W.I.L. Offshore News Digest for Week of May 12, 2008

LAND OF THE FREE?

Liberty in America is not quite as revered as its leaders pretend.

The headline question is a standard rhetorical lead-in by libertarians, anarchists, and certain leftists when they are the receiving end of arbitrary power. Their answers is most cases would be "Not very." When The Economist and Freedom House, a middle-of-the-road advocate for worldwide freedom, ask the same question that is something else again. While expectedly restained in their words compared to what one usually reads on these pages, they are nevertheless unmistakeably critical of road the U.S. and the Bush administration have traveled over this century. Let us hope they are correct in the faith expressed in America's capacity for self-correction.

No other country puts as much emphasis on "freedom" as the United States. Patrick Henry demanded "liberty or death". The national anthem calls America "the land of the free". Great reformers from Abraham Lincoln to Martin Luther King have urged America to live up to its ideal of "freedom". When a group of French Americanophiles wanted to flatter the U.S., they sent the Statue of Liberty.

And no other country boasts as much about its mission to give freedom to the rest of the world. Woodrow Wilson thought that he had a God-given duty to bring liberty to mankind. George Bush regards his foreign policy as a crusade for freedom -- "the right and hope of all humanity".

But how good is America at living up to its own ideals? A new study by Freedom House tries to answer this question. The fact that Freedom House has devoted so much attention to the U.S. is significant in its own right. Founded in 1941 by a group of Americans who were worried about the advance of fascism, Freedom House is now the world's leading watchdog of liberty. The fact that "Today's American: How Free?" is such a thorough piece of work makes it doubly significant.

The judicious tone of "How Free?" will undoubtedly disappoint leftists. Freedom House bends over backwards to give the authorities the benefit of the doubt. Other countries have recalibrated the balance between freedom and security in the face of terrorists who want to inflict mass casualties on civilians. America's recent sins, however, are minor compared with those of its past. Newspapers have published highly sensitive information without reprisals. Congress and the courts have repeatedly stepped in to restore a more desirable constitutional balance.

But the verdict on the Bush years is nevertheless sharp. "How Free?" not only details and condemns the administration's familiar sins, from Guantanamo to extraordinary rendition to warrantless wiretapping. It reminds readers of its aversion to open government. The number of documents classified as secret has jumped from 8.7 million in 2001 to 14.2 million in 2005 -- a 60% increase over three years. Decade-old information has been reclassified. Researchers report that it is much more difficult and time-consuming to obtain information under the Freedom of Information Act.

Government whistleblowers have repeatedly been punished or fired -- even when they have been trying to expose threats to national security that their bosses preferred to overlook. Richard Levernier had his security clearance revoked for revealing that some of the country's nuclear facilities were not properly secured. Border security agents have been punished for pointing out that the border is inadequately monitored, and airport baggage-handlers and security people for pointing to weaknesses in the security system. The Office of Special Counsel, which was established to enforce laws designed to protect the rights of such people, is widely regarded as "inept and even hostile to whistleblowers".

"How Free?" also has some hard things to say about America's criminal-justice system. The incarceration rate exploded from 1.39 per 1,000 in 1980 to 7.5 in 2006, driven, among other things, by the war on drugs. America now has one of the highest rates of imprisonment in the world: 5.6 million Americans, or one in every 37 adults, has spent time behind bars. Even though prison-building is one of the country's great growth industries, overcrowding is endemic, with federal prisons operating at 131% of capacity. America is also one of the few countries to ban felons and, in some states, ex-felons from voting. At any one time 4 million Americans -- one in every 50 adults -- is disenfranchised because of past criminal convictions. This includes 1. million blacks, or 14% of the black male population.

Freedom House's strictures are, if anything, too soft. America insists on criminalizing victimless crimes such as prostitution. Last week Deborah Jeane Palfrey, the so-called DC Madam, committed suicide. The government had thrown the book at her, including racketeering and mail fraud, because it really wished to penalize the arranging of assignations between consenting adults. In her suicide note to her mother she wrote that she could not "live the next six-to-eight years behind bars for what you and I have both come to regard as this 'modern-day lynching'."

The American legal system also seems to have lost any sense of proportion. Christopher Ratte, a professor of archaeology, recently tried to buy his 7-year-old son a bottle of lemonade at a baseball game. He was handed a bottle of Mike's Hard Lemonade, an alcoholic drink, by mistake. Officials noticed the boy sipping the drink and immediately whisked him off to hospital. He was fine. But the family was condemned to legal hell. The police at first put the 7-year-old into a foster home and a judge ruled that he could go home only if his father moved out. It took several days of legal wrangling to reunite the family.

This is not just the legal system. This is the whole bureaucratic mentality that makes any rule violation a major offense. Every 2-bit worker in some position of responsibility and power becomes a potential Torquemada. This cultural shift is reflected in the legal system.

"How Free?" repeatedly argues, even as it dredges through the most depressing material, that the American system has proved admirably self-correcting. The response of civil-liberties advocates has been swift and dogged. The Supreme Court has forced the administration to extend the Geneva conventions to inmates in Guantánamo and other military prisons. Congress has reined in warrantless wiretapping. The press has repeatedly published leaked material.

This is perhaps a little optimistic -- the courts have been slow and Congress half-hearted. But nevertheless the self-correction is now entering a higher gear. All the current presidential candidates, Democratic and Republican alike, have condemned torture and rendition and declared their desire to close Guantanamo. Freedom House's new publication will be an important contribution to this process of self-correction.

HOW DO YOU SAY “WE SURRENDER” IN MANDARIN?

Bill Bonner does a little math on China's growth, peeks into history and his insights on human nature, and comes to the inevitable conclusion -- modulo a few bull market corrections between now and then.

An old friend gave us a subscription to the National Geographic. When an issue comes, Henry [the author's son] takes it and spends hours reading. This month, the magazine devoted the whole issue to China and Henry passed almost all of Sunday afternoon studying it. "China is unbelievable," was his judgment by evening.

Every detail is a superlative ... bigger, faster, higher, more ... more ... more. Things are happening so fast that in just 10 years, China will be the world's biggest economy. We do not have to tell you what that means, dear reader. Give a guy some money and it is not long before he thinks he can tell other people what to do and how to live. The United States became the world's largest economy around 1900. By 1918, Woodrow Wilson was headed to France with his "14 Points."

"God himself only needed 10," said Clemenceau. But America had lent a lot of money to the French and English. They had to listen politely, even if they thought Wilson was a fool.

Now, China has the money -- the biggest pile of dollars in the world. And soon it will have the most powerful economy. It will not be too much longer before Chinese leaders will want to throw their weight around. And they will have plenty of pounds to toss wherever they want. There are only 5 girls for every 6 boys. By the time China has the world's largest economy, it will also have 30 million young men who cannot hope to find a wife. What will they become? Soldiers! Then, China will have the world's biggest and most modern military ... and a keen desire to show the rest of the world how things should be done.

How do you say, "We surrender" in Mandarin? We don't know, but the Pentagon may want to look it up, just in case.

But do not worry, that is still a long way away. With many a slip betwixt the cup and the lip. Oh yes, China is headed for trouble too. You cannot have that kind of growth without trouble. In some ways, China is the biggest bubble the world has ever seen -- bigger than dotcoms ... bigger than U.S. housing ... bigger than credit, finance and derivatives. Not only is it expanding rapidly -- it MUST expand or it will blow up. Like a credit bubble, it cannot rest ... it cannot stand still. If it stops expanding ... bad things happen.

In a credit bubble, people need more and more credit to service the bad loans and bad investments they have made. If they do not get more money, the credits go bad. Businesses go belly up. People miss their payments. Loans get marked down. Pretty soon, you have a recession ... or worse. China's bubble is far more dangerous, because it has hundreds of millions of people who have come to depend on high rates of growth. They cannot stay where they are ... they are not peasants anymore. They have moved to the cities to join the international proletariat. They need work! They need progress! They need to build giant roads and aqueducts, airports and factories. They need to produce more things. They need to contribute to the global economy. They need jobs. And if they do not get them, China could blow up. What is more, China's economy is run -- at the very top -- by officials who are even more blockheaded than our own. If trouble fails to find them, they will find it.

What caught our eye was a chart of China's oil use. Ten years ago, China imported 165 million barrels of oil per year. Today, the total is more than 1 billion. What does it do with all that energy? It grows ... it develops ... it chugs ... it thumps ... it soars.

Looking at the photos (we have not been to China for more than 15 years) [presumably the photos in the National Geographic article], the replace reminds of a teenager -- sassy, obnoxious, and outgrowing his pants. It is an adolescent nation, growing so fast it must eat all the time. In addition to the oil, China has opened 229 new coal-fired power plants since 1990. Wonder why the price of oil hit a new high last week -- above $126 a barrel? Well, China is a big part of the answer.

And rice is now selling for twice as much as did last year. Could that too be blamed on China? Well, partly. When the Chinese lived on the land, they fed themselves with what they produced. But once in town, they become more customers for the globalized market ... competing for their daily bread with people in Des Moines and Dubrovnik.

You have heard the expression about land -- "they are not making any more of it." Well, in China, they are actually losing it. Since 1949, says National Geographic, China has lost 1/5 of its farmland to dust-storms, desertification, pollution and urbanization. Each year, the country loses more ground -- an area approximately as large as the state of Rhode Island.

Let us see, more and more people moving to the cities -- hundreds of millions of them. Building factories ... building houses ... buying cars ... washing machines ... computers ... More and more people competing for the world's resources ... less and less farmland ...

Oh, we will do the math later.

LIECHTENSTEIN FINANCIAL CENTER SHOWS STRONG GROWTH

Liechtenstein Financial Market Authority addresses current developments concerning the German tax affair.

The Liechtenstein FMA's 2007 annual report covered the period before the German tax scandal resulting from the theft of client data from a trust company came into prominence. In short, the sector achieved a good, but not suspiciously fast, growth rate. The FMA used the release of the report to address its response to the incident's repercussions.

An interesting sidelight -- interesting because it is a sidelight -- is that Liechtenstein's financial institutions avoided succumbing to the temptations of the U.S. mortgage market mania, unlike their Swiss brethren. While UBS and other Swiss financial institutions have been embarrassed -- and financially devastated -- by their subprime mortgage losses, Liechtenstein's suffered a few flesh wounds at most.

While the reputation of Liechtenstein's financial center may have suffered as a result of the German tax affair, it appears that no significant damage has been done by the subprime crisis, according to the annual report from the jurisdiction's Financial Market Authority.

The report has concluded that new markets for Liechtenstein's financial institutions in the Middle East and South East Asia have buttressed another year of strong growth for the jurisdiction's financial services industry. ...

By the end of 2007, 2,089 financial market participants domiciled in Liechtenstein were subject to FMA supervision: banks, investment undertakings, asset management companies, and pension schemes. In comparison with the previous year, this represented an increase of 10%.

The assets under management of all financial market participants increased in the 2007 business year from Sfr228.9 billion ($217.1 billion) to Sfr277.7 billion. This represents an increase of 21.3%. The 16 banks licensed in Liechtenstein managed client assets of Sfr201.3 billion, corresponding to an increase of 16.1%. ...

The responsibilities of the FMA as an independent and integrated supervisory authority include guaranteeing the stability of the financial center. The FMA is not a central bank, but -- according to Mario Gassner -- it must ensure that negative occurrences among individual financial intermediaries do not have an effect on the financial center as a whole. This means that the FMA must recognize developments and therefore potential risks to the financial center early on and act accordingly. For this reason, the FMA has established ties with the Swiss National Bank, and intends to deepen this dialogue further.

The responsibilities of the FMA also include ensuring compliance with recognized international standards.

At its presentation of the 2007 Annual Report, the FMA also addressed the current developments concerning the German tax affair, which was triggered by the theft of client data from a Liechtenstein trust company.

"For the FMA, the primary concerns were data security and the protection of client data, as well as the impact on the financial center as a whole. Over the last few months, the FMA has been under considerable pressure in dealing with these events, in addition to its daily business."

We are reminded of when during the Watergate hearings, Senator Daniel Inouye, during one witness's testimony, muttered "What a liar" into an open mike. When asked what he meant, he said something like, "It means next time I talk to myself I will do it in Japanese."

However else Liechtenstein responds to the data security breach, we presume that much stricter data protection measures will be implemented going forward.

"Despite these turbulent times, it immediately took the necessary supervisory measures in a calm but decisive manner and sent clear signals to those involved. Because of official secrecy, the FMA is unable to give detailed information on the cases in question," the Authority stated.

The FMA believes that the reputation of Liechtenstein and its financial center have been damaged by the events. At the same time, however, the FMA noted that cooperation among financial center actors functioned smoothly during the crisis. It observed that the financial center system remained stable, but that the country cannot afford to sit back, and that financial center reforms must be implemented rapidly.

According to the FMA, the subprime crisis has not entailed any direct risks for Liechtenstein banks, since no investments in the affected securities were made. When the problems on the U.S. real estate market and the resulting subprime and banking crisis became apparent, the FMA immediately obtained a picture of any relevant risks from the banks, insurers, and pension schemes.

Some life insurers had invested directly in U.S. mortgage-based products, but the amounts were modest, and the products only affected life insurance policyholders bearing their own risk. The FMA confirmed that: "The subprime crisis and the resulting banking crisis therefore has no major impact on the Liechtenstein financial center." However, it add that the impact will be felt due to the resulting financial crisis, which has adversely affected the stock markets."

TAX TREATMENT TEMPTS BUSINESSES TO CHANGE COUNTRIES

The headline would warrant a nomination for the "Keen Grasp of the Obvious" award of the month, except that so many tax policy makers act as if they are oblivious to it. Or have acted. With a recent flood of relocation announcements, national governments are paying attention.

When Halliburton moved its headquarters from Houston to Dubai last year, the oil services group provoked a political storm. Despite assurances that the company was not seeking to avoid tax or scrutiny, the move was lambasted by Democrats as an example of corporate greed. Senator Hillary Clinton led the attack, denouncing the move as "disgraceful".

On the other side of the Atlantic, the spotlight is also on corporate defections after two big UK companies said last month they were shifting to Ireland for tax reasons. Others have also hinted at leaving. When United Business Media, a trade publisher, announced the move of its headquarters to Ireland, Vince Cable, the Liberal Democrats' Treasury affairs spokesman, criticized this as "blatant tax avoidance".

Politicians fear loss of jobs and tax revenues when companies move their headquarters. But their moral indignation cuts little ice with multinationals whose ties with their home countries have diminished because of international expansion and cross-border mergers.

Over the last decade, 6% of multinationals have relocated, partly for tax reasons, according to research from Oxford University's Centre for Business Taxation. Companies competing with rivals based in lower-tax regimes are under pressure to cut their tax bills. Moreover, they are being wooed as never before by small countries keen to attract skilled jobs or create a larger tax base.

UBS, the investment bank, predicts a "gradual erosion of governments' ability to tax". When Shire, the UK pharmaceutical company, announced its move to low-tax Ireland last month, Amit Kara, director of UBS, said: "This is the kind of tax competition we should expect. The pressure will remain on countries such as the UK to continue lowering corporation tax especially for the fleet-footed. The tax burden may shift to smaller companies."

At first sight, there is little reason for governments to panic about the threat of shifting headquarters. Companies will still pay tax on the factories, sales and other profitable activities in the countries where they operate. But finance ministries fear that migrating companies will find new ways to strip the tax base of the countries where they operate. Academic research published last year showed that foreign-owned manufacturers in Europe paid less than half as much tax as domestically owned businesses.

A very interesting statistic, and not really surprising. When a company has operations in multiple jurisdictions it is only a matter of time before it starts to look at ways to take advantage of the situation vis-a-vis reducing taxes.

Julian Alworth, an associate fellow at Oxford's Saïd Business School, sees fiscal reasons as dominant in determining relocations. He told a recent conference: "When you look at why companies are moving headquarters, it is often to reduce the liability in the country where their headquarters are located and where they have their operations." He cited a controversial attempt by Stanley Works, the U.S. tool manufacturer, to move its headquarters to Bermuda in 2002, which was ditched after a political outcry.

The suspicions of finance ministries are also aroused by the mobility of the income that companies derive from intellectual property or financing operations. Many big countries attempt to trap this income in their tax net using anti-avoidance rules. By moving to a more lenient regime, companies hope to escape these restrictions.

Boasting an attractive tax regime for intellectual property has become part of the marketing pitch for countries wanting to attract foreign corporations, particularly the regional European headquarters of U.S. multinationals. Kraft, Google, Electronic Arts and Yahoo have all recently switched their European headquarters from the UK to Switzerland. eBay, Amazon and Microsoft have moved to Luxembourg. The Netherlands boasts names such as Cisco Systems, Nike and Starbucks.

As multinationals become more skillful at managing their intellectual property, there are tax as well as commercial advantages. By holding brands and patents in low-tax countries and charging other subsidiaries for their use, profits are lowered in high-tax countries.

W.I.L. first described this tactic (see here) almost 10 years ago, and it has been going on for a lot longer than that. Companies are finally implementing the idea en masse.

Unsurprisingly, these shifts of intellectual capital are unpopular with many tax authorities. Two years ago, Mark Everson, former commissioner of the U.S. Internal Revenue Service, warned that the increasing transfer of intangibles was a "high-risk compliance concern", adding: "Taxpayers, especially in the high technology and pharmaceutical industries, are shifting profits offshore."

"High-risk compliance concern" nothing. It is an outright loss of taxable profits concern!

The small, low-tax countries that encourage profit-shifting of this sort are also criticized. Ireland's success at attracting knowledge-based companies is seen as overly aggressive by some rival governments. Arnauld Montebourg, a French politician, last year accused low-tax Switzerland of "predatory practices". The Netherlands -- which attracted Ikea from Sweden and Gucci from Italy -- was lambasted for its approach to taxing mobile income by the Amsterdam-based Center for Research on Multinational Corporations, a non-profit research group. "All the empirical evidence indicates that the Netherlands is a tax haven," it said.

These criticisms are shrugged off by tax competition advocates, who believe tax competitiveness encourages investment. But resentment from larger rivals poses risks for small countries eager for foreign business. One of the worst fears of Ireland's politicians is that the republic will be arm-twisted into adopting the European Commission's proposals for a common method of computing corporate taxes. When Christine Lagarde, French finance minister, said last month that France would push this concept forward in its European Union presidency, Bertie Ahern, the outgoing Irish prime minister, dismissed it as a "daft" idea.

Big countries are meanwhile strengthening their defences. In the U.S., the IRS is fighting the migration of intellectual property, inflicting tax demands running into billions of dollars on pharmaceutical companies. Germany has just reinforced its rules on the transfer of assets to foreign companies. The UK has proposed tightening its anti-avoidance rules by taxing the worldwide "passive" income of companies with UK headquarters.

These measures have a "Fool me once, shame on you. Fool me twice, shame on me" quality to them. Sure, you can nail companies the first time. Then they adjust. Companies will make darn sure that the assets are not born in, nor ever set foot in, Germany or the U.S. Then what is there left to tax the next time around? Of course, that is in the future -- not a time frame governments are known for paying much attention to.

But the problem is that these tougher regimes impose a hefty compliance burden on companies and expose them to the risk of double taxation. In the UK, the complexities of the proposed anti-avoidance system have exasperated big businesses already disenchanted with Britain's tax regime. Richard Lambert, director-general of the CBI, the British employers' federation, says companies "are seriously concerned about the high level and rising complexity of taxation in the UK and are increasingly prepared to vote with their feet".

Shire said it was leaving to "help protect the group's tax position". UBM said its long-term interests would be helped by Ireland's "less complex system of taxation". But nobody can confidently predict whether this trickle will become a flood. There are some powerful factors that deter companies from migrating, including the prospect of capital gains tax bills and the threat of reputational damage.

Also, for all the criticism of Britain's tax regime, it has an enduring appeal for some multinationals because of its generous treatment of interest costs and payments to shareholders. Barclays, Britain's 3rd-largest bank, thought hard about moving its tax domicile when it tried to acquire ABN Amro last year but calculated that its shareholders would be better off if it stayed in Britain.

Nonetheless, more big companies are considering leaving the UK. International Power, WPP, AstraZeneca and GSK have all hinted that the matter is under review. A few years ago, this could have been viewed as saber-rattling. But a big barrier to migration has recently been lifted: companies are no longer required to have a UK base to be included in the FTSE index.

Nor can the government rely on exit taxes to stem the tide. Unlike the U.S., which has tried to devise laws to keep companies on American soil, European governments are under pressure to remove barriers to movement within the single market.

In Britain, the threat of an exodus has sparked a debate about how policymakers should respond. Insurers are lobbying the Treasury for concessions to stem migrations to Bermuda. Deloitte, the professional services company, has argued for a special tax rate on mobile income such as trademarks. Another radical option being discussed is imposing a minimum tax for multinationals on their UK profits, as an alternative to stringent anti-avoidance measures.

The Treasury has an awkward dilemma. It depends on corporate taxpayers for 1/10 of its revenue. It does not want to make overly generous concessions. Nor does it wish to single out specific sectors or types of income for concessions, which might create new loopholes for avoidance.

So far, the Treasury's focus has been on making the tax regime more attractive for multinationals by exempting foreign profits from tax. This move could help stop corporate migrations, were it not accompanied by tougher anti-avoidance rules. One of the main reasons why DaimlerChrysler based itself in Germany rather than the U.S. after its 1998 merger (subsequently unwound) was that Germany exempted foreign profits from tax.

The UK has also promised to cut the corporation tax further, following a 2 percentage point fall to 28% this year. Gordon Brown last week told business leaders that one of his aims as prime minister was "to reduce corporation tax even further when we can afford to do so". Some businesses are clamoring for radical cuts. A recent CBI taskforce called for the corporation tax rate to fall, over time, to 18%.

A view sometimes aired in government is that large countries such as the UK should be more sanguine about losing the headquarters of big domestic businesses and focus on attracting "real business" into the country, regardless of who owns or controls it. Genuine investment goes to countries where it can be deployed. Tax is far less important in these considerations than proximity to markets, infrastructure and the availability of skilled staff.

Yet if countries such as Britain become reconciled to losing headquarters to lower-tax rivals, they will pay a price. As well as shedding well-paid jobs and advisory work, they risk a decline in influence and investment as decision-makers go elsewhere. When world-leading businesses uproot themselves, more is at stake than national pride.

U.S. CONGRESSMAN TAKES AIM AT DEFERRED COMPENSATION IN TAX BILL

Sometimes news of the closing of a tax "loophole" causes one to wonder how it slipped through in the first place, when it not some obvious sop to special interests. The loophole at hand looks like it could have been an oversight, or it may have been overtaken by evolving practices.

Currently those receiving deferred compensation pay taxes when it is actually in hand, whenever that ultimately turns out to be. The flip side of the rule is that the company paying the compensation cannot deduct it until the cash leaves the company's accounts. But if the company is "tax indifferent" -- such as with an offshore company -- the wash concept is no longer valid. U.S. House Ways and Means Committee Chairman Charles Rangel now proposes to make the deferred compensation immediately taxable to the receiver in such cases.

Legislation introduced into the House of Representatives ... proposing tax breaks for families, business, and clean energy production, is to be partly paid for by a provision that would deny certain tax benefits to executives receiving deferred compensation.

The Energy and Tax Extenders Act of 2008 (H.R. 6049), introduced by House Ways and Means Committee Chairman Charles Rangel (D-New York), would extend tax credits and deductions that expired last year or would expire at the end of this year. ...

The bill would provide tax relief for individuals and families, including:

• Deduction of State and local sales tax
• Deduction of tuition and other education expenses
• Deduction of out-of-pocket expenses by teachers
• Deduction of property taxes for non-itemizers, and
• Relief for more than 12 million children through an expansion of the refundable child tax credit to taxpayers earning $8,500 a year.

The bill also aims to provide tax incentives for businesses to invest in new technology by extending the research and development credit and active financing provisions. Rangel's legislation would also help reduce America’s dependence on foreign oil by encouraging the use and production of renewable energy ...

The bill is to be paid for by two major revenue provisions: closing a tax loophole connected to the payment of deferred compensation; and delaying the implementation of worldwide allocation of interest.

The first of these measures would tax individuals on a current basis if such individuals receive deferred compensation from a tax indifferent party. At present, the law generally allows executives and other employees to defer paying tax on compensation until the compensation is paid. This deferral is made possible by rules that require the corporation paying the deferred compensation to defer the deduction that relates to this compensation until the compensation is paid.

Matching the timing of the deduction with the income inclusion ensures that the executive is not able to achieve the tax benefits of deferred compensation at the expense of the Treasury. Instead, the corporation paying the compensation bears the expense of paying deferred compensation as a result of the deferred deduction.

Where an individual is paid deferred compensation by a tax indifferent party (such as an offshore corporation), there is no offsetting deduction that can be deferred. As a result, individuals receiving deferred compensation from a tax indifferent party are able to achieve the tax benefits of deferred compensation. This proposal is estimated to raise $24.3 billion over 10 years.

The second revenue provision would delay the implementation of a liberalized rule for allocating interest expense between United States sources and foreign sources for the purposes of determining a taxpayer's foreign tax credit limitation. Although enacted in 2004, this election is not available to taxpayers until taxable years beginning after 2008. The bill would delay the phase-in of this new liberalized rule for nine years (for taxable years beginning after 2017).

This proposal is estimated to raise $29.962 billion over 10 years.

Yeah we know: $24 billion here, $30 billion there (excuse us, $29.962 billion -- talk about spurious precision, Exhibit A), and pretty soon you are talking about real money, but ... this is chickenfeed compared to the Iraq war, mortgage bailouts, agricultural subsidies and other boondoggles the U.S. government is currently up to its neck in. This is not just rearranging the deck chairs on the Titanic. It is refinishing one of the deck chairs.

TOP UBS BANKER DETAINED IN U.S.

UBS, the largest Swiss bank, is already reeling from huge writedowns of its holdings of U.S. subprime mortgages (see "How Mania Psychology Trumped Swiss Banking"). Now one of its top officers has been detained by U.S. federal government authorities as part of an investigation of whether UBS helped its American customers evade taxes. He was quickly release, but forbiden to leave the U.S. while the investigation continues.

This would appear to be unusually aggressive behavior on the part of the U.S., perhaps emboldened by the revelations falling out from the Liechtenstein bank data theft scandal. However, it is in line with past arrests of British executives of online gambing companies that illegally (according to U.S. laws) continued to service U.S. customers.

A top banker at UBS has been "briefly detained" by the U.S. authorities investigating whether the Swiss bank helped its American customers evade tax. The bank confirmed ... that the U.S. department of justice (DoJ) is carrying out the investigation.

It refused to name the banker but the Financial Times identified him as Martin Liechti, head of UBS's wealth management operations in North and South America. Wealth management is the core of UBS's private banking operations and Liechti is believed to have been held during a visit to Miami last month. The Financial Times said that he had been held as a "material witness" and is to stay in the U.S. while talks with the DoJ continue. It was unclear why he was in the U.S. ... the paper added.

The DoJ is investigating investment advice UBS gave its U.S. private banking clients between 2000 and 2007 while the main financial regulator, the SEC, is also investigating whether employees of the Swiss bank failed to register with it as required. German prosecutors clamping down on thousands of rich Germans using trusts in Liechtenstein and Switzerland are also investigating the bank over suspicions it helped clients evade taxes.

The latest revelation is yet another blow for the reputation of UBS which [reported] it had lost a record Sfr11.54 billion [apx. $11 billion] in the first quarter and would axe 5,500 jobs, including 2,600 in its stricken investment banking division. It has been forced to write down Sfr37 billion in assets.

VANUATU TO DITCH TAX HAVEN STATUS

Country is tired of the "stigma".

Vanuatu has repudiated its former tax haven status, promising to scap its most important secrecy laws within months. This follows the recent exposure of a large Australian tax evasion scheme that was run through Vanuatu.

"We want to develop into some form of financial hub getting away from this financial secrecy business," said Vanuatu Financial Services Commissioner George Andrews, who vowed that Vanuatu would crack down on businesses that provide foreigners with local tax-haven accounts. Good luck to them. It is unclear what competitive advantages they bring to the table, other than being geographically close to Australia.

The Vanuatu Government will scrap its secretive company law provisions within months as part of a legal overhaul aimed at abolishing the Pacific nation's reputation as an international tax haven. The Vanuatu Financial Services Commission said the country would replace its company law secrecy provisions -- which allow for the creation of companies with hidden owners and undisclosed cash deposits -- by the end of the year.

The move follows the arrest last week of 58-year-old Vanuatu-based Australian businessman Robert Agius, who is accused of masterminding a A$100 million offshore tax scam involving more than 400 people.

VFSC commissioner George Andrews, who declined to comment on any matters before the courts, said ... that under proposed new legislation, the Pacific nation would crack down on all Vanuatu businesses that provided foreigners with local tax-haven accounts. "Our aim is to get genuine investors in and try to steer crooks out of Vanuatu," Mr. Andrews told The Australian. "We've been associated with this stigma for a long time and we now aim to get away from being a tax haven. We want to develop into some form of financial hub getting away from this financial secrecy business."

According to the Australian Taxation Office, about A$5 billion flows from Australia to international tax havens each year, with about $350 million of that destined for Vanuatu.

Mr. Andrews said that under the new legislation, all Vanuatu businesses that provided company and trust formation services would be regulated, with those companies required to obtain a licence to operate. He said the VFSC would have "advanced powers" to enable it to cooperate and share information with foreign regulatory authorities.

The overhaul is expected to involve the abolition of Section 125 of the Vanuatu International Companies Act, whereby companies and banks are not allowed to release information about private client accounts to any third parties without the consent of account holders or a local court order.

The crackdown is an about-face for the VFSC, whose website as recently as yesterday was spruiking [Australianese for publically promoting] the ease by which offshore accounts could be created in Vanuatu and the nation's lack of taxes and company reporting requirements.

The VFSC's website also currently provides a list of "reputable" brokers who specialize in setting up offshore accounts. That list includes contact details for PKF Vanuatu, the firm from which Mr. Agius allegedly operated the $100 million offshore tax scam.

Vanuatu's crackdown on offshore companies is expected to hit major Australian banks Westpac and the ANZ, which issue thousands of offshore bank accounts in the Pacific nation each year. ... [T]hose banks created up to 90% of the accounts established by Mr Agius's PKF Vanuatu. Six of the 33 international tax havens identified by the OECD are in the Asia-Pacific region -- the Cook Islands, the Marshall Islands, Nauru, Niue, Samoa and Vanuatu.

CONCERNS OVER BRITISH TAX HAVENS

Lax regulation risks serious damage to the UK’s reputation.

Bermuda and its motherland overseer have come under fire for failing to meet internation anti-money laundering procedure standards. Now the warning has been generalized to all British Overseas Territories.

Lax regulation in Britain's Overseas Territories risks serious damage to the UK's reputation in the global financial system, an MPs' report has warned.

The House of Commons Public Accounts Committee noted that the Foreign Office had accepted the evolution of territories such as Bermuda, the Cayman Islands and the British Virgin Islands as tax havens, as a way of diversifying their economies. But it said that the territories' financial services lack the investigative capacity fully to tackle problems like money-laundering, and warned it was "complacent" for UK authorities to allow them to manage the risks alone.

The committee called for the Foreign Office and UK crime-fighting agencies to bring in more investigators and prosecutors to bolster regulatory efforts in offshore financial centres for which Britain has responsibility. The report came as the Commons Treasury Committee announced its own inquiry into offshore centres, which will look into whether they have contributed to international financial instability.

Seven of the UK's 14 Overseas Territories have offshore financial centers, with major operations in Bermuda, the Cayman Islands and the British Virgin Islands and smaller centers in the Turks and Caicos Islands, Montserrat, Anguilla and Gibraltar.

The PAC report warned: "The UK's reputation in the financial services industry is linked to how well its Territories perform against international standards. "The (Foreign Office) and its Governors have a key role in protecting the UK from serious reputational risks and possible financial liabilities by ensuring that global standards for banking, insurance, securities and defences against money laundering, to which the UK has signed up on the Territories' behalf, are being met."

PAC chairman Edward Leigh said: "The Foreign and Commonwealth Office is not doing enough to manage the risks arising from the UK's liability for the 14 Overseas Territories choosing to remain under British sovereignty.

"In most of the Territories, the standards of regulation across areas such as banking, money laundering, insurance and securities are not as good as those in the Crown Dependencies. The FCO, actively supported by other relevant agencies, must do more to help the Territories, especially the smaller ones, strengthen regulation. Where necessary, this should include bringing in more UK investigators and prosecutors."

U.S. LEGISLATORS EYE ONLINE POKER MARKET

No sooner has the U.S. federal government cracked down on all companies who illegally allow Americans to bet online using credit cards, then it considers allowing certain exemptions in order to tax the activity. In other words, what was a criminal activity no longer is if the feds can get what they consider their fair share of the action.

As federal and state funds dwindle, lawmakers are eyeing a potentially lucrative source of income: Internet poker. According to a 2006 U.S. law, it is illegal to pay for most online wagers with a credit card -- which basically prohibits Americans from betting money on online poker or other such games. (Some people get around this by using foreign credit cards and bank accounts.) A bill sponsored by Rep. Robert Wexler (D-Florida) seeks to exempt online poker and other games of skill from the law. If the legislation passes, it could lead to more than $3 billion a year in taxes.

"Regulating online poker could be a new revenue stream," says Josh Rogin, a representative for Wexler, "and there aren't many these days." But critics fear that making it legal to bet money on Internet poker could harm people's bank accounts -- and lives. "The proposed legislation does not include funding for programs to prevent and treat gambling problems," says Executive Director Keith Whyte of the National Council on Problem Gambling.

NOT-SO-SAFE-DEPOSIT BOXES

Safe-deposit boxes are located within banks, and thus should not be viewed as a safe place to store things such as gold, cash, etc. that one might need in a crisis, major or minor. First of all, the bank might be closed -- if only temporarily -- and access to the box would be unavailable. Second of all, if gold is confiscated again, as in 1933, then gold stored in safe-deposit boxes would not escape the edict.

Another danger is that certain states, notably California, are eyeballing "unclaimed" property in safe-deposit boxes as a source of revenue. The definition of "unclaimed" has gotten steadily looser. The bottom line is: keep very close track of your box contents and pay your storage fees early.

The 50 U.S. states are holding more than $32 billion worth of unclaimed property that they are supposed to safeguard for their citizens. But a Good Morning America investigation found some states aggressively seize property that is not really unclaimed and then use the money -- your money -- to balance their budgets.

Unclaimed property consists of things like forgotten apartment security deposits, uncashed dividend checks and safe-deposit boxes abandoned when an elderly relative dies. Banks and other businesses are required to turn that property over to the state for safekeeping. The problem is that the states return less than a quarter of unclaimed property to the rightful owners.

San Francisco resident Carla Ruff's safe-deposit box was drilled, seized, and turned over to the state of California, marked "owner unknown." ... Unknown? Carla's name was right on documents in the box at the Noe Valley Bank of America location. So was her address -- a house about six blocks from the bank. Carla had a checking account at the bank, too -- still does -- and receives regular statements. Plus, she has receipts showing she is the kind of person who paid her box rental fee. And yet, she says nobody ever notified her.

"They are zealously uncovering accounts that are not unclaimed," Ruff said.

To make matters worse, Ruff discovered the loss when she went to her box to retrieve important paperwork she needed because her husband was dying. Those papers had been shredded. And that is not all. Her great-grandmother's precious natural pearls and other jewelry had been auctioned off. They were sold for just $1,800, even though they were appraised for $82,500. ...

Bank of America told ABC News it deeply regrets the situation and appreciates the difficulty of what Mrs. Ruff was going through. The bank has reached a settlement with Ruff and continues to update its unclaimed property procedures as laws change.

Ruff is not alone. Attorney Bill Palmer represents her and countless other citizens in a class action lawsuit against the state of California. "They figured the safety-deposit box was safer than keeping it under the mattress," Palmer said. "In the case of a lot of citizens, they were wrong, weren't they?"

California law used to say property was unclaimed if the rightful owner had had no contact with the business for 15 years. But during various state budget crises, the waiting period was reduced to seven years, and then five, and then three. Legislators even tried for one year. Why? Because the state wanted to use that free money.

"That's absolutely correct," said California State Controller John Chiang, who inherited the situation when he came into office. "What we've done here over the last two decades has been dead wrong. We've kept the property and not provided owners with the opportunities -- the best opportunities -- to get their property back."

Chiang now faces the daunting task of returning $5.1 billion worth of unclaimed property to people. Some states keep their unclaimed property in a special trust fund and only tap into the interest they earn on it. But California dumps the money into the general fund -- and spends it. ...

California became so addicted to spending people's money, that, for years, it simply stopped sending notices to the rightful owners. ABC News obtained a 1996 internal memo in which the lawyer for the Bureau of Unclaimed Property argued against expanding programs to notify rightful owners. He wrote, "It could well result in additional claims of monies that would otherwise flow into the general fund."

It is not just safe-deposit boxes. A British man went to retire and discovered the $4 million in U.S. stock he had been counting on had been seized and sold for $200,000 years earlier -- even though he was in touch with the company about other matters.

A Sacramento family lost out on railroad land rights their ancestors had owned for generations -- also sold off as unclaimed property. "If I had hung onto it, I would be a millionaire, multimillionaire," said John Whitley. "But that didn't happen because we didn't get to hold it."

California's unclaimed property program was so out of control that, last year, the courts issued injunctions barring the state from seizing any more property until it made reforms. Since then, Chiang has taken several steps to try to clean up the program.

For example, the state now sends notices alerting citizens about unclaimed property before it is handed over to the state -- the only state to do so. Once unclaimed property is delivered to the state, it is now held for several months while the state tries to contact the owners, rather than it being immediately sold off or destroyed.

Which raises the question, in the Internet era, is anybody really lost anymore? California and other states are just beginning to make use of modern databases that can find most anyone in minutes. Unfortunately, California only uses those databases to search after it has already seized a citizen's property. If California does get better at locating people, that could present another challenge. Remember, right now, the state spends the money. ...

California's fiscal problems are legendary and once again in the news, so it is reasonable to question whether the state can afford to repay its citizens if a bunch of them surface at once. "There is always going to be money to give the owners when they make their claim, " Chiang insisted. "I don't want my legacy to say I continued a broken program. I want my legacy to be 'this guy was the guy who truly cared about the people and returned their money.'"

California is not the only state to come under fire for its handling of unclaimed property. In Delaware, unclaimed property is the 3rd largest source of state revenue. Idaho recently passed an unprecedented law that says the state gets to keep unclaimed property permanently if the rightful owners do not claim it within 10 short years. And all 50 states pay private contractors 10 to 12% commissions to locate and seize accounts for them. It is an inherent conflict of interest: the more rightful owners are found, the less money the contractors make.

[T]here are some states who handle their people's property with respect. Oregon never takes title to unclaimed property. Instead, it holds it in a perpetual trust fund. Colorado uses the interest on its unclaimed property fund to pay for some state programs, but leaves the principal untouched. Missouri, Iowa and Kansas make extra efforts to reunite people with their property -- even setting up booths at state fairs to get the word out. The State of Maryland actively compares the names on unclaimed accounts with state income tax records. If it finds a match, the state simply cuts a check and sends it to the citizen.

So, the question for citizens is, how do you protect yourself?

• Make contact with your bank, your brokerage firm, etc. at least once a year, in a way that creates a paper trail. Make sure they have your current address.
• If you own stock, occasionally vote your proxies or take other steps to keep your stock ownership active. Stay in touch with your broker.
• Write a list of all your accounts and keep it with your will, so your heirs will know where to look.
• Consider insuring valuables even if you keep them in your safe-deposit box. That way, you are covered financially if the bank or state makes a mistake and empties your box. Plus, safe-deposit contents have been known to be destroyed by fire or flooding.
• If you want to search for unclaimed property in your name, you do not need to pay other people to do it for you. Check out the following links for more information:
  • National Association of Unclaimed Property Administrators
  • missingmoney.com

RON PAUL, THE REVOLUTION, AND ENDING ABUSES AND USURPATIONS

Preview reviews of Ron Paul's landmark The Revolution: A Manifesto covered in these pages have emphasized its compelling logic and elegant prose. Michael Scheuer, author of Marching Toward Hell: America and Islam After Iraq and Imperial Hubris and Through Our Enemies' Eyes, and -- notably -- 22 year CIA veteran, brings a slightly different perspective.

Scheuer thoroughly agrees with Paul's assessment that the terrorists are "over here because we're over there." And he notes the utter lack of ego or self-promotion in Paul's book. There is no "Only I can fix this mess" message. Instead Put puts the solution back on, in truth, the source of the problems: the American people.

Congressman Ron Paul's new book, The Revolution, is an unusual presidential campaign book in that the candidate -- Dr. Paul -- is almost entirely absent. This is not to say that his presence is not felt; indeed, Dr. Paul is with the reader every step of the way and writes in a clear and very direct style. But the reader will find that Dr. Paul is not offering the audacity of hope or chanting change. He does not argue that it takes a village or having slept with a former president. And he surely does not hold up his military service as a reason why he should be elected.

Instead, Dr. Paul politely, laconically, but frankly lays it on the line for his countrymen: America is in significant and potentially catastrophic trouble economically, financially, and militarily; the country's political class is homogenous, gutless, and ill-educated; its two major parties do not offer a nickel's worth of difference on important issues, especially foreign policy [pp. 2, 26, 163]; and our leaders are consciously negating parts of the Constitution, compromising America's national sovereignty, and circumscribing the liberties of Americans. But then, astoundingly and correctly, Dr. Paul does not say "Only I can fix this mess" -- as have Senators Clinton, Obama, and McCain. He says: "Only you, the American people, can fix this mess." Dr. Paul confronts Americans with a reality that ought to both chill and inspire them.

Ours is not a fated existence, for nowhere is our destiny etched in stone. In the final analysis, the last line of defense in support of freedom and the Constitution consists of the people themselves. If the people want to be free, if they want to lift themselves out from underneath a state apparatus that threatens their liberties, squanders their resources on needless wars, destroys the value of their dollar, and spews forth endless propaganda about how indispensable it is and how lost we would be without it, there is no force that can stop them. If freedom is what we want, it is ours for the taking. [p. 167]

At the risk of angering some of this website's [LewRockwell.com's] readers, to my conservative-but-not-libertarian mind no American presidential candidate or serving president since Abraham Lincoln has put so clearly to Americans the problems they face and the sole means of their solution. "I wish you to remember now and forever," Mr. Lincoln told an audience in Indianapolis on 11 February 1861,

that it is your business not mine; that if the union of these States and the liberties of this people, shall be lost, it is but little to any one man of fifty-two years of age, but a great deal to the thirty millions of people who inhabit these United States and to their posterity, in all coming time. It is your business to rise up and preserve the Union and liberty, for yourselves, and not for me.

Albeit through far different philosophical lenses, Dr. Paul sees much the same thing as did Mr. Lincoln: an approaching national calamity that only the American people themselves can act to avert. And Mr. Lincoln's reference to "posterity" is an appropriate point from which to look at Dr. Paul's concern for America's future because he, as did Mr. Lincoln, believes that the guide for ensuring the welfare of our posterity lies in the Constitution left to Americans by the Founders of their republic.

Dr. Paul reminds Americans that they are the inheritors -- the posterity, if you will -- of the work and guidance of the single wisest, most courageous, and most foresighted group of leaders who ever lived at one time and labored successfully to form a new republic. Refusing to be fashionable -- a most admirable characteristic -- Dr. Paul forthrightly declares that the Founders' work and guidance remain just as relevant to Americans today as it was two-plus centuries ago. [p. 10] In making this argument, he echoes Oxford Professor Daniel N. Robinson's contention that the Founders drew from "the political life of early America [which itself] is an extended treatise on the nature of human nature," a treatise that held as a certainties the beliefs that man was a flawed, non-perfectible creature whose attitudes and character did not change over the ages. The Founders knew that people do not change, that good and evil are constants in history, and -- most important -- that power not freedom is the universal value.

As Dr. Paul notes, all U.S. politicians in this era pay lip service to the Founders and their work, but few seem to know anything about what the Founders thought, fought for, or passed on to us. In so saying, Dr. Paul is being kind. I doubt a single one of the other presidential candidates could extemporaneously compare and contrast the differences over the draft constitution that put fellow Virginians James Madison and George Mason at odds in 1787. Indeed, it would not surprise me if they failed to distinguish between a paper by Ben Franklin and the latest political pronouncement from Ben and Jerry, the Vermont socialists. Dr. Paul has a well-honed contempt for charlatan politicians who talk a good game about their fidelity to the Founders, but by their actions show they regard them as a group of irrelevant and thankfully dead white males. "These critics should have the honesty to condemn the Founding Fathers ... [but] they wouldn't dare," Dr. Paul writes, "But it would be refreshing to hear it stated in so many words: our current political class is blessed with historic genius, and Jefferson, Washington, and Madison were contemptible fools." [p. 14]

Let me say that I am not competent to assess the entire range of issues discussed by Dr. Paul in The Revolution, but that at least makes me the equal of all his presidential competitors. On the issue of U.S. foreign policy and its impact, however, I have had a bit of experience and can say with confidence that no sections of Dr. Paul's book are more immediately important to Americans than those dealing with foreign affairs. America today faces a quickly approaching, total, worldwide, and economically ruinous war -- in which the conscription of our young will be unavoidable -- against growing numbers of Islamist fighters and their broadening support base. And if there was ever a war that the United States did not need to wage in a total manner, it is this one.

At base, the war is about matters overwhelmingly internal to the Muslim world. America has been attacked and will continue to be attacked not because the Islamists hate our freedoms and liberties or even because we are their main enemy. We are being attacked because of the unrelentingly interventionist foreign policies our bipartisan political class has pursued in the Muslim world for more than 35 years. This interventionism -- as Dr. Paul so well argues -- has involved us in other peoples' wars in which America has no genuine national interests at stake, most notably in the Arab-Israeli religious war. We were attacked in Yemen, Somalia, Saudi Arabia, East Africa, Yemen, again, New York, Washington, and now in Iraq and Afghanistan because of our decades-long record of interventionist policies, which have included unqualified and unconscionable support for Israel and equally unconscionable and unqualified support and protection for Muslim tyrannies like Saudi Arabia.

So mindless has been what Dr. Paul terms "hyperintervention" [p. 16] that the U.S. finds itself in the absurd position of being the major backer and protector of both sides in the Arab-Israeli religious war, Saudi Arabia and Israel. As Dr. Paul rightly says, the Islamists' "grievances are basically that we're ‘over there,’" [p. 18] and we are "over there" because of the lust of U.S. leaders to intervene. "The point is a simple one," Dr. Paul concludes, "when our government meddles around the world, it can stir up hornet's nests and thereby jeopardize the safety of the American people. That's just common sense. But hardly anyone dares to level with the American people about our fiasco of a foreign policy." [p. 19]

Hardly anyone, that is, except Dr. Paul. In The Revolution, Dr. Paul has some kind things to say about my work, that of Dr. Robert Pape, and for the studies of others who have tried to focus Americans on the growing dangers to the U.S. posed by their political class's overseas interventionism. Always the self-deprecating gentleman, Dr. Paul does not mention that it is really those of us he compliments who ought to be thanking him for making it possible to begin a debate on the issue of interventionism. Without Dr. Paul's courage, persistence, and the popularity of his non-interventionist views among Americans in their mid-20s to mid-30s -- which must be profoundly disturbing to the two major parties -- there would be no such debate and bipartisan interventionism would continue to be the unquestioned order of the day.

Dr. Paul's detailed and outspoken defiance of our political elite's interventionist gospel, however, has begun to expand what Alexis de Tocqueville called the remarkably closed circle of acceptable speech in America. Dr. Paul's success is evident in that non-interventionists can now speak publicly and be smeared as appeasers, America-haters, and anti-Semites no more than 80% of the time. This, believe me, is a marked improvement as compared to several years ago. And in an April 2008 talk I gave about my book Marching Towards Hell to San Francisco's World Affairs Council and Chicago's Global Affairs Council, I tried in the following brief digression to make a small payment on the large debt all non-interventionists owe Dr. Paul. "And, if I may be frank," I said to the hospitable San Franciscans and Chicagoans,

Americans today face no bigger threat to their national security than Senators McCain, Obama, and Clinton who in May 2007, along with those presidential candidates now withdrawn, condemned and tried to silence Texas Congressman Ron Paul for speaking the truth. When Dr. Paul said that the Islamists attacked us on 9/11 because we had been intervening in their world for more than 50 years, he spoke the non-partisan truth on behalf of all of us.

And, yet, Dr. Paul was dismissed as absurd by most of his fellow candidates, and faced demands that he recant and apologize. On that occasion, free speech was acceptable only if it meshed with our political class's all-party line, which is summed up in the phrase: "The terrorists hate us for who we are, not for what we do." Today, this is the quite dishonest operating assumption of Senators McCain, Clinton, and Obama.

The most important impact of this sorry episode, however, is that Dr. Paul's fellow candidates and the unctuous media deliberately halted the first post-9/11 foreign policy discussion among senior U.S. politicians that would have worried Osama bin Laden and his allies. When Dr. Paul told Americans the truth and was shunted aside by other candidates and the media, bin Laden and his ilk breathed a heavy sigh of relief. For the time being, bin Laden's only indispensable ally -- the status quo in U.S. foreign policy -- was safe.

To conclude, I can only urge Americans to get Dr. Paul's The Revolution, read and think about it, and then share and talk about it with your family and friends. But be prepared to feel a new burden of responsibility in your life because Dr. Paul makes it clear that America's future is in its citizens' hands. Again at the risk of angering this site's readers, Dr. Paul's book will tell you exactly what Mr. Lincoln told Americans 170 years ago: "If destruction be our lot, we must ourselves be its author and finisher. As a nation of freemen, we must live through all time, or die by suicide." Dr. Paul recognizes this reality and closes his book with the simple sentence: "Let the Revolution begin." [p. 167]

And so let it, but let us first underscore the importance of Dr. Paul's exhortation by remembering that it must begin from our recognition of duty. "But when a long train of abuses and usurpations, pursuing invariably the same Object," a certain Mr. T. Jefferson of Virginia wrote in the summer of 1776, "evinces a design to reduce them [Americans] under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security." Perhaps Dr. Paul should have written: "Do your duty Americans, let the revolution begin."

TAKE THE RED PILL

The Red Pill/Blue Pill metaphor from The Matrix has worked its way into popular culture, denoting a choice between blissful ignorance (blue) and allowing oneself to be exposed to the sometimes painful truth (red). Thomas Woods explains why he things that cynics who have written off the American people -- as blue pill takers who just care about consuming and being entertained -- are "surely wrong." He certainly makes the case that would may be true in general cannot be assumed to apply to any particular individual.

In The Revolution: A Manifesto, Ron Paul says he does not believe the claim that most people are indifferent about freedom as long as they are kept entertained and well fed. It is more a lack of knowledge, he says, that keeps people from embracing the free society.

I have gone back and forth on this, and I am inclined to think the truth is somewhere in between. But I think the cynics, who hold out no hope for the American people at all, are surely wrong. Case in point: this thread.

This nurse had accidentally left her copy of The Revolution: A Manifesto at her nurses' station overnight. When she arrived the next morning, fearing the book might be lost, she found to her amazement that the overnight nurse had actually read the entire thing. Not only that, but she had become an instant convert, wanting to spread Ron Paul's message to her friends and family, and get extra copies of his book. This is a person who, just a day earlier, had supported Hillary Clinton on the grounds that she wanted to see a woman in the White House.

Another person in the same discussion thread says that his own father, once a staunch McCain supporter, is now firmly for Ron Paul and withdrawal from Iraq. Having had a chance to read Dr. Paul's positions for himself, he is now convinced that if all Americans could do so, Ron Paul would be president.

And then there is my own experience. I will be frank: Like most people, I was not intellectually creative enough to break free of the phony choices our political system gives us. All I knew for sure was that I was not a leftist. Therefore, I lazily concluded, I must be in Rush Limbaugh's camp. Yes, I was once a full-fledged neoconservative, pretty much from the moment I became politically aware until around 1993.

What jolted me out of it? Among other things, I attended Mises University 1993, put on by the Ludwig von Mises Institute, while a junior at Harvard. It was far and away the most intellectually exciting experience of my college career. (Now I am on the other side of things, actually lecturing at the Mises University program, and almost envious of the students who are about to be introduced to the intellectual pleasures of the Austrian School for the first time.)

Then there is my experience teaching American history and Western civilization to students in New York. I did not propagandize them, since that is not appropriate in a college history classroom, but the brighter ones perceived soon enough the chasm separating the late-18th-century America I was describing and the America of today.

From time to time they demanded to know my views on this or that subject, or my political philosophy in general. My protests that I did not want to politicize the classroom or intimidate students who had views different from my own were brushed aside: we just want to know what you think, man!

Lo and behold, it made sense to them. And they had never heard it before. I found myself making converts without really trying. (And no, they were not just saying so in order to ingratiate themselves into the professor's favor; most of these testimonies came in the form of emails well after the semester had ended.)

All these experiences, I suspect, are not really so unusual.

Set aside those who (a la The Matrix) prefer the blue pill and ignorance over the red pill and knowledge. The fact is, plenty of people want that red pill, even if they do not know it yet -- as I myself did not, some 15 years ago now.

That pill can take many forms. I can think of three right away: LewRockwell.com, the Ludwig von Mises Institute, and Ron Paul's new book.

But these things can do the work they are intended to do only if we bring them to people's attention -- friends, family, co-workers, whatever. You know what to do next.

IDENTITY FRAUD HITS NET TELEPHONY

The problem described here appears to be small so far. It is also not too hard to defend against, if you know the potential hole exists. As a larger share of voice communication migrates to voice-over IP, and thus the pickings get richer for hackers, the problem might well be expected to get more serious.

A new type of identity fraud, which sees hackers tapping into voice-over IP telephony accounts, has been highlighted by a VoIP equipment maker. Usernames and passwords from voice-over IP (VoIP) phone accounts are selling online for more than stolen credit cards, Newport Networks has found. The information allows someone to use the telephone service for free.

Net telephony fraud is still in its infancy, with eavesdropping on calls being the most common security flaw.

But the move into stealing usernames and passwords which are routinely sent across the network when a call is made, is a worrying new trend thinks Dave Gladwin, vice president of products at Newport Networks. "It is still at an embryonic stage but as voice adoption increases it becomes more of a problem and needs addressing," said Mr. Gladwin. The details are not sent as plain text but are encoded in such a way as to be "easily captured and unobscured", said Mr. Gladwin.

Credit card details have been traded fairly openly online for some time and can be bought for around $12 each. VoIP account details fetch a slightly higher price, at $17, according to Mr. Gladwin.

The problem is less of a issue for businesses which routinely offer VoIP services for their employees because users are tied into a secure corporate network. But for consumers, relying on public or unsecured home wi-fi networks, there is more of an issue.

There is really no excuse for not encrypting wireless communications on your home network. It is a small matter of configuring a few settings in the router and the receiver. On public networks, such as a typical coffee shop "hot spot", you do not have the same choice, so you have to take security matters into your own hands. By the way, this applies equally to email, data sent via a form over the Web, and other text-based communications over unencrypted wireless networks.

"90% of carriers don't offer a secure VoIP service," said Mr. Gladwin. He estimated it would cost around $4/$6 per subscriber for service providers to instigate the additional level of security needed. "Most of the software out there has the capability of running in secure mode if the service providers would accept it," he said.

VoIP provider Skype said its service, unlike some of its rivals, offered end-to-end encryption. "It doesn't matter whether I am on an open wireless connection, there is no way someone could get hold of my username or password," said Jonathan Christensen, general manager of audio and video at Skype.

He accepts there are security issues facing the industry, especially for providers that use "less robust security mechanisms" but he questions how big a draw a free VoIP account would be for net criminals.

This is a view shared by Jupiter analyst Ian Fogg. "I have not seen security issues with VoIP as a big issue. This is partly because such services are not that mainstream and therefore have not been targeted by criminals in the way that e-mail and online banking services have," he said.

FUJITSU RELEASES FULLY-ENCRYPTED HARD DISK DRIVE

This product from Fujitsu looks like a breakthrough in enabling one to automatically and efficiently secure the contents of one's PC hard disk drive. A steady stream of news items about stolen or misplaced notebooks containing intimate personal data means this product and future competitors should have a large market.

Fujitsu, a maker of hard disk drives (HDDs) and a variety of electronics ... announced its new hard drive that features full encryption with 256-bit AES key, something never before seen in consumer class of devices. ... [T]he new product sports high performance and capacity./

256-bit AES encryption is sufficiently strong that the the U.S. National Security Agency (NSA) has declared: "The design and strength of all key lengths of the AES algorithm (i.e., 128, 192 and 256) are sufficient to protect classified information up to the SECRET level. TOP SECRET information will require use of either the 192 or 256 key lengths." The largest successful publicly-known brute force attack has been against a 64-bit length key with a simpler structure than AES. In short, the Fujitsu drive has very strong encryption protection.

Fujitsu MHZ2 CJ-series of hard disk drives in 2.5" form-factor offer 80GB, 120GB, 160GB, 250GB and 320GB capacities, and are designed for Serial ATA-150/300 interface. The HDDs sport 7200rpm motor, 16MB cache and declare average read seek time of 10.5ms and average write seek time of 12.5ms.

The main feature of the Fujitsu MHZ2 CJ family of hard disk drives is 256-bit AES encryption. The drives implement the AES hardware encryption directly into the processor chip of the hard disk drive, resulting in more robust security and faster system performance than software-based encryption. Even though Fujitsu is not the first to introduce AES-encrypted HDDs, competing solutions from companies like Seagate Technologies offer 128-bit long keys.

The built-in AES automatically encrypts all data when storing it on the hard disk drive and decrypts the data when read. All data stored on the hard disk drive can be erased instantly, in less than a second, using the advanced secure erase feature that erases the key itself.

The new hard drives from Fujitsu will be useful for public institutions and companies that handle large amounts of personal and other confidential data, this dramatically lowers the time and cost involved in wiping clean the hard drives of computers that are disposed of or reused.

While fully-encrypted hard disk drives substantially lower [anyone's] ability to access the data without permission, even when personal computer itself is stolen, the PC should still be vigorously protected against attacks from the Internet whose ultimate goal may be stealing or corrupting data.

With the instant-erase feature one can envision attacks that try to erase the encryption key and effectively destroy all the data on the hard drive.

LATEST RELEASE CONVERTS AN UBUNTU LINUX SKEPTIC

In last week's posting, Running a Business on Desktop Linux, the test Linux distribution used for comparison with Windows was Ubuntu. Ubuntu or one of its derivatives has become the most popular gateway to Linux. But for all the resources thrown at developing the distribution -- it is the pet project of a billionaire -- it could be better, as this article writer allows. But the latest release of the distribution, version 8.04 "Hardy Heron" (don't ask), is getting there. Which is good news for would-be converts from the Dark Side.

I have to disclose that I have never been a real fan of Ubuntu. I have tried it about every release and had more than my share of issues with it. Ubuntu 8.04 was released last month, and the first reviews mostly spoke of how nice this version was, so I downloaded the i386 version to test. Sigh -- it is rough when you have to change a long-standing opinion.

Ubuntu ISO images serve as both a live CD and an installer. Choosing the install option boots an X server and starts the same installer found within the live CD environment. The live CD took 2.75 minutes to boot to the desktop, but things looked promising. The first improvement I found was that I no longer needed the noapic boot option to avoid a black screen at X. The resolution for my Nvidia 6150 Go graphic chip and LCD display was 1280x800 using the nv Xorg driver, and my Altec Lansing MCP51 sound chip was activated and working. I did not expect the Broadcom 4311 wireless chip to work and it did not, but the wired Ethernet chip did.

It was at this point that I started the same familiar hard drive installer that has been in use for several versions. The timezone screen was the first update I noticed. The map portion now zooms in as you hover the cursor over the zone markers. I found it to be a bit difficult to navigate, but the drop-down menu is still present.

The next new feature is at the partitioning screen. Now an interactive partition graphic at the Guided option allows you to adjust the size of your Windows partition by moving the separator handle. Since my disk is already partitioned, I chose Manual. In previous versions, the Migration Assistant failed to import my Windows wallpaper, user icon, and bookmarks, but it worked this time. The installer finished without issue, and I chose to install GRUB onto the Ubuntu root partition. That worked out well; Ubuntu picked up and listed all the other systems on my machine. With previous versions, only some were listed. After the hard drive install, my Ubuntu takes 36 seconds to boot to the login screen, which is equal to or better than other Linux distributions on the same machine.

This release also includes a Windows installer called Wubi that installs Ubuntu onto your Windows partition. It is a very simplified installer with just a few configuration options available, but it seemed to work well with my Windows XP on NTFS. After the install, Ubuntu is available at the Windows boot screen. It takes 51 seconds to boot to the login screen and the applications seem to function fine, even if they take a bit longer to start than they do under native Ubuntu. OpenOffice.org takes 15 seconds to start and Firefox takes six. Hardware support was also comparable. This is quite an improvement over Window installers of the past.

The look of mud

Ubuntu has become the face of Linux for most new users these days, and the first impression is important. At first boot, the first thing you will probably notice in this release is the new login screen and desktop background artwork. The login screen is tastefully understated, but the new wallpaper features an expressionistic heron on a burnt amber background. There is a reason why no other distribution uses brown as its default color scheme. Brown is not an attractive color, and Hardy Heron is just not a pretty distro.

One of the more obvious changes this release is the new Unlock button on some of the Administrative utilities. Previously you would have to type in your password before an administrative application such as Time and Date would open. Now it will open without a password, but you will still need to supply your password in order to "unlock" it and make changes. There is an Authorizations utility in which the default security policy can be adjusted on a per-tool basis. You can allow anyone to change settings without a password, or block any changes at all, and everything in between. This new PolicyKit has some use on a multi-user system (especially if you are sharing a computer with a child, for example) or in conjunction with a network tool that can manage multiple clients, but for a single-user it seems overkill, and for the new user the interface seems rather daunting.

The 8.04 software stack is fairly complete for a starter desktop. The kernel version is 2.6.24-16. 8.04 features Xorg 7.3, GCC 4.2.3, and GNOME 2.22.1. Some of the major packages installed by default include OpenOffice.org 2.4.0, Firefox 3.0 Beta 5, and the GIMP 2.4.5. Ubuntu comes with several games such as Mines, Same GNOME, Mines, Chess, Mahjongg, and Sudoku. The Internet applications include Ekiga VoIP client, Evolution Mail, Pidgin instant messenger, Vinagre VNC client, Terminal Server Client, and Transmission BitTorrent client. Sound and video programs include Sound Juicer, Brasero for disc burning, Totem movie player, and Rhythmbox music player.

Like many distributions today, the repositories are equally or even more important when considering the software availability. There are lots of great applications in Ubuntu's repos that are not included on the CD, such as Apache, Gallery, Bacula, Nexuiz, PHP, and MySQL. You may wish to install the Build-essential meta package that will install the packages necessary to build software from source packages. Ubuntu comes with two front ends for the APT package management system: Synaptic and Install and Remove Applications. There is also a user-friendly Update Manager, but no updates were available to test this tool this early in the release cycle. The APT utilities earned points for the speed in which they downloaded and updated the package database in comparison to other APT distros.

I did not have any trouble with applications crashing, freezing, or exhibiting strange behaviors. They seemed quite responsive. Firefox installed my choice of Flash software so I could watch online video at YouTube and Google Video. The installable GStreamer codec plugins allowed me to watch other video types I had on hand, such as AVIs and MPEGs. Oggs, MP3s, and audio CDs were no trouble either. Encrypted DVDs are not supported, and no plugins are available for those through Ubuntu, but you can find them elsewhere on the Internet.

Even the developmental version of Firefox was fast and stable for my modest requirements. I am not sure it was wise to include beta software in a Long Term Support release, and during my testing period I have seen complaints about it begin in blog and forum postings, but the included version of Firefox worked fine for me.

Hardware Support

As I stated, Hardy Heron supported the basic hardware on my laptop with no problems. It also addressed other advanced requirements. The printer configuration wizard was easy and worked well setting up my Samba shared printer. Inserting removable media opens a Nautilus window and places an icon on the desktop.

I had to install the B43-fwcutter package and use the Hardware Drivers utility (previously referred to as the Restricted Drivers module) to enable my unsupported wireless chipset, but once enabled, it supported WPA authorization. The Network Manager applet appears in the upper panel for easy roaming. CPU Frequency Scaling was enabled by default to lower temperature and prolong battery life. A battery monitor appears in the upper panel when the laptop is unplugged. Hibernation works from the login menu or the battery monitor menu, but suspend does not. It wakes up to a black screen. I thought installing the proprietary nVidia graphic drivers might help, but this is where I ran into trouble. ... After [the] drastic measure [of installing the nVidia proprietary drivers from nvidia.com] I was able to suspend as desired and enable the 3-D desktop effects.

In the menu under System you will find an entry for Help and Support. Clicking it opens a Help browser with information on lots of topics of interest to new and experienced users of Ubuntu. Topics range from basic computer skills and principles of Linux to using the command line and writing your own programs, and everything in between. This information is also available online at help.ubuntu.com. In addition, there are mailing lists, paid support, IRC channels, and online discussion forums.

Ubuntu 8.04 has still not won me over completely. Though I realize I can change the look and feel of my desktop, I still think the "Ambassador of Linux" should be prettier upon first boot. I am disappointed in the Ubuntu nVidia driver handling, but happy that I can finally use my wireless connection in Ubuntu. The functional Migration Assistant, the available Help tool, and refined software stack earn Ubuntu points in helping new users adjust, while the new PolicyKit loses one for overcomplicating an already confusing concept.

However, I found little to complain about this release. In the end, my experience with 8.04 was much better than any version previously. I was actually fairly impressed, darnit.

On the other hand, another user, whose view is encasulated in the title of his article, "Ubuntu 8.04: Not quite there, yet", concluded:

Ubuntu 8.04 shows progress in comparison to 7.10, against all odds. Many errors have been fixed, the hardware is better supported and one can really see it. It is a pity, that developers, instead of concentrating on fixing bugs and improving stability, decided to add many new features, introducing new bugs as the result.

The most important question is ... do I recommend Ubuntu 8.04? If I were to answer simply "yes" or "no" the answer would be negative. If you need a good system, that "just works", wait a few months before installing Hardy Heron, until it becomes really stable, as the LTS staple suggests. If you like shiny new features and challenges, and you do not get confused by Firefox or GNOME hangups, install Ubuntu 8.04 now. You might be lucky and it may work better for you than it did for me ;)

Why We Love Ubuntu Linux (or Do We?)

Why has Ubuntu generated such momentum in the Linux distribution arena? Users respond to a request for feedback.

I had always taken the view point that, while I was a Fedora person, Linux distributions were pretty much one and the same. After all, Linux at heart is the kernel, Torvalds' creation. Then there is a set of GNU and other free open source software that provides rich functionality. A graphical user interface -- these days GNOME or KDE -- gives a bit of polish, while an installer and package management tool help with adding and removing software. Although the latter two items may vary, fundamentally any Linux distro consists of pretty much the same things.

Or, so I thought. I heard rumblings about Ubuntu from all different areas. It gained momentum while I was looking the other way. Indeed, even as recently as last year I wrote stories for this column using Red Hat Linux commands and output to illustrate. I was surprised by the amount of feedback which criticised the choice to use Red Hat when Ubuntu was the bees knees.

Sure enough, Ubuntu did not seem to have a single bad review when I checked it out. It had gained a reputation for being dead easy to install and a doddle to maintain. Apparently, even one's grandmother could use it, we were told. I theorized in this column I should apply a "Ubuntu test" to every command or output I used. Yet, then the criticism came the other way; hard-core Debian groupies felt slighted anyone would use such a rogue platform which, they felt, stole from the work of Debian.

It is hard to deny that the new releases of Ubuntu -- most recently Gutsy Gibbon and now Hardy Heron -- catch attention more than new versions of Slackware (now up to v12) or Red Hat or Damn Small Linux or a great deal of others. Major PC retailer Dell chose Ubuntu for their line of Linux-based desktop computers which brought great excitement that Ubuntu would be the distribution which took Linux into the mainstream. However then ASUS hit a winner with their wildly-successful Eee subnotebook but this had a custom Linux derived from Xandros.

On the one hand, Ubuntu had all the signs of being the most unifying and popular Linux distro of all time, but on the other I kept finding people grumbling about it. On reflection, the grumbles may be because Ubuntu has been so massively hyped that the reality can be disappointing when compared to expectations. Perhaps Ubuntu has made itself a victim by virtue of its own marketing.

Anyhow, enough about me; time to hear what readers and user group members think.

By far the most common refrain was that Ubuntu was well supported and that its installation process did all the work. Reader Piere said, "Ubuntu is my choice, for the simple reason is there are more people using it. It is easy to get support ... a couple of clicks and a coffee later, and I have a full system, OS & Apps. And when things stuff up the forums have always come to the rescue."

The regular release cycle of Ubuntu is definitely a factor to consider. Each six months there is a major upgrade, taking advantage of what happens to be new in the open source world as well as driving towards a centrally defined roadmap of where Ubuntu wish to head.

However, is support really a factor in Ubuntu's favor? If we talk about "the community" helping out, does that not mean the Linux community in general? Actually, no, according to [one reader] who says Ubuntu has "the largest and most friendly user base ... Ubuntu users never say 'RTFM' ['Read The, uh, Friendly Manual']. They are very friendly to users new to Linux. This is not an accident. It started with [commercial sponsor of Ubuntu] Canonical. They deserve the praise they are getting."

[Another reader] writes, "I think that Ubuntu is such a darling because it has done so many things right so many users. It is the perfect distro for people just switching from MS [Microsoft]. Compiz allows for unsurpassed workstation organization. Word processing? Check. Image manipulation? Check. Audio editing? Check. Podcasting? Check. CD/DVD burning? Check. Web browsing? Check. Got a problem?" The thought that Ubuntu is the most friendly to switchers from other operating systems is certainly interesting. A reader titled "Linux Convert in the Making" agrees, commenting "Ubuntu is near perfect for the transitionist in anyone. It is relatively hands off, or at least inasmuch as Windows XP and far more than Windows Vista, easy to load, easy to start. It breathed new life into some old hardware (Dell 8100) that slogged and trudged under Windows XP."

Tim agrees: "I have to say that I love Ubuntu. People often talk about Microsoft ... being able to be used 'out of the box.' I can seriously say that Ubuntu finds most of my hardware straight up, more than Windows ever did."

Others tout the ease of installation line. Jacob writes, "My favourite, as many, is the Ubuntu family. I believe it is the distro of the moment because 'it just works.' I experienced three separate outcomes installing Susie on a machine three different times. I have yet to install Ubuntu on a machine (6 different installations) and not have it work."

Not every one is a Ubuntu supporter. FST777 advises "I prefer and use openSUSE. I have found it to be as (or more) polished as Ubuntu ..." while Emin says "I prefer CentOS for work related projects and Pardus at home. CentOS because it is built from RHEL [Red Hat Enterprise Linux] sources. Pardus because it comes with all the bells and whistles (codecs, flash, drivers ... etc.)" ...

KoenV says "I have always wondered why people think Ubuntu is so great. As an alternative for Windows, Ubuntu -- with its Gnome desktop -- is NOT as interesting as any KDE based distro -- Kubuntu excluded, since Kubuntu to me is not a fully featured KDE based distro ... To me, as a windows replacement, Madriva with a KDE window manager, is far better than Ubuntu. But you know, someone -- a Linux newbie -- writes an article in a respected newspaper about 'how good Ubuntu is' (not knowing of any alternative) and others blindly follow." ...

So, this is it in a nutshell. We love Ubuntu because it works out of the box on a wide range of hardware, because Canonical have been smart and pushes out regular updates on a reliable fixed schedule. The community support is considered a major draw card, being friendly and helpful. The fact it comes from Debian is a good sign.

Yet, we do not love Ubuntu because it does not work with all hardware, because it does not default to the KDE window system and because it comes from Debian but is published under its own name.

Also see this article: "Ubuntu Stealing Linux Thunder?"

Previous	Back to top	Next