Wealth International, Limited (trustprofessionals.com) : Where There’s W.I.L., There’s A Way

W.I.L. Offshore News Digest for Week of March 3, 2008

This Week’s Entries : This week’s W.I.L. Finance Digest is here.

U.S. AND OTHERS FOLLOW UK, GERMANY INVESTIGATING TAX EVASION IN LIECHTENSTEIN

The thief who stole bank records from Liechtenstein bank LGT Group and then sold the list to various interested tax authorities has unleashed a tax revenue windfall for several countries and a publicity windfall for anti-offshore anti-privacy voices all over. This New York Times article brings those who have been heretofore blissfully unaware of the incident up to date.

Following the lead of Germany and Britain, at least eight other countries, including the U.S., said ... that they were investigating whether some of their citizens were using banks in Liechtenstein to evade taxes. The countries involved in the investigations also threw their combined weight behind efforts to change banking secrecy rules in Liechtenstein, a principality nestled between Austria and Switzerland that has a thriving business in managing outsiders' money.

German prosecutors, aided by stolen bank records, began their crackdown nearly two weeks ago, when the police searched the home of a prominent German executive. Since then, 91 of the 150 people being investigated so far have confessed to evading taxes, the prosecutors said, and 72 people have turned themselves in without a visit from the authorities.

Targets in the inquiry have already paid €27.8 million, or $41.5 million, to begin settling their cases, and German prosecutors made clear ... that they expected to collect much more before their investigation is over. ...

The investigation goes back to 2006, when German intelligence services paid nearly €5 million for confidential banking data to an informant, apparently a former employee of the LGT Group, a Liechtenstein bank.

The Germans have so far made a pretty good return, on the order to 5-to-1, on their investment in the stolen data. And the returns continue to roll in. Of course, compared to the billions of dollars/euros lost by the German state banks from speculating in U.S. subprime mortgage-based securities, the $41.5 million is a rounding error. But the amount of money is not the point. Discrediting tax havens or using publicity to pressure them into giving up their evil ways is.

Later, the British authorities paid money to the same person for data on British subjects who had sheltered money in Liechtenstein, and they are investigating about 100 people in Britain, according to an official close to the inquiry who spoke on the condition of anonymity because the case was continuing.

Australia, Canada, France, Italy, the Netherlands, New Zealand and Sweden are also looking into tax evasion by their citizens in Liechtenstein, according to statements from Britain and other countries.

The I.R.S. said ... that it was beginning enforcement action against "more than 100 U.S. taxpayers" on suspicion of evading taxes through investments in Liechtenstein. The I.R.S. was approached last year by an informant with data from the LGT Group, said Barry Shott, deputy commissioner for international affairs in the agency's large and medium-size business division. "We get information from a lot of people in a lot of different ways all the time," said Mr. Shott, who did not identify the informant. "We came into possession of the information and it seemed to be interesting."

He stressed that the U.S. did not pay for the information upfront. But he noted that under federal law, a person who gives the I.R.S. useful information can file a claim to receive a percentage of the money that is collected based on the data.

Audits in the United States have gotten under way, and the I.R.S. is already experiencing "a range of cooperation" with the taxpayers involved, Mr. Shott said. He stressed that the I.R.S. would look favorably on people who report themselves, but that the agency would go to them if necessary. "We know who they are," he said.

Other countries have long sought to pressure Liechtenstein to adopt rules of the O.E.C.D. aimed at curbing tax evasion. The organization, based in Paris, has called Liechtenstein, Monaco and Andorra "uncooperative tax havens."

Dave Hartnett, acting chairman of Revenue and Customs, the British tax agency, said in a statement, "In the light of recent developments involving Liechtenstein bank accounts, there needs to be a significant move toward full implementation of O.E.C.D. standards on transparency and effective exchange of information in tax matters."

Peer Steinbruck, the German finance minister, said last weekend that Germany would also push for change in other countries, including Switzerland, Luxembourg and Austria. Those countries have agreed to limited efforts directed by the European Union to provide account information or tax revenue, and Germany is pressing for further action. Germany plans to raise the issue at a meeting of finance ministers from the 27-nation E.U. next week, and with Prince Albert II of Monaco, who is visiting Berlin this week.

"Liechtenstein is the tip of the iceberg," said Grace Perez-Navarro, deputy director of the Center for Tax Policy and Administration at the O.E.C.D. "They are interested in seeing change in other places, too."

The high tax countries are shocked -- shocked! -- to discover that there is tax evasion going on, and via the use of tax havens no less. The subtext of many of the announcements, that somehow the discovery is some big revelation is, of course, pure bunk.

Fears that Germany and other countries might mount a sustained effort to curb investments in Switzerland have prompted sharp reactions in that country, a well-known destination for money from around the world.

Michel Y. Dérobert, head of the Swiss Private Bankers Association, said that disclosures that Germany's spy agency was involved in obtaining data on its citizens from abroad sat uneasily with his members. "I think this type of episode will discourage German-speaking banks from hiring Germans," Mr. Derobert told the newspaper Le Matin in Switzerland. "That would be logical, although until now we have had good relations with Germany."

The Munich newspaper Suddeutsche Zeitung reported ... that German prosecutors had trained their sights on Vontobel Treuhand, the Liechtenstein subsidiary of the prominent Swiss bank Vontobel. ... LGT, which is owned by the royal family of Liechtenstein, said Sunday that the data obtained by the German authorities covered 1,400 clients, 600 of whom are German citizens. The information is thought to have been taken by a former employee, Heinrich Kieber, who offered it to at least two European countries, Germany and Britain.

As reported in this news item, Liechtenstein citizen Kieber's current whereabouts are unknown.

The data was from LGT Treuhand, a subsidiary of the bank that specializes in setting up foundations, where money can be sheltered and then invested without reporting capital gains to governments outside Liechtenstein. ...

After Germany and Britain obtained their data, authorities began sharing it, according to another official close to the investigation, since a network of tax treaties foresees just such a step. Torsten Albig, a spokesman for the German Finance Ministry, said Monday that Germany would share the information, and the Dutch finance minister, Wouter Bos, said he had already requested it from the Germans. Éric Woerth, the French budget minister, said France was scouring a list of hundreds of names.

Unaddressed in the coverage of the stolen Liechtenstein data incident and its aftermath are the technical details of the stratagems employed by the ratted-out tax evaders. Evidently they were relying on secrecy to make their strategies work. This is never a good idea, in our opinion. As the case at hand clearly reveals, there is no such thing as ironclad secrecy even under the best of intentions. Privacy is definitely desirable, but it is priority for its own sake, rather than a tool to make what is otherwise a dodgy approach work.

Under U.S. tax law, any offshore trust with a U.S. citizen as one of the named parties effectively has no tax or privacy advantages. A foundation with a trust-like arrangement would be treated as an offshore trust tax-wise. A U.S. taxpayor who set up a Liechtenstein foundation and did not report its income or existence would be courting trouble down the line, unless it was set up explicitly to end around those requirements.

NO CHANGES FORESEEN IN AUSTRIAN BANK-SECRECY SYSTEM

Austria says it sees no need to change the Austrian bank-secrecy system in light of the revelation of tax evasion through use of Liechtenstein foundations. Bank secrecy is a "core value" in Austria and granting untrammeled foreign government access to client information would be "an unacceptable assault on Austrian sovereignty" -- not to mention an unacceptable assault on the Austrian financial industry.

Both SPO Chancellor Alfred Gusenbauer and OVP Vice Chancellor and Finance Minister Wilhelm Molterer have said that there is no need to change the Austrian bank-secrecy system in the wake of the revelation of widespread tax-evasion in Germany through use of personal foundations in Liechtenstein.

Gusenbauer and Molterer claimed that the Austrian system conformed to relevant EU regulations. Molterer added that Austrian law on foundations and taxes differed significantly from Liechtenstein law in those areas and that bank secrecy would not apply in criminal proceedings.

The FPO and the BZO are also opposed to changes in the Austrian bank-secrecy system. FPO finance spokesman Lutz Weinzinger declared that "bank secrecy is a core value in Austria and part of the country's business culture" but hastened to add that he was "no friend" of tax-evasion.

BZO national councillor Veit Schalle added that foreign access to information about Austrian accounts would be an unacceptable assault on Austrian sovereignty and would massively damage the country as a financial location. The Greens are the only party that supports changes. They said that they would consider a parliamentary initiative in that regard if the German scandal spilled over into Austria.

Austrian banks are also opposed to any changes in the Austrian system. Austria is on the OECD's black list for its failure to implement an EU-wide requirement for registration of capital gains. The OECD, the German finance ministry and the NGO ATTAC (Association for the Taxation of Financial Transactions for the Aid of Citizens) have all called for better clarification of tax-evasion in Austria.

All the tax havens being pressured by the OECD et al are being asked/told to sustain a hit to their financial sector businesses in exchange for augmenting the tax collectors' coffers. Not exactly a mutually beneficial exchange, but the OECD does have its ways of making its pressure felt.

WIKILEAKS VS. SWISS BANK RULING LEAVES BIG QUESTIONS UNANSWERED

Close on the heals of a disgruntled ex-employee of a Liechtenstein bank stealing and then selling confidential information on the bank's clients (see post above), comes a case similar in several essentials. This time the news item concerns information stolen (probably) from a Swiss bank's Cayman Islands subsidiary. Instead of attempting to sell the data, it has been published wholesale on a Web site called Wikileaks.org. The motivation is not altogether clear, but at first blush the idea appears to be to "expose" those using tax havens, who are deemed suspicious by dint of that fact.

A lot of interesting legal issues have arisen out of the Swiss bank's attempt to use the legal process to prevent the details from leaking. Given Wikileaks's indeterminate legal status, who even has jurisdiction? Would the "public interest" be better served by squelching the list publication or letting it continue?

Free speech advocates immediately hailed as a victory the decision on Friday of a federal judge to withdraw a prior order turning off the Web address of the site Wikileaks.org. But the reasoning of U.S. District Judge Jeffrey S. White also means that the court may dodge having to grapple with some of the meaty First Amendment questions posed by the case and touched on repeatedly at a lengthy hearing in San Francisco.

The lawsuit, brought by a Swiss bank and its Cayman Islands subsidiary against Wikileaks and Dynadot, the San Mateo, California, company that is the registrar for the domain name Wikileaks.org, became a cause célèbre for organizations like the American Civil Liberties Union, Public Citizen and the Electronic Frontier Foundation. Such organizations responded with a barrage of court filings in the wake of an order signed by Judge White last month that required Dynadot to disable the Wikileaks.org address, making it more difficult -- but far from impossible -- for Internet users to get to materials published by Wikileaks.

Even if the Wikileaks.org domain is disabled, those who know the direct IP Address (IPA) of the server can find the site. Undoubtedly those involved would take pains to make this knowledge widely available if this suit were successful.

The bank, Bank Julius Baer & Co., claimed that Wikileaks had displayed confidential, personally identifiable account information of its customers, as a result of possibly criminal actions by a former employee. Lawyers for the bank ... repeatedly told Judge White that Julius Baer clients had a right to keep their account information private and that there was no compelling interest to justify their disclosure. In this way lawyers for the bank set up a conflict between freedom of speech and the right to personal privacy.

"All of this is private info that is not newsworthy," said William J. Briggs, one of the lawyers for the bank. If one of the affected customers had been Ken Lay, the late, disgraced former chief executive of Enron, then perhaps there would be news value, Mr. Briggs continued, but that was not the case here. "Here there have been absolutely no targeted individuals identified. There's just been wholesale leaking of private banking information."

Judge White questioned lawyers about the possibility of redacting names from the documents. But Joshua Koltun, a lawyer for a graduate student whom the bank said was an "officer" of Wikileaks, warned that the names could prove to be essential information. "That's how you identify who's been salting away money in accounts," Mr. Koltun said ...

Everyone will have an opinion of the morals of Wikileaks and its actions. If it confined itself to exposing government agents' double-dealings and corruption, we would not have a problem. The wholesale leaking of potentially damaging information on private citizens strikes us, however, as highly irresponsible. Power is a dangerous thing, even if the holder supposedly consorts with angels.

The judge and the lawyers also struggled mightily to define Wikileaks, which defines itself as an organization "founded by Chinese dissidents, journalists, mathematicians and startup company technologists, from the U.S., Taiwan, Europe, Australia and South Africa."

Traditional entities, like companies and individuals, have citizenship status that can determine when they are subject to a particular court's jurisdiction. But what is Wikileaks, which has not been represented by a lawyer throughout these proceedings? "Whatever this entity is, it has not filed a response," Judge White observed.

Paul Alan Levy, a lawyer for Public Citizen in Washington, argued that the bank had brought more publicity to the documents on Wikileaks than ever by filing its lawsuit and obtaining the order affecting the site's domain name. Under such circumstances, Mr. Levy asked the judge, "Should you give them any relief to help them unring the bell?" The question implicitly was whether the victims of public disclosure on the Web have any shot at redress.

After hours of discussion that suggested the judge's level of concern with reaching the correct outcome, Judge White looked unhappy that he could not think of a way to help the bank customers affected by the release of the documents. But he said that he feared the initial order suspending Wikileaks.org raised serious questions of unjustified prior restraint on free speech, and that in any event, once the documents were online, the court might well be powerless.

"Maybe that's just the reality of the world that we live in," Judge White said. "When this genie gets out of the bottle, that's it."

In the end, that is about all anyone can really say. If one's private data is at risk of exposure even in jurisdictions where such exposure is a crime, the question becomes what additional steps one should take to protect one's privacy. The highest priority is keeping your name off as many records as is possible. But ultimately there will be some record linking your name to whatever legal entities you use to interface with the financial system.

Hopefully the Liechtenstein and Swiss bank client data cases will encourage a deeper look at data security by all institutions concerned. With governments now having been revealed to be willing to pay large sums of money for stolen data which could lead to tax collections or prosecutions (see this story from last week), the security better be good.

41 COUNTRIES ARE TAX HAVENS ACCORDING TO OECD CRITERIA

The OECD has identified 41 "countries" (such as the U.S. Virgin Islands, but we quibble) as tax havens. The label covers a multitude of OECD-identified sins, but it is an interestingly comprehensive list.

Data from the Organization for Economic Cooperation and Development points to 41 countries as having tax-haven status according to four criteria. The four criteria are: (1) insignificant or non-existent tax levels, (2) absence of transparency in tax matters, (3) absence of fiscal data exchange with other countries and (4) attractiveness for straw companies with fictitious activities.

Some jurisdictions have taken steps to boost transparency in their dealings with the OECD, which seeks to coordinate economic policies among the world's leading industrialized nations Others, notably Liechtenstein, Andorra and Monaco, exchange no information with other states. However, of the total, 38 countries have made commitments to the OECD to ensure transparency and to exchange data:

So 38 of the countries are backing off, or promise to back off, on OECD tax haven criteria numbers 2-4. (Monaco has given recent signs of joining the 38 in some capacity.) Interestingly, when and if that happens then the U.S. should be included among the non-tax-haven tax havens, given its "insignificant or non-existent" tax rates on certain important investment assets, such as government debt, where attracting foreign capital is vital.

  1. Anguilla
  2. Antigua and Barbuda
  3. Dutch Antilles
  4. Aruba
  5. The Bahamas
  6. Bahrain
  7. Barbados
  8. Belize
  9. Bermuda
  10. Cyprus
  11. Dominica
  12. Gibraltar
  13. Grenada
  14. Guernsey
  15. Cayman Islands
  16. Cook Islands
  17. Isle of Man
  18. Marshall Islands
  19. Mauritius
  20. British Virgin Islands
  21. U.S. Virgin Islands
  22. Jersey
  23. Liberia
  24. Maldives
  25. Malta
  26. Montserrat
  27. Nauru
  28. Niue
  29. Panama
  30. Samoa
  31. Saint Kitts and Nevis
  32. Saint Lucia
  33. Saint Martin
  34. Saint Vincent and the Grenadines
  35. Seychelles
  36. Tonga
  37. Turks and Caicos
  38. Vanuatu

    39. The OECD has labeled three states as non-cooperative:

  39. Andorra
  40. Liechtenstein
  41. Monaco

When and if the OECD successfully achieves a substantial rolling back of privacy -- oops! We mean obtains agreement that transparency is a great idea in theory in practice -- our guess is that the low tax rates, i.e., "unfair tax competition", will come under the gun.

TESCO’S £1 BILLION TAX AVOIDING PLAN -- MOVE TO THE CAYMAN ISLANDS

U.K. supermarket chain company Tesco has pulled a neat trick whereby it sheltered on the order of £3 billion in capital gains from the sale of its store properties, and thereby saved as much as £1 billion in taxes on the gains.

Tesco has created an elaborate corporate structure involving offshore tax havens which enables it to avoid paying what could be up to £1 billion of tax on profits from the sale of its UK properties. The complex new structures uncovered by a 6-month Guardian investigation include a string of Cayman Island companies, each named after a different color, from aqua to violet.

These are being used by the supermarket giant as it proceeds with its announced program to sell and lease back £6 billion worth of its UK stores. The stores are being sold to external investors providing Tesco with a big one-off gain which, ordinarily, would be liable to tax, while allowing it to remain in the stores and pay rent to the new owners.

This sale-and-leaseback arrangement is not uncommon. The standard line is that the retail company is "getting out of the real estate business" and concentrating on its "core" retailing business.

The first two deals, worth £445 million and £650 million, have already used the companies set up in the Cayman Islands -- where the rate of corporation tax is zero -- allowing Tesco to avoid tax on about £500 million profit.

Large corporations are increasingly developing strategies to cut tax bills and Tesco is not alone in its tax planning. Nearly a third of the UK's 700 largest businesses paid no corporation tax in the year 2005-6. A further third paid less than £10 million each, according to figures from the National Audit Office released last year.

Alistair Darling, the chancellor, recently provoked an outcry from wealthy individuals by launching a crackdown on non-domiciled residents in Britain who pay no tax on earnings outside the country. HM Revenue & Customs said this week it was on the trail of up to 30,000 people owing more than £100 million in back taxes who have hidden their assets in secret accounts in Leichtenstein. But companies such as HSBC have argued against the UK tax system by threatening to move their headquarters overseas where rates are lower.

The Guardian's analysis of Tesco's accounts over the past five years also shows that the company has paid an effective tax rate of just over 20% on the rest of its profits, at a time when the UK corporation tax rate is 30%. Tesco defended its position, saying it had a duty to organize its affairs in a tax-efficient manner. It said profits from its interests are included in full in the company's UK tax returns. It also said it was one of the largest taxpayers in the UK.

The investigation has found:

One must presume that the "transfers" of the properties to the Caymans structures was all done in strict accordance with UK tax rules after substantial due diligence. There must be some loophole and structuring wiggle-room that enabled Tesco to avoid realizing a gain on the transfers.

Tesco's executive director, corporate and legal affairs, Lucy Neville-Rolfe, defended the offshore structures in a statement. "While every company seeks to operate as tax-efficiently as possible, to do so is our duty to shareholders and customers alike -- Tesco pays a great deal of tax. ... [W]e are in the top 10 taxpayers in the UK." She added that this was "a marked contrast to the significant number of FTSE-100 listed companies that pay little or no corporation tax at all."

The statement added that it was normal for cash tax payments to differ from accounting charges. "These differences, which account for the disparity between the 29% accounting charge and the 20% cash tax payments are mainly down to timing and arise because tax laws and financial accounting standards differ in their recognition criteria."

Quite so. Companies of course like to present an image of maximum profitability to shareholders and minimum profitability to the IRS, HMRC, and company. All perfectly within the rules. To make a big deal about the apparently low tax rate paid on the profits reported to shareholders is gross financial ignorance -- or is banking on the readers' ignorance.

Tesco would not comment on how the ownership of its new partnership companies was structured. "We are not prepared to supply you with commercially confidential documents such as the partnership agreements and other information," Neville-Rolfe said. "Transactions such as these are by their very nature complex as they have to be structured to meet the commercial needs of Tesco, the new partner and the banks providing finance.

"We have an open relationship with Her Majesty's Revenue and Customs and meet with them regularly to discuss our tax affairs, including our property and international transactions. Full details have been provided to HMRC in the normal way."

NEW ST. VINCENT AND THE GRENADINES IBC ACT GETS ROYAL ASSENT

Details of SVG's now formally approved IBC legislation are available. The structure is about as flexible as one could want. W.I.L. offers St. Vincent IBCs -- see here.

New International Business Companies legislation has received Royal Assent in St. Vincent and the Grenadines, and is now the definitive law regarding IBCs in the jurisdiction. The SVG International Business Companies (Amendment and Consolidation) Act 2007 received Royal Assent on February 22nd. Its main provisions include: The 2007 IBC Act also makes provision for the incorporation of segregated cell companies where pre-incorporation clearance has been obtained from the International Financial Services Authority, the local regulator.

The Act, like similar legislation in other jurisdictions, provides that such companies may be approved by the regulator where they are formed to be used as a mutual fund or a captive insurance company. However the SVG Act goes further; approval may be given where the company is formed for any other purpose approved by the local regulator.

Under this last category, companies established for the purpose of owning, managing, and developing or investing in real estate (in any part of the world) will be approved for incorporation as segregated cell companies, provided certain strict criteria are met.

RON PAUL: DIRECT DESCENDANT OF THE FOUNDERS

Major media’s criminal neglect of Ron Paul’s candidacy is nearly complete.

Absent some extraordiary confluence of events, Ron Paul's candidacy for the Republican presidential nomination is dead, even if his ideas live on. Ivan Eland, frequent writer for The Independent Institute, summarizes Paul's rational approach to foreign policy -- so rational it does not stand a chance of being implemented by anyone else, or being supported by the ruling class media.

As the nation's major media outlets crown John McCain (George W. Bush on steroids) as the Republican nominee for president, their nearly criminal neglect of Ron Paul's candidacy in the 2008 presidential campaign is nearly complete. "Big media" have never deemed Paul a "major candidate," as their paltry coverage of him shows.

In fact, the media often brand the ardent groundswell of popular support for Ron Paul as an odd curiosity. The problem is that if Ron Paul is a kook -- as they imply -- then so are the nation's founders. His policy prescriptions of more limited government at home and military restraint abroad put him far closer to the spectrum of opinion at the founding than any other candidate in the 2008 race.

The media barons would never dream of implying that the founders were loony tunes. But the country's current massive government, with its intrusive activism at home and abroad, is so far removed from the founding vision that the modern-day manifestation of such values appears downright weird to today's press corps.

The media barons might not directly claim that the founders were "loony tunes," but they are fully capable of ignoring their policy prescriptions. We also frequently are told that the world is so much more complex now, in ways the founders could not have comprehended, that their views can be safely discounted. Whatever it takes ...

Most appalling is the media's emphasis on criticizing Paul's foreign policy views. The Washington Post, in an op-ed dedicated entirely to undermining Paul's candidacy, argued that Paul is an "isolationist" who would withdraw from Iraq immediately, would not defend South Korea if it were attacked by the North, and has attempted to understand why Osama bin Laden attacks the U.S.

The "isolationist" label is a stock smear used against anyone who favors nonintervention in other nations' affairs -- as if the only two alternatives are incessant meddling, and having nothing to do with the rest of the world. If you maintain friendly relations with your next door neighbors but do not routinely walk in the door uninvited and interfere in their family squabbles, is that so bad? By the logic of nattering know-it-alls who make up so much of the Washington establishment and their press concubines, such a policy makes you a misanthrope who would just as soon spend your days in a monastary after taking a vow of silence.

Yet the nation's founders were not isolationists, and neither is Paul. Like the founders, he wants to avoid unneeded and unconscionable military attacks on other countries that pervert the republic at home. In his usual frank manner, Paul bluntly admits that the U.S. has failed in Iraq. Alone among all of the Democratic and Republican candidates who ran or are still running in 2008, Paul understands the oft-neglected domestic ill effects of a quixotic and overly broad "war on terror," including the war in Iraq. He grasps that the erosion of the Constitution and civil liberties, which make the U.S. unique among nations, may be the war's most important negative consequence.

Paul is also unique among the candidates in pointing out that now, rich U.S. allies, such as South Korea, are capable of defending themselves against far poorer foes. South Korea's economy is about 30 times that of the North and no longer needs a U.S. security guarantee. With the Soviet Union long relegated to the trash bin of history, no longer must the U.S. subsidize European defense through retaining the outdated NATO alliance and stationing of U.S. forces in Europe.

Paul is a rare politician who actually acknowledges expert opinion on al Qaeda. That opinion has concluded that bin Laden attacks the U.S. because of its foreign policy toward the Middle East -- that is, the invasion and occupation of Muslim lands, and support for Israel and corrupt, autocratic Arab dictatorships. Yet contrary to empirical evidence and polls in the Arab/Islamic world, other politicians in both major parties -- to buttress their interventionist foreign policy prescriptions -- either conveniently ignore al Qaeda's motives or disingenuously attribute bin Laden's hostility to his distaste for American culture or political and economic freedom.

In sum, Paul has astutely realized that the republic's founding principles have never been more relevant to today's world. No matter what the outcome of the 2008 election, Paul's participation in the campaign and its debates has been a huge plus in highlighting the long-forgotten founders' policies of limited government and military restraint and in advocating their relevancy and renewal in today's world. That is why I was proud to accept an invitation to serve as a foreign policy advisor to Paul's campaign. Like being a Maytag repairman, however, it is a lonely job, because the already savvy Paul does not need much advice.

THE HEGELIANISM OF THE 2008 ELECTION

Llewellyn H. Rockwell, Jr., founder and president of the Ludwig von Mises Institute and editor of LewRockwell.com, cuts to the root of the political conflicts of the day. The most fundamental conflict is one of world views. Is the world a basically cooperative place, where if left to themselves people will voluntarily work towards their mutual advantage? Or is it riven by intractable group-based conflicts, where your group -- race, sex, religion, whatever -- will either dominate or be dominated? If the later, then government intervention is needed to effect/avoid the desired/feared outcome.

Marxists promote the conflict view of the world -- originally capital vs. labor, and later in other forms when the original idea was discredited. The Marxian view in turn has roots in the Hegelian view that history drives toward a synthesis of two opposing forces. The philosophies of the two principle political parties in the U.S. are both, when stripped down to their essentials, ones based on a world in conflict. (Thus the article's title.) They both pander to people's fears of what will happen if they are on the wrong side of a conflict resolution.

But relying on the state to resolve conflicts is a fool's game. The evidence alone is overwhelming on this as it is, and the reason why is easy to see. Every act of the state reduces the capacity of people to work out their problems voluntarily, thus exacerbating whatever conflicts exist. "By purporting to be the great social referee, it accumulates more power unto itself and leaves everyone else with less freedom to work out their own problems," Rockwell writes. It is the problem masquerading as the cure.

If the political prediction markets are right, we are going to end up with a presidential contest between two people who agree on the pressing need to expand the entire welfare-warfare state. They can argue about priorities, but they agree on the overall goal. With the campaign lacking serious issues, something tells me that the great American obsession over race is going to play a major role, which is gravely unfortunate since the discussion is unlikely to be enlightening.

Of course it is all politics, that is, equal parts dissembling and illusion, and designed to confer on some groups more power over other groups. But it does raise important questions: What is racism and how can we tell if it exists? I am not talking about someone who dislikes African-Americans or whites or Latinos. We might call that racism on the level of individual ethics, but there are no inevitable and widespread social consequences of a bad attitude. Defining racism, a notion highly charged with political implications, also raises the specter of the Thought Police: Did you or did you not think politically incorrect thoughts?

Let us deepen and broaden the discussion in light of what Ludwig von Mises says about racism in contrast to the liberal view of the social order. In Omnipotent Government, he shows that the modern doctrine of racism originated with the Frenchman Joseph Arthur Comte de Gobineau as a way to justify aristocratic privilege. In the hands of the Nazis, the doctrine was extended to the alleged superiority of Aryans as versus everyone else. They claimed that the races were inherently incompatible, and advocated state policies to bring about their desired outcome.

Mises first regards racism as a particular species of a general social theory that posits the existence of intractable conflicts in society, and that therefore it is impossible for society to work properly absent some fundamental structural change brought about by the state. In the old Marxist variety, this conflict was between capital and labor. That view does not have many adherents anymore since real-world events have disproved the Marxian vision for more than a century. The poor did not get poorer under capitalism. They became richer than ever before in human history.

In a similar way, the racialists must also confront the reality of the market economy. As Mises said, in a market economy, there is no legal discrimination against anyone. Freedom prevails, and "whoever dislikes the Jews may in such a world avoid patronizing Jewish shopkeepers, doctors, and lawyers." The problem is that this does not produce the results racists want. Indeed, the market always tends to bring people together in peace, neither compelling nor forbidding exchanges.

"Many decades of intensive anti-Semitic propaganda did not succeed in preventing German ‘Aryans’ from buying in shops owned by Jews, from consulting Jewish doctors and lawyers, and from reading books by Jewish authors." What the racists wanted required more. "Whoever wanted to get rid of his Jewish competitors could not rely on an alleged hatred of Jews; he was under the necessity of asking for legal discrimination against them."

The end result, then, is a policy of interventionism. This interventionism is required if a racist result is to be brought about, and the allegedly intractable conflict finally resolved. If this logic is carried to its end point, the result is mass suffering and death. The Jews were the problem in Germany, so they had to be eradicated. The Kulaks in Russia similarly had to be destroyed. Same with the anyone with Western or bourgeois attachments in Mao's China or Pol Pot's Cambodia. The Hegelian synthesis in each of these cases is achieved through mass slaughter. The supposedly persistent conflict between groups is washed away in rivers of blood.

Even as Marxists abandoned their old view of capital-labor relations, they promoted the conflict view of society -- one entirely at odds with the old liberal idea -- in other forms. This is because the Marxian view itself has deeper roots in Hegel's view that history must tend toward a synthesis of two opposing forces, culminating in some transforming moment. Socialism is one way to render the Hegelian view in material terms. But there are other ways. So long as you have the perception of a war-to-the-knife conflict, history cries out for a resolution.

Thus does the Marxian view easily mutate to take on a different caste depending on the political moment. The sexist view of the world, for example, holds that men and women have opposing interests, and that a gain by one sex always comes at the expense of the other. A forced rearrangement of social institutions, they believed, was required to fix the problem. ...

The conflict view is a part of the environmentalist agenda too. The notion that humans cannot advance without killing nature is widely held today. ... We see this further today in the area of religion. Some people are dead set on the idea that a free society is incompatible with a multiplicity of religious faiths. This view is particularly popular among Christian fundamentalists, who claim that Islam will never be satisfied until it wipes out Christianity, and that every new mosque is a mortal threat to Christendom. They cannot imagine that people can co-exist in peace, tolerance, and trade, leaving religion to personal conscience.

So too with race. Decades after Gobineau, in the 1930s, it became the intellectual fashion to believe that state eugenics was necessary to cull the population of its inferior elements, so that the superior elements could thrive. ... Why was state planning necessary? Because, it was believed, there was a genetic competition that pitted all racial groups against all, and only one group could win.

Thus did the racialist view sample Marxism, changing the posited conflict from capital and labor to the races. What they failed to understand, or understood but hated, was the capacity for voluntary institutions to harmonize racial interests. The United States showed this to be true. After the ghastly civil war came the blessed abolition of slavery, and then the end of laws requiring racial segregation. We saw how the free market can bring about cooperative trading relationships among all people. (Of course, the laws hindering freedom of association and contract in the name of antiracism retarded social cooperation.)

And the Jim Crow and other forced segregation laws of the post-U.S. War Between the States South locked a system of racial conflict in place.

What freedom has illustrated is that differences among people do not need to lead to intractable conflicts. More and more social cooperation is possible and fruitful, to the extent that people are granted the freedom to associate, trade, make contracts, and work together toward their mutual advantage.

Sadly, however, among many people in this country, there is still the impression that state-mandated institutional change, even revolution, is required to end intractable conflicts. They believe that the very essence of the social structure captures this racial conflict. Some blacks hold this view, some whites hold this view, some Latinos hold this view -- the ideology of racism does not elude any group.

It should be no surprise, then, that Mises's ideas have drawn fire from white racialists who insist that by talking about markets and freedom, we are evading the real issue, which is who will dominate. ... [B]lack activists too speak as if the only issue that really matters is gaining legal preferences for their group. In either case, the agenda is all about who has power over whom, rather than ending the ability of any group to have power over any other group.

The state is not a neutral observer. It will pass environmental legislation. It will regulate relations between races and sexes. It will put down this religion in order to raise that one up. In each case, the intervention only exacerbates conflicts, which in turn creates the impression that there really is an intractable conflict at work. For example, if the state taxes one group to give to another group, it fuels conflict and gives the impression that legislation is the route to liberation.

But who is the real winner in this game? The state and the state alone. By purporting to be the great social referee, it accumulates more power unto itself and leaves everyone else with less freedom to work out their own problems. And here is the real problem with racism or any -ism that fails to understand the capacity of the free society to work out its own problems through exchange and mutual benefit.

Thus can we see that racism is not a unique problem in society but part of a larger misconception about the basis of social cooperation. Of course, it is essential to retain the old liberal view even in the midst of all the coming conflicts, both in rhetoric and in policy. Always and everywhere, the only serious political issue is what the state should and should not do. All the rest distracts.

Vista SP1: Still Lagging Behind the Linux Desktop

Linux columnist -- but not Linux fanatic -- Steven J. Vaughan-Nichols got his hands on pre-release (but out of beta) version of Windows Vista with Service Pack 1. He finds it just as wanting as the original Vista. On the other hand, he is impressed with Windows XP SP3. Microsoft seems intent on phasing out XP. We shall see.

Personally, we have been testing a Vista-based machine the past week, just to see what it is like before paving it over. It sure is fun watching icons render one at a time on a dual-core 2GHz CPU machine. It seems that bloat is climbing faster than processing power in Microsoftland.

Review -- I had really thought that Vista SP1 would be an improvement. I did not think it would be a big improvement, but still that it would be more competitive with Windows XP and the modern Linux desktop. I was wrong.

I have now been working with Vista SP1, the so-called RTM (release to manufacturing) version, for about two weeks. I am amazed at how little improvement I see in this so-called major update.

Last year, I took a long, hard look at Vista versus desktop Linux, testing SimplyMEPIS 6, in a four-part series. In the months since then, we have learned that Microsoft lied about how much hardware was needed to run Vista in an affair that we are now calling Vistagate.

Personally, I did not need to see Microsoft/Intel e-mails to know that "Vista Capable" PC requirements were so much BS. I found that doubling Microsoft's minimum daily PC requirements would get you to the point of a bearable Vista experience. Not a good one, mind you, just one that would not have you pulling out your hair.

SP1 was supposed to make this better. Or, to be more precise, it was supposed to improve Vista's performance, fix problems and improve its interoperability. In my fortnight of living with Vista, I have found it has done none of the above.

This time, I ran Vista on two different systems. The first was the same HP Pavilion Media Center TV m7360n PC I had used in my 2007 MEPIS-versus-Vista test. The m7360n has a hyperthreaded 2.8GHz Pentium D 920 dual-core processor, 4MB of Level 2 cache, an 800MHz front-side bus, and 2GB of DDR (double-data-rate) RAM. ...

My other test box was a Gateway 835GM. This is another older -- circa 2005 -- system. It has a dual-core 2.8GHz Intel Pentium D 820 with the Intel 945G Express for graphics. I had upgraded it to 2GB of DDR RAM. Like the HP Pavilion, it started life as a Windows Media Center PC.

Now, I did not expect either system to be great with Vista. Neither one has the horses for that. If you really want to run Vista, I think you need 3GB of RAM, a dedicated graphics processor with a minimum of 256MB RAM of its own, and a modern dual-core processor like the 2.33GHz Intel Core2 Duo E6550. I did expect better than what I found, though.

These same two systems, however, are killer desktop Linux PCs. On each of them I used the following Linux distributions over the last year: OpenSUSE 10.3, SLED (SUSE Linux Enterprise Desktop) 10 SP1, MEPIS 6.5 and 7.0, and Kubuntu 7.10. Each of these Linuxes ran lightning quick.

There were some hardware compatibility quirks at first, but nothing that took more than a couple of minutes to fix with any of these distributions. In short, these computers made great Linux PCs. It was a different story with Vista SP1. For my tests, I did not try to upgrade either system to Vista.

Microsoft has admitted that SP1 has hardware incompatibilities with some hardware on already working Vista systems. Do not ask me how they managed to break drivers that were already working on Vista PCs; they just did. ...

What I can say, though, is that while Vista PC's overall performance has improved, it is still not the equal of any of the Linux distributions on my hardware. I also discovered, and this really was a surprise to me, that Vista SP1's network performance was beyond awful. ... I also found that, and for this I don't have an explanation, Vista is awful at USB 2.0 file transfers. That is not too big a deal if you are just backing up the day's work on a USB stick. However, if you are doing graphics work, for example, and using a USB 2.0-connected storage device for your images, you are going to notice a real performance drop.

I also found that applications fared poorly in general on Vista SP1. I found Microsoft Office 2003, for example, to be more sluggish on Vista SP1 than it was running with CrossOver Linux 6.2 and Linux on the exact same hardware. Yes, that is right: Windows applications ran faster on Linux than they did on Vista. Now, it was not a lot faster, but I found that, on average, Office 2003 was about 5 to 10% faster on Linux with CrossOver than on Vista SP1.

At day's end, what I found was that Vista SP1 really has not improved that much from Vista. The Linux desktop, on the other hand, has improved since I first compared MEPIS 6 to Vista. It is not so much Linux has improved its performance as it has increased its ease of use and hardware compatibility. The Linux desktop of early 2008 is clearly better than the Linux desktop of early 2007. The same cannot be said of Vista.

XP SP3, on the other hand, is a step forward from XP SP2. I find it more than a little odd that Microsoft is pushing Vista, which is a failure, no matter how Microsoft cuts its prices. XP SP3, not Vista SP1, is Microsoft's real competition for the steadily improving Linux desktop.

SHORT TAKES

Nordic Ministers Vow End to Tax Avoidance in Our Time

The Nordic Ministers of Finance are putting a stop to tax avoidance. At the end of October 2007 they signed a tax information exchange agreement with the Isle of Man. There are plans to go further and draft several agreements which will end tax avoidance.

The Nordic Council of Ministers has been working to put an end to tax avoidance since June 2006 and has therefore begun negotiations with several jurisdictions. Information exchange agreements will be signed giving the tax authorities access to information about the capital investments and incomes of tax avoiders. This cooperation will strengthen negotiations and reduce costs. The agreements will be constitutional and bi-lateral.

The Ministers of Finance aim to enter into agreements similar to this one with the Isle of Man with those jurisdictions where there are grounds for exchange of information to prevent tax avoidance. For the Nordic countries in the long run this could involve considerable sums of money, which have been stashed away around the world.

Negotiations have already begun with the Cayman Islands and the British Virgin Islands. Torsten Fensby, based in Paris, has been charged with leading these negotiations on behalf of the Nordic Council of Ministers.

It is hard to see these measures getting any more than incremental tax collection increases. Heavily taxed Nordic country citizens have every incentive to move their assets and business to countries that do not have information exchange agreements with the home country if the heat gets to hot in any particular jurisdiction.