uniformity. If we do not panic, we can deal with the all the badness of Islam using the proven and ethically defensible ideals of Western liberal democracy and concern for individual human rights.

No president is more despised by opponents of big government than Franklin D. Roosevelt. His New Deal is singularly blamed for introducing large-scale national economic intervention to the United States. But FDR did not drop from the sky. He emerged in a particular context that was shaped by his predecessors, without whom we might have never heard his name. His immediate predecessor of course was Herbert Hoover, the one-term Republican elected in 1928 who had the misfortune to be in office only several months when the stock market crashed. History has treated Hoover curiously. His enemies see him as the heartless leader who stood by as the population was ravaged by the Great Depression. His admirers see him as the last lion of laissez-faire individualism, valiantly resisting the tide of statism that washed over America in the 1930s.

Both pictures are grotesque distortions of reality driven by political interest. To see this one must consult the Hoover revisionism produced by historians such as William Appleman Williams, Arthur A. Ekirch Jr., and Murray Rothbard. As Rothbard wrote almost 30 years ago, “To his credit, Hoover himself never claimed to be an exponent of laissez-faire. Indeed, at every Republican convention until his death the old man would be trotted out to give a speech that no one ever bothered to listen to: In this speech Hoover would insist that he himself was the father of numerous measures the New Deal got credit for, and he would proudly go through the list. But everyone, friend and foe alike, was too busy making myths to hear him.”

Williams, in his sweeping book The Contours of American History, pinpoints Hoover as “the key figure” in the “small core of leadership” of the Progressive “corporation community” that became influential in 1913-14. Laissez faire – the “unruly” free market where no one’s profits were secure – was the last thing these prominent businessmen wanted. Their transforming experience came with U.S. entry into World War I, which brought with it central planning the U.S. economy. For the first time, American businessmen got their hands directly on the levers power. It must have been a rush. They saw the corporatist state, with organized labor in the role of cooperative junior partner, as the way of the future. (In the 1920s they were not unaware of what Mussolini was doing in Italy.) “The key leader among those Progressive and sophisticated corporation executives was Herbert Hoover,” Williams writes.

Hoover, of course, was a Republican, which, given the party’s historical record, should not lead anyone to think he favored laissez faire or small government. Before his term as president, he was secretary of commerce under Presidents Warren G. Harding and Calvin Coolidge, a position bound to be of overriding importance if held by the activist Hoover. As Ekirch writes in The Decline of American Liberalism, “Seeing no conflict with the rugged individualism he prized ..., he proceeded to make the Department of Commerce into a vast agency for the promotion of business interests both at home and abroad.” Williams also notes that the Democrats nearly asked Hoover to run for president on their ticket in 1920. The then-assistant secretary of the Navy – a man named Franklin Roosevelt – said, “He is certainly a wonder, and I wish we could make him President of the United States. There could not be a better one.”

Hoover was concerned about what was going on in the world. For one thing, he watched events in the new Soviet Union and blamed “the great inequalities and injustices of centuries.” He warned that “individualism run riot” would galvanize the downtrodden and bring socialism to the west. Corporatism was the path to social tranquility.

Williams emphasizes that Hoover saw foreign economic expansion as critical to the nation’s stability and success. Like so many businessmen, he believed that industry would overproduce for the domestic market and would need ever greater foreign outlets for the surplus – or else prices and profits would plummet. Yet to Hoover’s credit, he abhorred war, having seen the upheaval set off by World War I, and understood that “we gain in prosperity by a prosperous world [and] not by displacing others.” (Hoover apparently lost this insight when he signed the infamous Smoot-Hawley Tariff in 1930.) His was to be a benign, pacifistic imperialism in which the well-wishing United States would build up the infrastructure and living standards of foreign peoples.

When he came to the presidency in 1929, elected as the super-competent businessman-engineer, Hoover responded to the farmers’ continuing troubles by signing the Agricultural Market Act, which created the Federal Farm Board, an agency to lend money to farm co-ops and to form agribusinesses. When the stock market crashed late in his first year in office, Hoover showed his activist credentials and previewed what was to come in the New Deal. Although he tried to meet the depression head on with activism (including the Smoot-Hawley tariff), Hoover refused to go beyond certain limits, and he paid the price at the polls. “Before that defeat in 1932, however, Hoover had pulled out every antidepression tool the Progressives ever owned,” Williams writes.

With the exception of a significant tax cut to encourage investment, his program anticipated FDR’s “radical” program, which is why Rothbard dubbed Hoover the “first New Dealer”. But Hoover would not go far enough to satisfy the corporate elite, which was touting Mussolini-style corporatism. Rothbard writes, “When Henry I. Harriman, head of the U.S. Chamber of Commerce, came to Hoover and said that big business would support Roosevelt in the election if Hoover did not accept what would later become the NRA [National Recovery Administration, i.e., the government-led cartelization of industry], Hoover astonished many of his progressive supporters by drawing back in horror, rejecting it, and calling it ‘fascism’.”

So the corporate elite backed Roosevelt in the election of 1932. The irony was complete. Hoover’s image was of an irrelevant apologist for business, while the corporate leadership deserted him for the Democrat who would later rail against the “economic royalists”. In the end Hoover looked like an opponent of corporatism, but the old engineer was perhaps its key architect. We are still recovering from his handiwork.

MYTHS OF THE 4TH OF JULY

America’s national holiday is the 4th of July, the anniversary of public promulgation of the Declaration of Independence. The 4th of July, like many other government holidays, is surrounded by numerous myths. Some of the most notable:

The 4th of July is a celebration of the U.S. Constitution.
Actually, the U.S. Constitution’s purpose was to remake the American governments of the Revolution by making the system less democratic. The delegates from 12 states who met in Philadelphia in summer 1787 had been sent by the states to recommend amendments to the Articles of Confederation. Instead, they instantly decided to meet in secret, and then the nationalists among them tried to win adoption of a national – rather than a federal – constitution.
The 4th of July was the day that the 13 states established their independence.
The states became independent in their own good time – some on July 4, some before, some after.
The chief legacy of the 4th of July is the political philosophy set out in the Declaration of Independence.
The Declaration of Independence was the work of a congress of representatives of state governments. The Declaration was about states’ rights, not individual rights, and the Congress that adopted it had no power to make it anything else. All the rest of the Declaration was mere rhetorical predicate.
The 4th of July is a non-partisan holiday dedicated to recalling the legacy of the American Revolution.
In the Founders’ day, the 4th of July was a partisan holiday. It was celebrated in the 1790s and 1800s by Jeffersonian Republicans desirous of showing their devotion to Jeffersonian, rather than Hamiltonian, political philosophy. If you were a Federalist in the 1790s, you likely would celebrate Washington’s Birthday instead of the 4th of July. The 4th was the holiday of the Virginia and Kentucky Resolutions of 1798, those great states’-rights blasts at federal lawlessness. It was the anti-Hamilton, anti-Washington, anti-nationalist holiday.
The fulfillment of the 4th of July lay in the establishment of a powerful national government.
Celebrants of the 4th of July in the Founders’ day rejected the idea that the Constitution had created a national government, but insisted that it was federal instead. That is, they said that Congress had only the powers it had been expressly delegated in the Constitution, that the federal courts had no more jurisdiction than they had been assigned, and that the vast majority of government functions had been kept by the states. When federal courts grabbed for more power in 1793, these people added the Eleventh Amendment to the Constitution. In response to the nationalists’ war on France and Alien and Sedition Acts, they first adopted the Virginia and Kentucky Resolutions of 1798, then elected Republicans – Jeffersonian states’-rights/laissez-faire advocates – to run their government.
The Declaration of Independence stood for the rights of white, male property owners alone.
The philosophical material in the first section of the Declaration, although commonplace at the time, had no legal or moral weight. Congress had no power to commit the states to it. Yet one might also note that revolutionaries who accepted the Lockean version of social compact theory did not necessarily believe that only white, male property holders had rights.
The fulfillment of the 4th of July will come when the United States has sponsored democratic revolutions throughout the world.
No. Both George Washington (in an address he co-wrote with Alexander Hamilton and John Jay) and Thomas Jefferson counseled that the U.S. avoid foreign entanglements, and thus foreign wars.

As you observe, or perhaps participate in, 4th of July festivities this year, note the pervasiveness of these myths.

Link here.
Ron Paul on recapturing the spirit of independence – link.
The case for independence – link.

The history of taxation is mostly a history of rising taxes. It makes depressing reading. Tax increases tend to accelerate as the right to vote is extended to more people. It may take time for this process to be evident, but rarely does it take longer than one generation. In no nation has this process been more true than the U.S. Yet the history textbook writers have successfully told the story as if the reverse were true.

When I was in graduate school four decades ago, I wrote a paper on then-current academic opinion – the opinions of specialists in colonial American economic history – regarding the burden of colonial taxation in 1775, i.e., the cost of funding the British Empire. Here is what I found. The total tax burden imposed by the British Empire on the colonies in 1775, as distinguished from the taxes imposed by colonial legislatures, was approximately 1% of national income in the North, and about 2.5% in the South. The main burden was from customs duties placed on non-British imports into the colonies. These were tariffs, i.e., sales taxes on imports. Against this “intolerable tax tyranny” of 1%, the colonists were persuaded by political organizers to revolt. They fought and died for seven years. They won in 1783.

From 1783 until 1788, they enjoyed virtually tax-free living at the national level. The national government could only beg states to pay taxes voluntarily. They paid very few. This produced a growing economy and generally stable politics. This story has not yet filtered down into the American history textbooks.

After 1783, a small group of young men who had exercised national leadership during the Revolutionary era were discontented. State governments offered no opportunities for lasting fame. They also wanted a national government that could impose taxes that Americans would have to pay – an end to voluntarism. So, they organized a political convention in 1787 to change all this. They were successful. The voters supported the replacement of the Articles of Confederation. The new national government could impose customs duties and luxury sales taxes, most notably on whiskey.

Americans in 1788 chose to be taxed by their very own national government, which was nearby and powerful, despite the fact that they had fought a revolution against sales taxes on non-British imported goods, imposed by a distant government which had proven itself nearly impotent in collecting direct taxes in the colonies. The voters got what they wanted: national taxation with representation. George Washington in 1794 then got to command the largest military force of his career – 13,000 men. He led them into Western Pennsylvania to crush a tax revolt against the Federal whiskey tax. You say that you did not hear the story told in this way? Let me fill in some gaps. ...

When the textbook writers coined the phrase, “No taxation without representation,” they baptized its opposite, “Taxation with representation.” I am willing to make a deal with the IRS. I will give up my right to vote in U.S. elections if the Federal government will cut my taxes to 1%. I will even pay 2.5%, because I live in the South. How about you?

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Offshore News Digest for Week of July 2, 2007

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