Offshore News Digest for Week of October 29, 2007

INVESTING IN AFRICA

“I have been investing in African countries such as Ghana, Botswana, Zambia and Zimbabwe for years. Botswana was rich in diamonds, Ghana in cocoa and gold, Morocco in phosphates ... Zamibia, with its emeralds and copper, and Cameroon awash in oil.” ~~ Jim Rogers, Adventure Capitalist

Across the vast continent of Africa, lurking underneath the soft red soil is a promise. The promise is of riches, riches given by the world to its people in the awesome form of natural resources. Africa holds some 99% of the world’s chrome resources, 85% of its platinum, 70% of its tantalite, 68% of its cobalt and 54% of its gold. Africa has vast resources of timber and bauxite. Diamonds, too, with nearly half of the world’s production. At various times in history, it has been a geopolitical playground as nations and companies compete to pry loose Africa’s natural gifts.

So far, success has been hit or miss. Nasty political regimes, corruption and incessant violence – and a long history of it – hamper any effort at a stable and rich Africa. Despite the wild uncertainty of the place, some companies have had success there. They have built up good businesses and have made plenty of money. It is all of matter of exactly where, of course, and in what commodity.

I think Africa will play a more important role in slaking the thirst of the West’s oil-guzzling economies. It is already more important than you may realize. The U.S. already gets about 18% of its crude oil from Africa, mainly from Nigeria. Some estimates say we will get 25% or more of our oil from Africa by 2015 – a mere eight years off.

If Africa is going to make up 25% of U.S. oil supplies, that implies a lot more growth and interest and money in African oil assets. In particular, West Africa – Nigeria, Chad, Cameroon, Gabon, Equatorial Guinea, Sao Tome and Principe, Congo and Angola. West Africa has plenty of oil. Angola alone has proven oil reserves of over 25 billion barrels. (Interestingly, Angola is also one of China’s principal oil suppliers.) Also, in West Africa, new discoveries happen more frequently than anyplace else.

The question is getting to the oil profitably. That is the problem. But there are a few points here that take some of the edge off. For one thing, the U.S. government likes West Africa as a supplier. In many ways, it is better than the Middle East, especially the offshore oil. West Africa is easily controllable by U.S. naval power – much more so than oil supplies in the Middle East. The U.S. already has bases and agreements in place with Senegal, Mali, Ghana, Gabon and Namibia.

Then it gets hard talking about these African countries as one big undifferentiated group. No one likes Nigeria, it seems, which has all kinds of problems. But Gabon, for example, is different. Gabon is one of the most prosperous countries in Africa. Gabon has a per capita income four times that of the rest of the sub-Sahara. It is rich in manganese and timber – and oil. Explorers discovered oil offshore in Gabon in the 1970s. Oil is now about half of the economy.

Gabon also has the longest serving head of state in Africa – El Hadj Omar Bongo Ondimba, who has been in power since 1967. Gabon can screw up. It has and will do so again, I am sure. In the 1990s, the country suffered through massive currency devaluation thanks to inept government policies.

Still, you can soften the risks somewhat by what country you invest in. There are big differences between some of those West African countries, as big as the differences between a bullfrog and a French poodle. Nonetheless, where there is oil, there is the promise of riches. And where there is the promise of riches, there are people who will try to get them. It brings fortune hunters like water holes attract wandering elephants across the arid African plains.

THE CHINA SYNDROME

The sun rises over Shanghai, cresting the towering skyscrapers that have become a signal of China’s recent rapid growth. The morning sun brings rise to a new day in a country where over one billion people have recently awoken from their long economic slumber. Like any other day, this one will be spent producing the products that we in the U.S. use every single day.

It is no secret that the U.S. is currently operating under a trade deficit with China. As it stands right now, the U.S. imports $202 billion more than it exports from China. There are several intrinsic reasons for the deficit. The population of China is more than four times that of the U.S. That means that China has an overabundant work force.

China also does not have the wage controls that we are used to in the U.S. Over 100 million members of the Chinese labor force live in rural areas and are forced to commute to industrial areas and compete for factory work. This drives the already low wages down even further. The cost for companies to produce their products can remain much lower compared with those costs in the U.S.

American consumers have fallen in love with the influx of cheap products that continue to roll in from China. This has added to the great demand for Chinese-produced items, which has energized China’s once Stone Age economy. With the economy in full swing, China has been able to become the industrialized and modern nation that we have seen.

This kind of growth does not come without a price. With the rise in the industrialization of its factories and other means of production, along with general and sweeping lifestyle changes of its population, China has now become one of the leading consumers of foreign oil. This is straining the already dwindling world oil supplies, while sending the global costs skyrocketing past record highs.

China also does not pose strict environmental and pollution restrictions on its manufacturers the way we do. This only adds to the ease and affordability of Chinese production, while doing nothing to curb the use of fossil fuels and other polluting energy sources.

Due to the rising economy, China is going through a period of rapid and unpopular inflation. Prices of almost all other goods, which used to be fixed by the government, have now been set free. In order to pacify an unhappy population, fuel and energy prices have remained fixed. While the U.S. is taxing its population’s fuel consumption, China’s is being subsidized. Also aiding the inexpensive fuel in China is the fact the fuel costs are in American dollars. As the strength of the dollar falls, many Asian currencies are on the rise. These practices are doing nothing to force any sort of efficiency or conservation onto the general population. Fuel is being consumed at increasing levels and there does not appear to be an end in sight.

How the U.S. hurts itself.

We see how these problems negatively effect fuel consumption and pollution in China, but we also see something very telling right here. It seems that U.S. environmental and trade policies do not act independently of each other. This should lead us to examine our current policies and see how they are or are not working.

Current restrictions on American manufacturers reduce output and raise consumer prices. The purpose of these restrictions is an attempt to keep the output of pollution down. The government does this because of increased pressure from environmental groups. The government also poses energy regulations on manufacturers. This is done in the form of taxes and other restrictions.

The government is attempting to limit pollution by thrusting these laws onto manufacturers, yet the regulations do little to curb usage. If anything, the demand for energy is just being moved across the globe. Factories in China are able to more than make up for the amount of production that is being lost in the U.S., and that does little to help the environment. The price is being paid by the American worker.

TO THE WTO: FROM RUSSIA WITH LOVE

All that bad stuff we said about you? Just kidding.

So the Cold War is starting up again? Russia and America will fight it out over missile defenses? The EU will drive away Russian investment in its energy sector? Well, not exactly. After a Portuguese face-off last week between Mr. Putin and European negotiators, the menacing bear broke into a smile and said, oh well, everything will be all right, you know.

Never believe a journalist or a Russian (old Georgian proverb). They are made for each other, indeed. After six months of relentless propaganda against America, the EU and just about everybody else who does not live within 50 kilometers of the Kremlin, all voraciously lapped up by the media, it turns out that all the poor Russians wanted the whole time was to be members of the World Trade Organization.

Only last June, President Putin told the Saint Petersburg International Economic Forum that the WTO was “archaic, undemocratic and inflexible,” proposing the creation of a Eurasian equivalent. It is good to know that the 1990s Russian jokes about why only one Monopolies Commission were not entirely frivolous. But the truth came out in Marfa, Portugal at the weekend, when Mr. Putin summed up the talks, “As a whole, the dialogue is going positively,” he said at a news conference, “We expect that it will end with a positive result.”

The Russian WTO show has been running for 10 years, and it will be ironic if Mr. Putin, who deservedly or otherwise is not getting a good rap from the world’s intelligentsia, is remembered as the man who took Russia into the Holy of Holies of the market economy. Certainly he has not set out to make friends and influence people: “Such a tough position toward Russia is unjustified and dishonest. It is an attempt to twist our arms, but Russia’s arms are getting stronger and the EU won’t succeed in twisting them.” That was said in 2003.

Marathon runner Pascal Lamy, who at the time was European Trade Commissioner, responded, “We are not asking the Russians to make unreasonable concessions or to force obligations on the Russians other than those in the WTO, or to try and influence the decisions the Russians will adopt at home.”

And only a few weeks ago, Russian Economic Development and Trade Minister German Gref, told Russian and German businessmen, “Negotiations are proceeding with considerable difficulty. They are deadlocked.” After all this, Mr Lamy, now head of the WTO, must have a special joy as he watches Russia approach the finishing line.

SINGAPORE STANCE ON BANK SECRECY PUTS E.U. TRADE DEAL IN DOUBT

Singapore will not be changing its tough banking secrecy laws despite calls from the E.U. for more transparency, a decision which could scuttle talks for a trade agreement between the island-state and the E.U. “We have no plans to change these (banking secrecy) laws ... They allow for the necessary transparency in combating criminal activity, while safeguarding investors’ interest for safety and security,” a spokesman for the Monetary Authority of Singapore said.

Among the changes sought by the E.U. is greater exchange of information between Singapore and E.U. countries on suspicious movements of money between the two markets. Singapore’s tough secrecy laws have helped make it a growing private banking hub, but it also aims to prevent any possibility of becoming a shelter for money-laundering, especially with the opening of two multi-billion dollar casinos in 2009 and its proximity to countries that are battling terrorist groups. But the Monetary Authority’s response could spell a delay – if not the end – of negotiations for a trade agreement between Singapore and the E.U.

Without any change in Singapore’s banking secrecy laws, it is unlikely that Singapore and the E.U. will sign a partnership and cooperation agreement (PCA). Such a deal is seen as a building block toward a broader free trade agreement (FTA) between the E.U. and the Association of Southeast Asian Nations.

“They (Singapore MPs) said that they are planning legislative changes to deal with these issues,” said Glyn Ford, a senior member of the European Parliament. “They are looking at the matter, they realize it’s a problem and they want to join the fight against terrorism. They didn’t give us a timetable but the clear implication is we are talking about some kind of action within months not years. The implication was that something will be done prior to the opening of the casinos.”

The European Commission has been negotiating a trade agreement with Singapore since 2005. “In our talks, we got to a point where we were very close to an agreement. The one stumbling block is over banking secrecy,” Ford said.

But in its statement, the Monetary Authority of Singapore said, “The so-called ‘stumbling block’ referred to in the article relates to the question of withholding tax on customer savings which the E.U. has sought to discuss with Singapore. ... The Singapore Constitution does not allow us to collect taxes on behalf of a foreign country.”

However, the MAS did not say whether Singapore will look into changing its Constitution to allow the levying of withholding taxes on E.U. citizens. The MAS also said that any allegation that Singapore is a potential haven of suspicious money from launderers and terrorists is “baseless”. “Singapore’s laws on banking confidentiality provide customers of banks the right to confidentiality of information, but do not shield criminal activity. We operate a rigorous regime against money laundering and financing of terrorism which is benchmarked against international standards,” the MAS said.

In the media briefing last week, Ignasi Guardans-Cambo, another E.U. member of parliament who took part in the talks with Singapore MPs, said Singapore needs to boost transparency in its financial sector to avoid the possibility of attracting organized crime given that it will soon open two casinos.

“It was not us but the members of the Singapore assembly who spoke about money laundering, saying that casinos will be set up in less than two years. It was their comment and they need to have a legal framework to prevent Singapore from becoming a money-laundering place,” Guardans-Cambo said. “The big money-laundering hubs in the world are disappearing and nobody wants Singapore to replace them. And, of course, nobody is accusing Singapore now, but that is a reality not only in terms of financing of terrorism, but also in terms of organized crime.”

“We say that we don’t think there is money laundering going on here, but clearly people engaged in money laundering are looking for places like Singapore with low levels of transparency to actually engage in money laundering,” Ford also said in the briefing.

HONG KONG LEADERS URGE INVESTOR CAUTION

Mainland stock market bubble, yen carry trade, global trade imbalances among concerns cited.

Two senior members of Hong Kong’s government have warned that, while the local economy has been faring well and is likely to continue in the same vein for the foreseeable future, investors should be on their guard in markets that remain volatile following the recent credit crunch.

In his latest “Viewpoint” column for the Hong Kong Monetary Authority, Joseph Yam, HKMA Chief Executive, observed, not for the first time, that there are a lot of uncertainties confronting Hong Kong’s economy and financial markets, particularly the economic and financial outlook for the Mainland and the U.S. He noted that while the mainland Chinese economy continues to grow at a fast pace, the macro monetary conditions are causing considerable concern. Inflation has been climbing to uncomfortable levels, requiring interest rates to be raised to contain it, but at the same time attracting more capital inflows.

“With plans to encourage the orderly outflow of capital by allowing residents to invest outside the Mainland not yet implemented, and domestic savings continuing to accumulate, the imbalance in the supply of and demand for financial instruments other than bank deposits persists, leading to prices being much higher than would otherwise be the case, and causing concerns about the possibility of a stock-market bubble,” he wrote. “It is not clear how this scenario might develop. The inevitable market adjustment, if sharp and destabilizing, would have serious implications for monetary and financial stability, not just for the Mainland but also for others, including of course Hong Kong.”

Speaking in the Legislative Council on Friday, Financial Secretary John Tsang echoed Yam's concerns, observing that although Hong Kong’s economic performance has fared well, the prevailing risks and uncertainties cannot be taken lightly. “While the credit market turmoil in Europe and the U.S. triggered by sub-prime mortgage problems has eased, and the Hong Kong economy is relatively unscathed so far, the global credit markets have yet to return to normal and the impact of the turbulence on the external economic environment has yet to fully emerge,” he stated. “We will have to pay attention to the second, or even the third round effect on the Hong Kong market. On top of this the huge volume of yen carry trade is another potential threat to global financial markets, an area which warrants close attention.”

MILLIONAIRES MUSHROOM IN HONG KONG

Independent market analyst Datamonitor’s report, “Wealth Management in Hong Kong 2007”, forecasts that the number of U.S. dollar millionaires in the SAR is set to rise from 51,000 in 2006 to over 83,000 by 2011. The assets they hold will increase from US$150 billion to almost US$250 billion – an average annual increase of nearly 11%.

Featuring relatively low taxes, simple business regulations and flexible labor market rules, Hong Kong is ranked by the 2007 Index of Economic Freedom as the world’s most free economy. “It is Hong Kong’s open economy that has seen its financial services industry thrive. Competition in the industry is saturated with many of the world’s largest financial institutions operating there,” says Datamonitor Financial Services Analyst and author of the report David Lalich. “The nation is heavily dependent on its services industry which accounts for almost 90% of its GDP.”

Although Hong Kong has endured a series of adverse economic events over the past decade, with the Asian economic crisis over 1997-98, the global economic downturn during 2001-02 and the SARS outbreak in early 2003, since then it has produced strong GDP growth.

Hong Kong has experienced an increase in both its number of individual millionaires and the value of their onshore assets. In 2006, there were over 50,000 wealthy individuals living in Hong Kong with US$1 million (HK$7.8 million) or more in onshore liquid assets, an increase from 31,000 wealthy individuals in 2002 representing 12.8% annual compound growth. Hong Kong millionaires held over US$150 billion in onshore liquid assets in 2006, having increased at an annual compound growth rate of 14.8% since 2002.

Datamonitor predicts that Hong Kong’s wealth market will see strong growth over the next five years and expects it to grow at a faster rate than its major rival Singapore. “The number of millionaires in Hong Kong will increase at an annual compound rate of 8.8% over the next five years, to reach 83,000 by 2011,” comments Mr. Lalich. In contrast, the number of Singaporean millionaires is expected to increase 7.3% annually over the same period.

DUBAI EMERGING AS NEW RIVAL TO LLOYDS OF LONDON

Traditionally, Lloyd’s of London, the international insurance market, has seen its chief competitive threats coming from the offshore financial centers of Bermuda and Gibraltar, and more recently from Dublin. However, it seems that there is now a new kid on the block. Dubai.

In comments made to the UK’s Daily Telegraph, Richard Ward, chief executive of Lloyd’s, observed that the London market is now not only facing direct competition from other established markets, but also from insurers in Dubai which are increasingly underwriting local risks. “Local markets are developing. What is clearly happening globally is that a lot of risks are having more tendency to be placed locally, rather than internationally. The challenge is to respond to that and ensure we see risks that would come ultimately back to the market place,” he told the paper.

However, Dubai’s ambition to become the major financial center between the European and Asian timezones has also fuelled growth in its local insurance market, Ward added, noting that the rate of growth of markets in the Gulf region has been “quite phenomenal.” To facilitate insurance industry growth, Dubai is in the process of enacting a series of new insurance laws.

According to Bradley Kading, president of the Association of Bermuda Insurers and Reinsurers, Dubai is not seen as a competitive threat to Bermuda, or any other established insurance centers, and is expected to interact with and compliment, “The future for insurance buyers likely includes the ability to access insurance markets from multiple locations. Historical centers like the U.S., London and continental Europe will remain influential. ... New centers like Bermuda, Ireland, Dubai and Singapore will become convenient hubs for certain markets. Bermuda’s global insurers and reinsurers will operate from multiple locations.”

IMF CONCLUDES CONSULTATION WITH GRENADA

Looks good, but there is too much tax competition among Caribbean jurisdictions, say IMF naboobs.

The International Monetary Fund recently announced that it had concluded its Article IV consultation with Grenada. The consultation found that Grenada’s economy has rebounded after the devastating impact of Hurricanes Ivan and Emily, with the recovery centered on reconstruction and 2007 Cricket World Cup (CWC) preparations.

Real GDP growth averaged 7% per year during 2005-06, and is projected at about 3% in 2007, and 4% beyond, reflecting a further strengthening of tourism, the recent initiation of several major tourism projects, and a gradual recovery of agriculture. Inflation has remained low, buttressed by the regional currency board arrangement.

It also revealed that solid progress has been made with fiscal measures, including the introduction of the National Reconstruction Levy, the adoption of an automatic fuel pricing mechanism, strengthened collection of tax arrears, and work toward implementing a VAT. Important steps have also been taken to reduce vulnerabilities, such as participating in the Caribbean Catastrophe Risk Insurance Facility and taking steps toward giving the Building Code force of law.

However, other structural reforms have suffered delays, including legislative action to reform the tax concessions regime, creating a one-stop shop for investors, strengthening the capacity to evaluate and prioritize capital projects, and modernizing the public sector. “Directors called on the authorities to explore a regional solution to the current counter-productive tax abatement competition among Caribbean countries,” the IMF Executive Board stated.

The Board’s assessment continued, “Directors considered that external competitiveness appears adequate, with Grenada’s share of the regional tourism market increasing. Fiscal consolidation will help sustain competitiveness and support the regional currency board arrangement.”

AUSTRALIA: LOVE IT OR LEAVE IT?

In May 2001, our family made its first fact-finding mission to Far North Queensland, Australia. We were enchanted with the people, the land, the climate, and knew this was the right place. We returned to the States, applied for, and were granted Permanent Resident status, but due to work commitments we were only finally able to return last year, just before our five year visas expired. What have we discovered since our initial visit?

Similarities to the United States are unfortunately much more numerous and prevalent than they were five years ago. American companies are everywhere now – McDonalds, KFC, Target, K-Mart, Dunkin’ Donuts, Baskin Robbins. Good god, they even have Curves, and those are only the obvious ones.

Hungry Jacks is really Burger King and Big W is Walmart in thinly cloaked disguise. As far as omnipotent megacorporations go, they have Coles and Woolworths controlling 85% of the nation’s grocery sales. I used to think Walmart’s 15% market share was scary. Australians pride themselves on their independence, and, at least here in the country, the majority of people are somewhat self-reliant, but the government, as led by John Howard, seems to look to the U.S. for its lead.

Infrastructure is being privatized and industry outsourced. China is Australia’s biggest customer hogging up mineral rights and raw materials, and Australia is one of China’s top customers purchasing loads of cheap goods much to the dismay of the people. Those were many of the things we were trying to get away from in the States. It is a little dismaying to see it happening here. We also wanted to get away from nuclear power and presently the government is looking toward nuclear facilities for their future needs, again, against the preferences of the general public.

The land of the free and the home of the brave is neither, one of our numerous reasons for leaving, but you don’t know what you’ve got until it’s gone. Big Brother is here, both literally and figuratively. They have the same tacky television show, and Queensland boasts the highest number of video security cameras in use anywhere in the country. There are relatively few police officers in our area and the people for the most part are law-abiding citizens, so I guess it works.

Regulations are everywhere. Seatbelts must be worn in vehicles, helmets on bike rides, etc. Because the government takes responsibility for the medical care you receive from an injury flouting these precautions, it makes some sense. There is still that feeling of being controlled. There is a lot of concern over public safety and liability. The latest is a possible ban on take-away foods. Your leftovers could spoil once you leave the premises, you could become sick and sue the owner of the restaurant. People are resentful of these ridiculous protections but do not seem concerned enough to speak out about it other than the occasional letter to the editor.

Personal freedoms are foundational to the Australian lifestyle, or at least the image of the Australian lifestyle, but there are no constitutional rights and the Queensland government at least seems eager to steamroll the public. Technically Australia is a free country, but given the level of government intrusion into daily personal life here, it feels positively oppressive. I am thinking it may be a fair tradeoff to live in a country where the occasional kidnapping or machete murder occurs, where there are no zoning or health and safety or building inspectors standing over your shoulder, no police officers pulling you over for not wearing a seatbelt, no teachers rating your child’s homemade lunch on a red, yellow, or green scale.

Ignorance is bliss, at least up here in the Far North. The newspapers are either nationwide publications focusing on sensational news from all over the country in New York Post-y, hysterical, tabloid style, or completely local in farm bulletin fashion. We have yet to find any in depth business or political coverage on any serious level. For those of us without cable, international news is limited. Other than the night I briefly saw Condoleeza replying to some threat involving the shutting off of oil to the U.S. if Iran is invaded, televised news reports are mostly focused on national or state goings-on. Is the U.S. going to invade Iran? Did we already? I sure will not hear about it unless the Australian military is called in for reinforcements. Advertising seems naive and quaint compared to the States and radio stations seem stuck in the 80s – a charming time warp, and we are glad at least for these media limitations.

Americans are spoiled. Everyone believes they are entitled to a giant tv with 600 channels, a sports car, and a house decorated as in a trendy style magazine and furnished with every possible gadget. We call it the American Dream. We outdo the Joneses while the Aussies make do. Aussies are suspicious and derisive of any show of wealth. Neighbors questioned the reason for two vehicles in our driveway. We explained that until our old troop carrier had an adequate number of seats – it was short two – we were renting a small, 4-door diesel pick-up. They were relieved, worried we might be too “flash” for small town, country living. That we desire high-speed internet access would probably seem flash too.

For all my ranting and complaining I have to say the people are, almost without exception, delightful. Helpful, friendly, inclusive, outgoing, real. True blue, as they say. We have made some great friends. Their submission to the government, though? They need to work on that.

Is it better here? We feel safer, if you count living in a house that does not even have a lock on the door, but not if you count being surrounded by venomous snakes, poisonous bugs, deadly marine life, and dangerous plants. Life is simpler. Population density is low. There is enormous natural beauty. For all that we are truly appreciative.

Will we stay here forever? I don’t know. It works for a great escape, but I do not believe we have found our ultimate destination. Like some Americans love to tell newcomers, and these Australians have said: “Our country, love it or leave it.” Or like it or lump it. Or something. And we are considering that advice. Because raising our daughters under the thumb of Big Brother or in the care of Mary Poppins who micromanages every aspect of your life and perpetrates the lie that you are living in a free country and spouts all kind of nonsense about equality and a fair go when clearly indigenous people are governed by an entirely different set of rules is nearly intolerable. But try explaining those concerns to your older daughters who are not too terribly worried when they have good friends they can hang out with eight hours a day and take cool classes their mom would not teach them at home. And come out at the top of their classes without really even trying, and go horseback riding or swimming in the creek after school. That being enough freedom for them, life and the pursuit of happiness taking top priority. Our biggest job while we remain here will be to continually remind the girls of their hardy rebel stock and the responsibilities it carries. So we stay. For now.

WARREN BUFFETT COMPLAINS HIS TAXES ARE TOO LOW

President can expect small thanks from billionaire investor Warren Buffett for cutting his taxes, after the Berkshire Hathaway chairman once again publicly criticized Bush’s tax policies for favoring the wealthy over low- and middle-income workers.

In an interview with CNBC, Buffett, thought to be worth about $52 billion, revealed that he had conducted an informal survey of his office staff, and found that his income tax rate was almost half that of his employees. According to Buffett, his office staff on average paid a combined income and payroll tax rate of 32.9%, while, without any help from tax advisors, his own tax rate is about 17%.

“The taxation system has tilted towards the rich and away from the middle class in the last 10 years. It is dramatic. I don’t think it is appreciated. I think it should be addressed,” he remarked. “There wasn’t anyone in the office, from the receptionist up, who paid as low a tax rate and I have no tax planning. I don’t have an accountant or use tax shelters. I just follow what the U.S. Congress tells me to do.”

Buffett made similar remarks to a fund-raising dinner for the Hilary Clinton presidential campaign, where he attempted to prick the consciences of the 600 Wall Street investors in attendance. “(We) pay a lower part of our income in taxes than our receptionists do, or our cleaning ladies, for that matter,” he observed. “If you are in the luckiest 1% of humanity, you owe it to the rest of humanity to think about the other 99%.”

U.S. REPRESENTATIVE RANGEL INTRODUCES TAX REDUCTION AND REFORM ACT

Comprehensive proposal sets sights on several offshore deferal mechanisms used by corporations and hedge funds.

U.S. Representative Charles Rangel, the New York Democrat in charge of the House Ways and Means Committee, has introduced wide-ranging tax legislation into the House that proposes to deliver tax cuts for millions of Americans, while cutting taxes for U.S. business.

Rangel announced that his Tax Reduction and Reform Act of 2007 would be the most comprehensive reform of the U.S. tax code since the Tax Reform Act of 1986, and would provide tax relief to more than 90 million working families through a permanent repeal of the individual alternative minimum tax (AMT), enhancement of other tax benefits, and a cut in the headline U.S. corporate tax rate by almost 5%.

Rangel’s bill also provides for a refundable child tax credit, an increase in the standard deduction, enhanced earned income tax credit, a one year patch to the AMT system for 2007, and extension of popular tax credits that expire at the end of the year. These provisions will be extracted from the larger bill in the coming weeks for expedited consideration before the Congress, he stated.

“For too long, hardworking families have struggled to keep pace with the rising cost of living in America. This legislation would put money back in their pockets to combat the growing economic insecurity gripping our nation,” Rangel commented. “The provisions in this bill would reform the tax code to provide a greater sense of equity and fairness that is so critical to our voluntary tax system. It has been more than 21 years since Congress and the Administration rolled up their sleeves to discuss tax reform and during that time the tax code has become a jumbled mess of outdated and inequitable provisions that cry out for simplification. The package I proposed today is entirely revenue-neutral to ensure that the tax cuts we provide are not paid for by future generations or through reckless borrowing as has been the case in recent years.”

The bill includes a significant reduction in the top corporate marginal tax rate to 30.5% from the current 35% level, and would permanently extend the current enhanced expensing rules that help small businesses compete. However, as ever, the devil is in the details, and the legislation would also curtail certain corporate tax benefits in order to offset the cost of the tax cuts. These include the repeal of the domestic production activities deduction, the repeal of the worldwide allocation of interest, the limitation of treaty benefits for certain deductible payments, and the requirement that U.S. corporations which defer income through controlled foreign corporations also defer the deductions that are associated with this income.

A controversial provision that is bound to provoke the ire of the private equity and hedge fund industry is a change in the tax treatment of “carried interest” for fund managers, so that they will no longer receive the lower 15% capital gains tax rate for what is, according to Rangel, “essentially a management fee or payment for services, which generally are taxed as ordinary income.” The bill would, however, continue to tax carried interest at capital gains tax rates to the extent that carried interest reflects a “reasonable return” on invested capital.

These is more bad news for hedge fund managers in the legislation, in the shape of curbs on hedge fund managers using offshore corporations and other structures to defer taxes on compensation received for providing investment services. For tax-exempt entities such as pension funds and university endowments, that invest directly in hedge funds, unrelated business income tax (UBIT) will be abolished, but this measure is designed to eliminate the incentive for exempt entities to invest in hedge funds and other investment funds through offshore “blocker” corporations.

Rangel claims that the Tax Reduction and Reform Act of 2007 is entirely revenue neutral, and is offset in large part by limiting the benefits of AMT repeal for taxpayers on incomes of more than $200,000 per year. However, the Ways and Means Chairman stated that an “overwhelming percentage” of families earning $200,000 to $400,000 and “virtually all” families with income of less than $500,000 will still receive a net tax cut, since they will no longer have to pay the AMT. These taxpayers will instead pay an AMT “replacement tax” at 4% on incomes above $200,000, and 4.6% on incomes above $500,000 ($250,000 in the case of single taxpayers). High income taxpayers will also be subject to overall limitation on itemized deductions, and phase-out of deductions for personal exemptions.

National Taxpayers Union says Rangel’s grand tax plan stinks.

The “mother of all reforms” unveiled last week by House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) really raises the tax burden on hard-working households and small businesses, according to the nonpartisan NTU, and will do nothing but rankle taxpayers.

NTU Vice President for Policy & Communications Pete Sepp offered the following assessment of Rangel’s plan: “Forget about the World Series for just a moment – Chairman Rangel’s tax plan has to be the biggest bean-ball ever thrown. Not only does it travel far and wide from the tax reform Americans had hoped for, but more taxpayers will wind up taking their lumps than initially advertised. Rangel’s plan isn’t just robbing Peter to pay Paul – it’s robbing Peter and Paul while convincing both of them that the other guy is the one paying the higher taxes.

“For instance, Rangel would get rid of the Alternative Minimum Tax (AMT) – an ill-conceived plan that never should have been established in the first place – but effectively resurrects it under a different name on the tax bills of millions of Americans. He boosts the standard deduction, only to erode the benefits of other common deductions. ... He would let small businesses continue to take tax-favorable expensing, but then force some of them to shoulder higher self-employment taxes. He would cut the corporate tax rate to make the United States more competitive abroad, but would take away the sensible tax rules that even other countries allow for their own home-grown companies. ...

“The reality is simple: Eventually, all taxpayers will suffer if this so-called tax reform act becomes law, because on balance it is likely to extract more money from our economy and small businesses. That means fewer jobs, less income growth, and bigger government. This plan fails to take a swing at making the Tax Code fairer, simpler, and less burdensome. Three strikes and you’re out, Mr. Chairman.”

The 362,000-member NTU is a non-profit citizen organization founded in 1969 to work for lower taxes and smaller government at all levels.

U.S. venture capital lobby expresses “deep concern” over Rangel plan provisions.

The U.S. National Venture Capital Association (NVCA) has expressed “deep concern” over provisions proposed in the Tax Reduction and Reform Act that would increase the amount of tax paid on private equity fund partners’ carried interest. In a statement, the NVCA stated that the proposals would mean an effective 100% tax increase on venture capitalists’ carried interest, and raise a significant barrier to investment in start-up companies and new technologies.

Venture capitalists argue that carried interest should continue to be taxed at the 15% capital gains tax rate, because it represents income derived from investment, which carries with it an attendant level of risk. But Rangel believes that such income is “essentially a management fee or payment for services, which generally are taxed as ordinary income.” The bill would, however, continue to tax carried interest at capital gains tax rates to the extent that carried interest reflects a “reasonable return” on invested capital.

Citing a 2007 Global Insight study, the NVCA says that venture-backed companies accounted for 10.4 million jobs and $2.3 trillion in revenue in the United States in 2006.

U.S. SENATE VOTES FOR 7 YEAR INTERNET TAX MORATORIUM

Matches the House’s bet, raises it by 3 years.

The U.S. Senate has approved legislation that would result in the current moratorium on internet access taxes being extended for 7 years. “This agreement is a common sense victory both for internet users and for state and local governments," Senators Tom Carper (D-Delaware) and Lamar Alexander (R-Tennessee) said in a joint statement issued after the voice vote. “It continues the moratorium on Internet taxation, avoids unfunded federal mandates on states and cities, updates the definition of Internet access, and allows Congress to revisit the issue after seven years.”

The current internet tax moratorium is set to expire on November 1. However, the House of Representatives has approved legislation that would extend the moratorium for just 4 years, and both bills will need to be reconciled before the tax ban can be extended.

The internet tax moratorium was first passed by Congress in 1998, but has had to be renewed twice in the meantime, the last time in 2004, for three years. While there is widespread support outside of Congress for the moratorium to be made permanent, there has been an apparent lack of enthusiasm for such a move among lawmakers. Indeed, an amendment added to the Senate Amtrak Authorization Bill by New Hampshire Republican John Sununu to make the internet tax moratorium permanent was rejected. Sununu blamed the Senate Democrat leadership for the lack of action on the issue, accusing it of being “uninterested in protecting Internet users from higher taxes.”

House of Representatives agrees to Senate proposal.

The U.S. House voted to approve new legislation that will extend the moratorium on internet access taxes at state and local government level by 7 years. The unanimous House vote followed Senate approval of the measure last week, and opens the way for President Bush to sign the bill into law, before the current moratorium on internet access taxes expires on November 1.

The legislation is largely unchanged from the previous moratorium enacted in 2004, and continues with grandfathering provisions for nine states that taxed internet access when the first moratorium was enacted in 1998 to encourage the growth of online commerce. The legislation does not, however, deal with the more complex issue of sales taxes on internet purchases, which is being examined in separate legislation.

The vote was welcomed by Democratic Congresswoman Anna G. Eshoo, whose Congressional district includes much of Silicon Valley, and who has been a leading figure in the movement to extend the tax ban, although she initially opposed a temporary extension in favor of a permanent ban. “No one should have to pay a tax just to access the Internet,” explained Eshoo. “Extending the moratorium for seven years is an important step forward to bolster innovation and enhance broadband policy in our country.”

U.S. AND ICELAND SIGN NEW INCOME TAX TREATY

The U.S. Treasury Department announced that Deputy Secretary Robert M. Kimmitt and Icelandic Finance Minister Árni M. Mathiesen have signed a new income tax treaty between the two countries. The treaty brings the existing agreement into closer conformity with current U.S. tax treaty policy.

For example, the new treaty contains a comprehensive limitation on benefits provision that is consistent with many recently concluded U.S. tax treaties. The agreement also maintains the existing treaty’s withholding tax exemption on cross-border interest payments, as well as the existing treaty’s reductions in withholding taxes on cross-border dividend payments.

The taxes to which the Convention will apply in Iceland are the income taxes to the state and the income tax to the municipalities. In the U.S., the taxes to which the Convention shall apply are the Federal income taxes imposed by the Internal Revenue Code, and the Federal excise taxes imposed with respect to private foundations.

NEW ZEALAND INCOME TAX BILL APPROVED

Finance Minister Michael Cullen and Revenue Minister Peter Dunne have hailed the passage of legislation which rewrites New Zealand’s income tax law. Commenting on the approval of the nearly 3000-page Income Tax Bill by parliament on October 25, the ministers stated that the bill is the culmination of 15 years’ work to rewrite the Income Tax Act, and was “a massive achievement for the many people who have been involved in the project over the years.”

“The purpose of rewriting the Income Tax Act was to produce tax law that is clear, written in plain language and is structurally consistent. That makes it easier for users to find what they need, to understand it, and to apply it, which in turn helps them to comply with the law,” Cullen and Dunne commented.

“Where possible,” they continued, “the language of the law has been made more concise, legalese has been avoided, and archaic terms have been removed or replaced. For example, a 14-line sentence has been broken up into three easily understandable subsections, and terms like ‘hereinbefore’ and ‘hereinafter’ have been rightly culled or replaced with modern language.

“In the process of rewriting the Act, great care has been taken to ensure that the original intention of the legislation has been retained. The few intended changes that have been made have all been presented for public consultation over the years.”

REFORM REPORT ARGUES U.K. “IPOD GENERATION” HIGHLY TAXED

A new report published by the center-right think tank, Reform, has accused the UK government of treating young people in the UK with “indifference”. The report alleged that the government’s fiscal policies are “mortgaging the future of a generation.” This particular report is the third of the think tank’s annual examinations of what it has termed the “IPOD generation” – 18-34 year-olds who are Insecure, Pressurized, Over-taxed and Debt-ridden.

The report argued that, “Instead of setting a new path of fiscal responsibility, it increased spending on healthcare and pensions and raised levels of borrowing. The Government has lost control of borrowing in recent years. For the five financial years from 2002-03 to 2006-07, its initial forecasts underestimated the true level of borrowing by a total of £121 billion.” Reform further suggested that higher spending and borrowing will impose upwards pressure on taxation.

Andrew Haldenby, Director of Reform, concluded by arguing that, “The Government fails to face the facts:; high taxation and high public spending impose massive burdens upon both young people and the economy. The rest of the world has outlined a better approach; an approach which will finally liberate the IPOD generation.”

BUSINESS TAX AMNESTY FAILS TO BOOST SOUTH AFRICAN TAX BASE

The South African Revenue Service (SARS) has received more than 353,000 small business tax amnesty applications. However, only 22% of those were from new taxpayers. This amnesty, which ran between August 1, 2006 and June 30, 2007, gave small businesses with an annual revenue of R10 million or less a chance to regularize their tax affairs.

Speaking to the allAfrica news service with regard to the newly released business tax amnesty figures, associate tax director at Ernst & Young, David French, observed that the amnesty’s main agenda was to grow the tax base by introducing new registrants, and the news that there were only 22% of new registrants “is certainly not a spectacular increase.”

In his medium-term budget policy statement, Finance Minister, Trevor Manuel stated that, “This year, we project to collect about R8.5 billion more than budgeted, mainly due to higher inflation and related salary increases. We expect that over the medium term, main budget revenue will be about 27½ percent of GDP. ...

“We reaffirm the principle that cyclical revenues should not be used to provide permanent tax relief. However, proceeds from better administration and tax compliance, and the broadening of the tax base may be used to lower the tax burden, as we have done in the past.”

SARs is reportedly expected to step up its pursuit of tax evaders large and small following the somwhat disappointing amnesty results.

SHOULD YOU REMARRY OR JUST SHACK UP?

Consult your financial adviser and lawyer, as well as your system of values.

In 2006, 1.8 million Americans aged 50 and above lived in heterosexual “unmarried-partner households”, a 50% increase from 2000, figures Bowling Green State University demographer Susan Brown. Much of that growth is due to the baby boomers passing 50. But it also reflects the problems of blending finances later in life. 90% of older heterosexual live-ins are widowed, separated or divorced.

Get remarried and your future Social Security checks might be smaller. The alimony from your ex, your kids’ college financial aid or the survivor’s annuity you receive from your late spouse’s job might evaporate. “I hate living in sin. But I guess I must hate living in poverty even more,” one woman told Stephanie Coontz, who studies contemporary families as a professor at the Evergreen State College in Olympia, Washington. Coontz notes some couples even choose not to marry in order to reassure adult children that they will get their inheritances.

If you are thinking about marriage late in life, get out your calculator, law books and tax software. The Government Accountability Office counts 1,100+ federal provisions, involving taxes, benefits and so on, where marital status has an effect. Here are some problem areas.

Estate Planning

Even if your will leaves everything to your kids, a second spouse can claim what is known as an “elective share” of your estate – typically 1/3. The easiest way to avoid trouble is with a prenuptial agreement in which your spouse-to-be gives up any claim to a share. After you are married, it takes more lawyering to disinherit a spouse.

Some unmarried couples should take precautions, too. In the jurisdictions that still recognize “common law marriage”, a partner could grab an elective share as a common law spouse. Usually, only long-standing heterosexual couples who hold themselves out as married – say, by filing joint tax returns or using the same last name – will be considered to have entered a common law marriage. But head off problems by signing a joint statement that you do not intend to have one.

What if you do want to leave a third or more of your assets to your new partner? Tie the knot. You can leave any amount to a spouse (who is a U.S. citizen) without having the bequest count against the current $2-million-per-person exemption from federal estate tax. Similarly, bequests to a spouse do not count against the exemptions (which are usually smaller than $2 million) in those states that still impose estate taxes. If you have married, you can devote your entire exemption to sheltering from tax what goes to the kids.

Alimony and Palimony

If you are receiving alimony from an ex-spouse, it will almost certainly end if you remarry and might even be cut off if you shack up – depending on the state where you divorced and your legal agreement with your ex. If you are in the midst of a divorce and have met someone new, bargain to receive more assets instead of alimony checks, says Sheila Riesel, a matrimonial lawyer in New York City.

As for palimony, it is not just for the rich and famous. If you live with someone and pay most of the bills, there is a danger, particularly in California, that if you split up, your ex-partner could win support payments, says Wendy Goffe, an estate lawyer in Seattle. So sign a cohabitation agreement, just as you would sign a prenuptial agreement, making clear whether palimony will be paid, and if so, how much.

Social Security

At retirement age a widow (or widower) can claim her late husband’s full Social Security retirement benefit if it is higher than the benefit she herself earned and she did not remarry before the age of 60. A divorced woman can also claim Social Security based on an ex-husband’s earnings, instead of her own, so long as they were married at least 10 years and she did not remarry before 60. If her ex-husband is still alive, she gets a “spousal benefit” equal to 50% of his benefit, which is often less than what she would receive based on her own earnings.

If, however, she did not remarry before 60 and her ex dies before she reaches her “full retirement age” (66 for those born from 1943 through 1954), she can receive his full retirement benefit, even if he had remarried and his new wife is claiming that benefit, too. If her ex-husband earned a high salary, that is probably more than the benefit she would get based on her own earnings or by claiming a 50% spousal benefit connected to a new husband.

Nursing Home Costs

Only 9% of current 62-year-olds are expected to end up in a nursing home for 5 years or more and 24% for one year or more. But with nursing home care costing $100,000 a year in many areas, it is something to think about. Most long-term nursing home residents end up on Medicaid, the state-federal program for the poor. If you marry, your income and assets must be used to pay for your new spouse’s care before he or she can tap Medicaid. The well spouse can keep a house but a maximum of only $101,640 in other assets and $30,492 a year in income. “You cannot sign away this responsibility in a prenup,” warns Bernard A. Krooks, an elder lawyer in New York City who has seen couples live together, rather than marry, because of the fear of nursing home costs.

Suppose you marry and then see signs – say early onset Alzheimer’s – that your new spouse may need years of care. Can you give your assets to your kids? Last year Congress tightened up the rules so that any gifts made during the five years before your spouse applies for Medicaid will delay his eligibility. If your spouse would otherwise be eligible now, but you have given the kids $200,000 in gifts recently, he will not get coverage for another two years or more, raising the question of how you will pay the bills in the interim. What about giving away assets before you get married? Krooks says states might challenge such transfers, but states have pursued live-ins for support without success.

Income Taxes

If your incomes are very different, you may well reduce your combined tax bill by marrying. But upper-income folks with similar earnings still pay a marriage penalty. For example, the 33% marginal rate kicks in at $160,850 of taxable income for singles and at $195,850 for couples. And better-off folks are denied lots of tax breaks.

Carol Kohfeld, 67, lives with a fellow retired college professor in Missouri. She has been using a nifty provision that allows a tax filer to withdraw money from an IRA, declare it as taxable income and then roll it into a Roth IRA, where it can grow tax free, potentially for decades. She hopes to leave the Roth to her kids from her earlier marriage. But the rollover maneuver is allowed only if a taxpayer has $100,000 or less in modified adjusted gross income (before the withdrawal). The same $100,000 applies to couples and singles. “If we were married, we’d be over the income threshold,” Kohfeld notes.

Even moderate-income retirees have to watch out for marriage gotchas. Up to 85% of Social Security benefits become taxable when “provisional income” (= one-half of Social Security, plus other adjusted gross income and tax-exempt bond interest) exceeds $34,000 for a single or $44,000 for a couple.

Real Estate

Married couples, provided they are both U.S. citizens, can freely transfer property to each other without worrying about gift taxes. That means you can easily make your new spouse a co-owner of your home. Sharing assets with an unmarried partner is trickier. You can give only $12,000 worth of gifts to another person a year without eating into your $2 million lifetime estate tax exemption. If you are adding your unmarried partner to a deed, you might have to pay a transfer tax which is waived for spouses.

One solution is to keep property and finances separate. If you are buying a house together and want to make sure your partner can keep it after your death, own it as joint tenants with right of survivorship. When one partner dies, the other gets sole ownership (but may owe estate tax). Another approach is to treat it as you would a business transaction. Two Seattle partners bought a fixer-upper house for $1.6 million. A lawyer recommended they go into it as business partners, with the percentage ownership based on each partner’s pro rata contribution and with a buy-sell agreement that covers a split-up.

Protection for the Unmarried

Married couples do enjoy a lot of rights and benefits unmarried folks do not. But as gay couples campaign to get some of these rights, unmarried heterosexual couples are gaining a new option, too – domestic partner registries. A registered couple can make health care decisions for each other and can inherit each other’s property if there is no will. These partnerships should not be entered into lightly, warns Jamie Pedersen, a Washington state rep who pushed the registry and signed up for it with his partner the first day it was open in July. Domestic registry rights are in flux, with fans of fuzzy marriage pushing legislators to add new rights. So if you sign up for one, keep tabs on what it means.

At the other extreme, laws making it a crime to live together as an unmarried couple are still on the books in six states. As a practical matter, you do not have to worry about criminal charges. But there are still situations where officials – or your ex-spouse in a custody battle – might use the law against you. In 2005 a Michigan court of appeals, citing the state’s anticohabitation statute, barred a man’s live-in girlfriend from their joint home when his kids from his first marriage visited. After the ACLU appealed the decision to the Michigan Supreme Court, the kids’ mom, who had fought for the live-in’s banishment, relented.

WHERE THERE IS NO WILL OR TRUST ...

Your mother-in-law could inherit your house. Your family could get stuck paying unnecessary taxes.

Do you have a will? In a recent PNC Wealth Management survey, 30% of adults with investable assets of $500,000 or more admitted they did not have this basic document. A Harris Interactive survey of the general population, done for lawyers.com, found 55% had no will.

If you die intestate – meaning without a proper will or living trust – your assets will be divvied up according to the law in the state where you live. To see how your estate would be distributed, based on your residence, relatives and net worth, go here and look for the retirement section. There you can try the intestacy calculator created by Pennsylvania estate lawyer Kurt R. Nilson. You might be shocked.

Example: Married couples with kids typically write “I love you” wills leaving everything to each other, with the idea that the survivor will take care of the kids. And since 1991 the National Conference of Commissioners on Uniform State Laws, a group dedicated to rationalizing and harmonizing state laws, has urged states to make this the default for a married person with kids (but no children from a previous marriage) who dies intestate. “A lot of people think their spouse gets everything,” says Nilson.

Yet only 16 states have made that the law. Some states have stuck to the traditional approach of giving a 1/3 share to the spouse, with the kids dividing the rest. Other states give spouses half. Mississippi gives an equal share to the surviving spouse and each child.

If your kids are young, your spouse will have the hassle of accounting for the kids’ funds separately and the worry of what the darlings will do with the money when they come of legal age. If your kids are grown, your spouse may have to beg them for help to maintain his or her current lifestyle. Even if you leave behind no kids, your surviving spouse may not get all your assets. In some states the deceased spouse’s parents, siblings, nieces or nephews and even more distant relatives receive a cut.

Without a will even a modest estate can get hit by unnecessary tax. You can leave any amount to a spouse free of federal and state estate taxes. You can also leave $2 million to nonspouse heirs without federal estate taxes kicking in. But some states tax far smaller amounts left to nonspouse heirs. Say you die intestate in Pennsylvania with a $2 million estate, a spouse and two kids. The state collects $44,325, since each child gets $492,500 (the spouse gets $30,000 off the top and half of what is left), taxed at a 4.5% inheritance rate.

What if you die intestate with a second spouse and kids from a first marriage? Your kids could end up with a lot less than you would want. In the “I love you” states, the second spouse typically gets a minimum of $100,000 and splits the rest 50/50 with your kids. But federal law gives 401(k) and other pension plans at work to the spouse, unless he or she has waived rights to them. The spouse gets the house, too, if you own it as joint tenants. The same goes for a jointly owned brokerage account. Your IRAs? They pass separately to whomever you have named as the beneficiaries.

Most states’ intestacy laws are brutal on unmarried couples. Your live-in partner of 20 years could get nothing and be forced from your shared home. “I’ve seen people come in and say, ‘We’re not really married, but for all intents and purposes we are,’” says Rebecca Manicone, an estate lawyer in Virginia. “Well, that doesn’t cut it.”

California, the District of Columbia, Maine, New Jersey and Washington give intestacy standing equal to that of a spouse to both surviving heterosexual and homosexual partners, but only if the couple has signed up for a state partners registry. In those states that still recognize “common law marriage”, a long-standing heterosexual partner might be able to claim the spouse’s share of your estate, but it could mean a lot of lawyer’s fees.

What if you die intestate leaving no spouse (common law or otherwise) and no kids? Your parents and siblings are usually next in line to inherit. In nine states the parents of your late spouse are in line, too, albeit toward the rear. In Colorado a natural parent who gave you away for adoption can be an intestacy heir.

Do not put if off. Get a will written and sign it. “We have some clients with very well-traveled, unsigned wills,” laments Timothy Speiss, a CPA in charge of Eisner LLP’s wealth advisory group in New York.

UNRAVELING RETIREMENT

Forbes’s guide is here to help you think things through.

When did growing old become so complicated? In this special retirement guide you will find out that such seemingly routine things as remarriage after 50, claiming Social Security benefits and relying on the projections of your lifecycle funds may require the assistance of a skilled financial planner or lawyer. Even dying gets more complicated if you consider the different rules for intestacy found in each state. When it comes to retirement, living on easy street later means understanding the fine print today

Annuity-like products offer many (but not all) of the benefits at lower cost.

Ever since the 1980s, company-sponsored defined benefit pension plans, which essentially guarantee steady income during the golden years, have been going the way of the dodo bird. Defined contribution plans like IRAs or 401(k)s, by contrast, are now the retirement vehicles of choice. It is easy to see why from the perspective of an employer. Defined contribution plans transfer the risk of retirement to the workers.

As 75 million baby boomers get closer to retirement, there is a growing demand for those steady income streams they would have gotten in the old days with a company pension plan. Only now, most people have their money locked up in their own IRAs and 401(k)s, and in order to make sure they do not run out of money before they die, distributions have to be carefully planned.

For years, private insurance companies have answered this demand by enticing employees to roll over their funds into annuities, both fixed and variable, which offer a guaranteed steady stream of income until death, but also tend to charge high fees. With U.S. retirement assets now totaling $16.6 trillion, according to the Investment Company Institute, and with $2.75 trillion in 401(k) plans and $4.16 trillion in all employer-based defined contribution plans, it is no surprise that Vanguard and Fidelity have come up with a low-fee alternative to retirement annuities in an attempt to fend off insurance company competitors.

In early October, Fidelity launched 11 new Income Replacement Funds, which are essentially fund-of-funds with horizon dates in 2-year increments from 2016 to 2036. This optional monthly payment program, called Fidelity Smart Payment Program, uses quantitative analysis to determine a schedule of annual target payment rates, with a goal of not running out of money before the target date is achieved.

Boyce Greer, president of Fixed-Income and Asset Allocation, Fidelity Investments, says that these funds could have another use given that Fidelity and others will not sell a regular annuity to somebody over the age of 85. “If the portfolio survives the beneficiary, it survives intact and it is an asset that can be passed on to heirs,” he says. “There are no encumbrances that have to be dealt with.”

Fidelity promises flexibility for investors, who can add more money, turn on and off their monthly payments, exchange into a fund with shorter or longer horizon dates, take additional withdrawals or sell the fund. The expense ratio ranges from 0.54% to 0.65%

Not to be outdone, Vanguard has announced three so-called “Managed Payout Funds” – Real Growth, Moderate Growth and Capital Preservation. Like Fidelity, they will be structured as funds-of-funds, investing mostly in Vanguard domestic and international stock index funds, bonds, REITs and commodities. However Vanguard’s lineup, which will be available before year-end, will have an estimated expense ratio of 0.34%.

Unlike Fidelity’s offering, the Vanguard lineup is designed to allow you to reap income from your funds, without depleting your capital. “We have a significant number of individuals who will be moving into retirement with rollovers from 401(k),” says Ellen Rinaldi, principal, investment counseling and research at Vanguard said. “These funds will act like endowment accounts, issuing monthly distributions while trying to preserve capital.”

Daniel Wiener, editor of The Independent Adviser for Vanguard Investors, points out that Vanguard’goals for two of the funds are tied to inflation, while Managed Payout Capital Preservation’s goal is to produce a 7% distribution rate. Both the Growth and Moderate Growth Fund’s goals are to exceed inflation by 5%. But the Moderate Growth fund’s goal is to distribute 5% per annum, while the Growth option distributes 3%. The idea, Wiener says, is that the Growth option will have the lowest payout but will provide the greatest opportunity for capital appreciation, while the Moderate Growth option will temper growth and produce a higher payout. The Capital Preservation option is not obviously concerned, he said, with growing capital but instead paying out lots of income.

Are these new income replacement funds a good deal relative to annuities? First, neither of these options guarantee income distributions the way most insurance-backed annuity products do. They also do not have the drawback of high fees or the risk of losing your capital should you die early.

Wiener argues that the expenses of 0.34% on the new Managed Payout funds are bit high for a Vanguard fund of funds. By comparison, he notes, STAR Lifestrategy funds and Target Retirement funds run expenses well below 0.30%. But James Lowell, editor of the Fidelity Investornewsletter, disagrees. Lowell argues that compared with fee-only advisers who charge about 2% of assets, 65 basis points from Fidelity is cheap.

Lowell says Fidelity’s new product solves what has been the single conundrum facing retirees: Where do they go for a reasonable price and assure themselves a portfolio that ensures income for the next 30 years? Another Fidelity watcher, Jack Bowers, editor of the newsletter Fidelity Monitor, is similarly bullish on the income replacement funds but cautions about the tax implications. “Each time you take a piece off of principal, that is a taxable transaction,” Bowers said. “It’s just 12 more transactions than you would have reported.”

Of course Vanguard and Fidelity will face stiff competition in this market. Already, AllianceBernstein and others are planning similar income distribution products. Moreover, insurance companies are set to unleash an onslaught of flexible annuity products, such as Lincoln Financial’s i4Life plan, which is a variable annuity that hedges against inflation, puts a floor under income payments and provides a death benefit if your die before 85.

The battle for boomer rollover business is on. Stay tuned.

Is a Roth 401(k) right for you?

A growing number of workers have a choice between contributing pretax dollars to a traditional 401(k) or funding a Roth 401(k). You put after-tax dollars in the Roth, meaning you get no deduction now as you do with a traditional 401(k). But when you retire, withdrawals from a Roth do not count as taxable income.

A Roth is a good deal for young workers whose tax rates are likely to rise. If your rate will be lower in retirement than what you pay today, it usually makes more sense to save in a pretax 401(k). Barry Milberg’s Erisa Expertise online calculator lets you plug in your own age and current tax rate to see how future tax rates could affect your results. A basic version of this calculator is available here.

Milberg’s calculator also demonstrates an advantage of the Roth for the biggest savers. Even if your tax rate stays the same, or decreases by as much as 10%, depending on your age, a Roth is superior if you want to save more for retirement than the $15,500/$20,500 traditional 401(k) contribution limit. Returns from a regular financial account will be nicked by taxes. By using the Roth, you are cramming a greater share of your total savings into an account where your money grows tax sheltered.

There is yet another advantage to a Roth for the well-heeled saver. You must start taking minimum withdrawals from a pretax 401(k) or a Roth 401(k) once you retire or reach 70½ (whichever is later). But if you do not need the money in a Roth 401(k) during retirement, you can roll it over to a Roth IRA and you (or your surviving spouse after you die) do not have to withdraw anything from it. You can let the Roth IRA sit untouched, growing tax free, and then leave it to your heirs, who are allowed to stretch out withdrawals (if they want to) over their own lifetimes, enjoying decades of extra tax-free growth.

GROWTH IN CAYMAN INCORPORATIONS PROMPTS REGISTRY STAFF RECRUITMENT DRIVE

The Cayman Islands General Registry has announced the recruitment of more staff to meet a growing demand for company incorporations. The Registry has reported that active companies registered in the Cayman Islands are up 10% in 2007 (87,230 companies), compared with the year before (79,227 companies).

In addition, there was 16% growth in the registration of new companies in the Cayman Islands. A total of 13,103 new companies were registered in the 2006/7 financial year, as compared with 11,306 new companies for the previous year.

To meet the new demand, the Registry has recruited six new staff in key positions. These include a customer liaison officer, a financial administrator, a personal assistant to the Registrar General, an assistant registrar, and two customer services officers.

U.S. GOVERNMENT ACCUSES 6 MEN OF $55 MILLION OFFSHORE FRAUD

Federal prosecutors charged six men, including a New York corporate lawyer, three former executives and two Israeli investors, with making $55 million in fraudulent profits via private stock sales. In Federal District Court in Brooklyn, prosecutors said that Edward and Steven Newman, Martin E. Weisberg, Andrew Brown, Zev Saltsman and Menachem Eitan ran a 4-year scheme that revolved around Xybernaut and Ramp, two companies that later declared bankruptcy. The S.E.C. filed a civil lawsuit against them as well.

At the crux of the case is a security known as a private investment in public equity, or PIPE, in which a company sells shares to an accredited investor, usually at a discount. Because of the tendency of these kind of investments to depress a stock – they dilute existing shareholder stakes – they can prove lucrative to those with advance knowledge of them.

According to the indictment, Mr. Saltsman and Mr. Eitan, two investors based in Israel, arranged to buy hundreds of thousands of shares in Xybernaut, a maker of portable computer hardware, and Ramp, a producer of software for health care providers, from 2001 to 2004.

The two men used 37 offshore shell companies to buy the shares at a sometimes considerable discount. Prosecutors said they had arranged the sales with the cooperation of Edward and Steven Newman, brothers who worked as the chief executive and president, respectively, of Xybernaut until 2005; Mr. Weisberg, a New York partner at Baker & McKenzie and a former Xybernaut director; and Andrew Brown, the former president of Ramp.

Mr. Saltsman and Mr. Eitan sold public shares of both companies short, and then repaid the shares using their discounted stock. Altogether, prosecutors say, the two men made $16 million in profit from their Ramp sales and $39 million from their Xybernaut transactions. To hide the transactions, which gave Mr. Saltsman and Mr. Eitan up to a 37% stake in Ramp and an 18% stake in Xybernaut, both companies illegally failed to disclose the PIPEs in regulatory filings.

Mr. Saltsman and Mr. Eitan are said to have paid more than $4 million in kickbacks to the other co-defendants. Among those payments were $1 million to Steven Newman through Mr. Saltsman’s Swiss bank account and $50,000 in cash to Mr. Brown, delivered in a paper bag, prosecutors said.

Mr. Brown was arraigned in Federal District Court in Brooklyn and posted a $1.5 million bond. Steven Newman was arraigned in federal district court in Virginia and posted a $1 million bond. Mr. Saltsman was arrested in London, and prosecutors are seeking his extradition. Arrest warrants were issued for Edward Newman and Mr. Weisberg. Prosecutors intend to seek the extradition of Mr. Eitan from Israel. He is not in custody.

Elkan Abramowitz, a lawyer for Mr. Weisberg, said, “My belief is that this indictment mischaracterizes Mr. Weisberg’s conduct in this matter. He acted at all times as an attorney and the payments described in the indictment will ultimately be shown to have been all legitimate.” A spokeswoman for Baker & McKenzie, Mr. Weisberg’s law firm, said it believed that the events began before he started at the firm, and that he was on leave until the matter was resolved.

LLOYDS TSB TO CONTEST U.S. MONEY LAUNDERING CHARGE

There was nothing obviously untoward about the letter the Geneva branch of Lloyds TSB sent an auditor in March 2001 that confirmed it was holding nearly $10 million in the account of a software company called AremisSoft. But according to a civil money laundering complaint brought against the bank by U.S. prosecutors, the confirmation letter, which they say was “simply false,” was one of dozens of transactions by Lloyds that helped a fugitive named Lycourgos Kyprianou, AremisSoft’s founder, steal hundreds of millions of dollars from the U.S.-listed company’s shareholders.

At the time the letter was sent, AremisSoft did not hold an account at Lloyds. Instead, $9.98 million was being held in an account that was controlled by Mr. Kyprianou under the alias “Lady Moura”. According to prosecutors, the false letter helped AremisSoft file misleading information in financial statements that “delayed for months” the discovery of a fraud at the company. They also allege that the bank conducted at least 50. transactions with Mr Kyprianou, even after he was indicted by a federal grand jury in 2002 for securities fraud and money laundering.

Among the allegations are claims that Lloyds permitted Mr. Kyprianou, who is at large in Cyprus, to use sham account names to shield his identity. In one case, accounts under the name “CEI” and “UG Business” were used as vehicles to maintain his yacht. The bank also allegedly provided Michael Miragliotta, Mr. Kyprianou’s personal assistant, with a list of account names from which he could conceal the identity of a separate account, called “Velvet Underground”.

The U.S. attorney’s office is seeking fines of up to $130 million in connection with the case and has brought similar charges against Bank of Cyprus. Last year, a New York judge dismissed a suit against Lloyds by U.S.-based trustees of AremisSoft after the bank successfully argued that the alleged wrongdoing occurred in Switzerland and that a Swiss court was a more adequate forum in which to hear the complaint.

Lloyds is likely to present a similar argument in its defence against claims by the U.S. attorney’s office, which asserted in its filing that New York was the proper venue because the alleged money laundering occurred in the state.

CALIFORNIA ORDERED TO PAY INTEREST ON SEIZED “ABANDONED” ASSETS LATER RETURNED

“After all, this was never the state’s money.”

California taxpayers are on the hook for as much as $500 million in interest that a judge says the state owes to thousands of property owners whose assets were taken into trust under a troubled state program that manages abandoned property, officials acknowledged. A federal judge in San Jose ordered state officials last week to begin paying interest to property owners whose assets were returned after being held in the state’s unclaimed property program. The ruling overturned a 2003 law that had halted interest payments. The attorney who won the case against the state estimated the cost of back interest to be as much as $1 billion.

The ruling is the second major blow to the state this year over how it has handled more than $5 billion in the unclaimed property account. In May, a federal appeals court in San Francisco found that the state routinely seized and liquidated unclaimed assets without properly notifying the owners before taking action. The court barred the state from accepting unclaimed assets until a new notification system is put in place.

“I’m grateful for what the judge had to say,” said attorney William Palmer, who has filed several lawsuits over the management of the unclaimed property program. “After all, this was never the state’s money.” In the case before Judge Richard Seeborg, Palmer’s client Agnes Suever, held onto a $13,000 cashier’s check for more than 10 years before trying to cash it in 2001 – and found that the money backing the check had long ago been transferred to the state.

Although the state returned the principal to Suever a year later, she argued she was still owed interest because the state had use of the funds for two years. Seeborg ruled that the state, after taking possession of the property and using it for its purposes, should pay Suever interest on the funds. “It is as if California claimed to be holding a tree in custody for its owner but insisted on pruning back and keeping all the branches that grew in the interim,” Seeborg wrote in his ruling.

Each year the state takes possession of hundreds of millions of dollars of lost or forgotten assets – from bank accounts and utility deposits to insurance payouts and stock dividends. Although the state is required to return the cash value of holdings when the rightful owners step forward to claim them, most of the time no one makes a claim and the state is allowed to use the money for programs such as schools, public health and prisons. Last year, the unclaimed property program generated almost $300 million to California’s general fund.

The state paid about $12 million a year in interest on seized property before the law was changed four years ago to halt such payments, records show. But because the state also eliminated interest payments retroactively, Palmer said, the liability is much more than the $48 million in interest covering four years. For most of the last three decades, the state paid interest of 5%, compounded annually. But the rates changed several times in recent years and it is not clear what the judge will decide the state will owe.

After the interest issue is settled, the state faces claims that noncash property was illegally taken without notice to its owners and transferred into the unclaimed property account. Several cases involve stocks and bonds whose value escalated between the time the state took possession of the asset and when the owner realized the property had been transferred to the state. More problematic, however, are personal items such as jewelry, personal papers and keepsakes that were destroyed or sold for cash by the state and whose value cannot easily be assigned.

State officials have made no estimate of how much more they could have to pay if those claims are upheld.

COURT RULING ALLOWS HM REVENUE & CUSTOMS TO BE SUED FOR NEGLIGENCE

HMRC has common law duty of care towards taxpayers when administering their tax affairs.

The Court of Appeal in London has backed a taxpayer in his attempt to extract compensation from HMRC for administrative errors and delays that he claims nearly sunk his business. The three appeal court judges ruled unanimously on October 25 that there was no reason in common law why HMRC should not have a duty of care towards taxpayers when administering their tax affairs, although they disagreed with the appellant, builder Neil Martin, that the department has a statutory duty of care towards taxpayers.

Martin took HMRC to court after a series of blunders by employees in the department that led to a three month delay in the issuance of a subcontractors certificate when his business was expanding in 1998. Without this certificate, Martin could not be paid by the main contractors who employed him, and he claimed that as a result of this, he suffered a loss of £500,000 pounds, and faced a tax bill of £250,000. The mistake that caused the delay almost ruined his business, Martin argued.

The ruling partially overturned a decision by the High Court, and could open the way for taxpayers who have suffered losses as a result of administrative errors by HMRC to sue the department for damages. Tax advisors welcome to the verdict has been cautious because the new precedent could be difficult to apply to other cases of negligence, since the facts in the Martin case are so unique. Also, HMRC still has recourse to seek leave to appeal the latest ruling in the House of Lords.

Nevertheless, the appeal court decision was welcomed by Professional Contractors Group, which campaigns for fairer treatment of freelancers and contractors by HMRC. “This is a complex judgment and, like Neil, we are studying it closely to work out its exact implications. But in the meantime we can say that it seems to be, at the very least, a step in the right direction,” PCG’s managing director John Brazier commented. “PCG still believes that a duty of care should be placed on HMRC so that its aggressive and often inept investigations of innocent taxpayers can no longer cause them material harm. We ... call on the Government to finish the job by establishing a full duty of care if necessary.”

OUT OF CONTROL

Legal rules have changed, allowing federal agents, prosecutors to bypass basic rights.

Loren Pogue has served 8 years of a 22-year federal prison sentence on drug conspiracy and money laundering charges.

Pogue, a Missouri native, never bought drugs, never sold them, never held them, never used them, never smuggled them, never even saw them. But because federal prosecutors allowed a paid government informant to lie about Pogue’s involvement in the sale of a parcel of land to supposed drug smugglers, he was convicted. Under tough federal sentencing guidelines, a judge had no choice but to give the Air Force veteran what might effectively be a death sentence.

Pogue – father of 27 children, 15 of them adopted – is 65. He does not expect to leave prison alive, and he is baffled that the government he served for more than 30 years worked so hard to betray him.

In another case, federal agents interrogated businessman Dale Brown for four hours at a Houston, Texas, warehouse. When he tried to leave, they stopped him. When he asked for a lawyer, they refused to get him one.

After Brown finally was charged in a government sting called Operation Lightning Strike, federal prosecutors denied that the warehouse interrogation had even happened. They said the dozen others who reported the same coercive tactics in the sting were making it up, too. Federal sting operations are supposed to snare criminals, but in Operation Lightning Strike, federal agents spent millions of dollars entrapping innocent people who worked on the periphery of the U.S. space program. The evidence against them was contrived. The guilty pleas were coerced. Those who fought the charges won.

Brown said all it cost him was his business, his savings, his family and his health.

In Florida, prisoners call the scam “jumping on the bus.” Inmates in federal prisons barter or buy information that only an insider to a crime could know – often from informants with access to confidential federal crime files. The prisoners memorize it and get others to do the same. Then, to win sentence reductions, they testify about crimes that might have been committed while they were in prison, by people they have never met, in places they have never been. The scam succeeds only because of the tacit approval of federal law enforcement officers.

In this nation’s war on crime, something has gone terribly wrong. A 2-year investigation by the Pittsburgh Post-Gazette found that powerful new federal laws designed to snare terrorists, drug smugglers and pornographers are being aimed at business owners, engineers and petty criminals. Whether suspects are guilty has come to matter less than making sure they are indicted or convicted or, more likely, coerced into pleading guilty.

Promises of lenient sentences and huge government checks encourage criminals to lie on the witness stand. Prosecutors routinely withhold evidence that might help prove a defendant innocent. Some federal agents work so closely with their undercover informants that they become lawbreakers themselves.

Those who practice this misconduct are almost never penalized or disciplined. “It’s a result-oriented process today, fairness be damned,” said Robert Merkle, whom President Ronald Reagan appointed U.S. Attorney for the Middle District of Florida, serving from 1982 to 1988. “The philosophy of the past 10 to 15 years [is] that whatever works is what’s right.”

The Justice Department did not respond to questions the newspaper posed in writing about concerns raised in this series. Nor would it return phone calls requesting comment.

WOLVES AND SHEEP

In his new book A Nation of Sheep, Fox News Judicial Analyst Judge Andrew Napolitano argues that, in the political arena, there are two types of people – wolves and sheep. Wolves love liberty and understand those who would trade liberty for security deserve – and will receive – neither. Sheep, by contrast, trust government to take care of them and are happily willing to give up liberty when demagogic politicians tell them it is necessary for “national security”.

Fortunately for America, our Founding Fathers were wolves who seceded from a tyrannical centralized government and created a new one of limited power, governed by a Constitution that sets explicit limits on the sphere of government. The Founders counted on the American people, who were wolves at that time, to vigilantly enforce the Constitution. But from its very beginnings, the federal government began trampling the Constitution and, today, the situation has reached a crisis point. However, most Americans are no longer wolves, but sheep, perfectly willing to submit to a centralized government that is even more obnoxious and intolerable than the one they revolted against.

Judge Napolitano dedicates a significant portion of his book to detailing the Bush Administration’s assault on the Fourth Amendment, which protects Americans from unlawful searches and seizures of their homes, person, and property. He perceptively notes that one of the main justifications for the American Revolution was the British policy of allowing soldiers to conduct searches by simply writing their own warrants. The Framers specifically outlawed this practice when they adopted the Fourth Amendment, which bans searches and seizures unless a judge has signed a search warrant.

As Napolitano noted in his speech “Civil Liberties in Wartime” at the Ludwig von Mises Institute’s 25th Anniversary Celebration, numerous presidents have circumvented and ignored the Fourth Amendment. The Bush Administration, however, has rendered it essentially meaningless.

Napolitano describes numerous instances of the Bush Administration’s disrespect for the Constitution in general and the Fourth Amendment in particular. For example, after 9/11 (the Administration’s favorite excuse for its assaults on liberty) Bush secretly authorized a domestic spying program that allowed NSA agents to intercept the telephone calls and emails of American citizens without an authorized search warrant. Even former Attorney General John Ashcroft believed this program violated the Constitution. Moreover, the PATRIOT Act allows FBI agents – like British soldiers in the era of George III – to write their own search warrants. In true Orwellian fashion, these self-written warrants are called “National Security Letters”.

Sheepish Americans may argue that the domestic spying program and others like it are necessary and, in any event, do not affect them because they are not “terrorists”. Napolitano makes several points in response to this. First, the Administration has adopted a loose definition of “terrorist” that could conceivably cover just about anyone. Thus, when (and if) the Government decides the threat of “Islamofascism” has rescinded, a president could use the statutes against virtually anyone with whom he disagrees simply by deeming them a “terrorist”, “enemy combatant”, or one of the other vague terms used in the statutes. Second, the federal government maintains records concerning the cell phone usage, emails, and other information, on hundreds of thousands, probably millions, of Americans, which obviously includes those who are innocent of any connection to terrorism. Thus, such policies are already being directed against the innocent.

Third, millions of innocent Americans are subjected to unconstitutional searches and seizures of their person and property every single day. This happens, of course, at the airports, where TSA thugs force them to take off their shoes, belts, and all metallic objects before walking through a metal detector. As Napolitano points out, these bozos are adept at harassing innocent Americans and spotting harmless objects such as water bottles, deodorant cans, and toothpaste tubes. However, when it comes to spotting things that might actually be dangerous, such as, say, bombs and guns, they have proven remarkably incompetent. The TSA’s own studies have found that TSA screeners missed up to 75% of fake bombs.

While Napolitano argues that crackdowns on liberty such as those discussed above are both unconstitutional and ineffective, he courageously argues that, even if they worked, they would still be unjustified. He correctly notes that the Framers took this position as well. They would not have tolerated the indignities we endure every day for even one minute. “Less freedom,” Napolitano says, “equals slavery” and would leave us with a nation not worth defending.

A Nation of Sheep’s attack on the sad state of government in America is not limited to the Bush Administration’s trampling of the Fourth Amendment and the Constitution. Napolitano also discusses the Administration’s assault on the Geneva Conventions, the right of habeas corpus, the freedom of the press, and other fundamental liberties. I recommend this book to anyone concerned about the state of constitutional government in America today.

Napolitano offers several suggestions for improving things, such as repealing the 16th Amendment, which gives the federal government the power to tax our incomes. This would leave the government with less money to wage war on other nations and our liberties. Napolitano’s bold overarching suggestion, however, is that Americans emulate the Founding Fathers and begin acting like wolves, not sheep. This can best be accomplished by electing the only wolf running for president, Congressman Ron Paul. Napolitano accurately describes Paul as the one candidate who does not “love power for its own sake, believe that Big Government should redistribute wealth, regard the Constitution as a quaint obstacle, and would enforce or disregard laws as they saw fit ... without regard to our history, our values, or our natural rights.”

LEOPARD WILL OPEN THE MAC OS X FLOODGATES (AND EMBARRASS MICROSOFT)

I think Windows Vista is a blunder. And with its annoying UAC system and horrifically slow operation, it will not take long before the majority of home users agree with me. If the recent figures showing Mac OS X is already gaining market share is any indication of the future, look for Leopard to outsell Vista by a staggering margin.

Simply put, Mac OS X Leopard is one of the most significant operating system achievements we have witnessed in years. Not only does it add functionality that Microsoft could only have dreamed of, it does so in a snappy environment that does not annoy you with pop-ups asking for permission or all of those security threats we have come to know (and hate) in Windows.

But my belief that Vista will soon bow to Leopard goes far beyond the OS itself. The major reason Vista will succumb to Mac OS X has little to do with Apple, but quite a bit to do with Microsoft’s current focus. Regardless of where you stand on the issue, one thing is abundantly clear. Microsoft fears Google and is doing everything it can to become the Google slayer instead of competing in its core business – software.

The company is on a slippery slope, and I do not think it can get off too easily ...