W.I.L. Offshore News Digest for Week of June 2, 2008

THE U.S. WANTS TO KEEP THE SLAVES ON THE PLANTATION – INCLUDING YOU

Privacy expert and Sovereign Society columnist Mark Nestmann fills us in on the details of Congress's plan to impose an exit tax. As Nestmann writes, Congress has effectively sent the message to anyone with more than a modest amount of wealth that "You are slaves on our plantation. And if you want to exercise your right to leave, you will pay dearly for the privilege."

Nestmann predicted in February 2007 that Congress would pass such a law eventually. It is obvious that most politicians think of us a sharecroppers on their plantation, so no one should be surprised when they encode such thinking into law.

The United States is the only major country on the planet that taxes citizens on their worldwide income, no matter where those citizens happen to live. ... If you were born in England, Ireland, Japan, or almost any other country, all you need to do to avoid the obligation to pay tax on your worldwide income is leave. ... But not the USA. To permanently disconnect from U.S. tax obligations, a U.S. citizen must not only leave the United States, but also take the radical step of giving up U.S. citizenship. ...

The income tax savings from expatriation can be huge. But for truly wealthy U.S. citizens, the biggest savings from expatriation come after they die. ... An entrepreneur with a $20 million estate could save over $8 million in estate and gift taxes by giving up U.S. citizenship.

However, the image of wealthy former U.S. citizens living tax-free in tropical paradises is an irresistible populist target. The result has been a series of increasingly stringent laws that penalize U.S. citizens who give up their U.S. citizenship with "tax avoidance" as a principal purpose.

Congress has now once again amended these "anti-expatriation" provisions in a new bill. Both houses approved the bill unanimously, and sent it to President Bush for his signature. ... [The law] imposes the first-ever "exit tax" on even moderately wealthy expatriates. ... Once President Bush signs this bill, the law will require future expatriates to pay a tax on all unrealized gains of their worldwide estate, including most offshore trusts. And the tax applies not only to former U.S. citizens, but also to long-term green card holders who have resided in the United States for at least eight of the 15 years before they expatriate. ...

It would be one thing if the exit tax only affected billionaires. But, with only a few exceptions for dual nationals and others with strong ties to another country, the law applies to any expatriate that:

1. Has an average annual net income tax liability that exceeds $139,000, adjusted annually for inflation for the five preceding years ending before the date you lose your U.S. citizenship or terminate your residency
2. Has a net worth of $2 million or more on such date
3. Fails to certify under penalty of perjury that he or she has complied with all U.S. federal tax obligations for the preceding five years or fails to submit any proof of compliance the IRS demands

If you qualify under any of these criteria, you may be subject to the exit tax. ... [T]he first $600,000 of gains is excluded. This exclusion doubles to $1.2 million for a married couple filing jointly, when both expatriate. This exclusion will increase by a cost of living adjustment factor after 2008.

Gains will be calculated "mark-to-market," or the difference between the market value on the expatriation date and the market value at acquisition. ... This phantom gain will presumably be taxed as ordinary income (at rates as high as 35%) or capital gains (at either a 15%, 25%, or 28% rate), as provided under current law. When you actually sell the assets, you will not have to pay any additional taxes. However, your adopted country might tax the gain a second time, leading to double taxation on the same income.

And now for the really bad news: Once you expatriate, you will pay up to a 51% tax on distributions from retirement plans. The same goes for most other forms of deferred payments. If there is a silver lining, it is that the tax is not due until you actually receive payments from the plan. ...

Your individual retirement account [IRA] is NOT eligible for this treatment. If you are a "covered expatriate," you must pay income tax on the entire value of the plan, as if you received it in a lump sum. ...

[I]f you are a covered expatriate, and you make a gift or bequest to a U.S. person 10, 15, or even 50 years after your expatriation, the recipient must withhold tax at the highest marginal gift or estate tax rate that applies. Exactly how much tax you pay depends on the amount of gift or estate tax paid to a foreign country with respect to that gift or bequest. ...

If your net worth is only a little over $2 million ($4 million for a married couple expatriating at the same time), the most obvious way to avoid the exit tax is to spend enough money to get your net worth under these thresholds. Take a trip around the world. Blow some money in Las Vegas. Throw a really big party.

You can also contribute your excess funds to a qualified charity, or give away up to $1 million over your lifetime to anyone else without triggering a gift tax liability. If you have paid more than an average of $139,000 annually for the previous five years, however, this strategy will not work. And if you do not have sufficient cash to pay the exit tax, your best option may be to elect to defer payment. You will pay interest for the period tax is deferred, and you may be required to post a bond with the Treasury Department.

Fortunately, you can make this election (which is irrevocable) on a property-by-property basis. For instance, it appears as if you could pay the exit tax on all assets outside your IRA, and defer it for the assets in the IRA. ...

The bottom line: with the exit tax, Congress has made the most significant change to the anti-expatriation rules since their inception in 1966. In doing so, the IRS has sent wealthy U.S. citizens and long-term residents a clear message: You are slaves on our plantation. And if you want to exercise your right to leave, you will pay dearly for the privilege.

Is expatriation for you? The decision to give up U.S. citizenship is a serious one. It requires that you obtain a passport from another country, leave the United States permanently, and set up residence in a suitable jurisdiction.

It is a step you should take only after consulting with your family and professional advisors. But it is the only way that U.S. citizens and long-term residents can eliminate U.S. tax liability on their non-U.S. income, wherever they live. And it is a tax avoidance option that Congress has now made much more difficult.

In Nestmann's February 2007 piece cited earlier he wondered whether the U.S. courts might declare an exit tax unconstitutional, on the basis that: "... the right to expatriate is fundamental in American law. Indeed, the Declaration of Independence cited it as a 'law of nature.' The U.S. Constitution guarantees the right to end U.S. citizenship, to live and travel abroad freely, and to acquire citizenship from other nations. All of these rights have been affirmed by the U.S. Supreme Court." He held out "a glimmer" of hope that the courts might do this. Sounds about right.

Also, we can readily imagine the thresholds being lowered so that anyone who expatriates with any net worth gets hit. After all, it is such a privilege to live in the land of the free that anyone who decides to leave deserves whatever punishment the government chooses to mete out.

EUROPE, U.S. BATTLE SWISS BANK SECRECY, PART II

Coverage continues from last week on the lastest U.S. and E.U. efforts to undercut Switzerland's long tradition of financial privacy.

A Wall of Silence

Switzerland's wall of silence has been in place for more than 70 years. In the Third Reich, both the Nazis and the persecuted Jews valued the small country's discreet services. After the war, Colombian drug dealers, African dictators and tax evaders from around the world pumped their ill-gotten billions into Swiss vaults. Former Philippine dictator Ferdinand Marcos, for example, had more than $600 million (€387 million) stashed away in Swiss bank accounts.

Money-laundering was not made a criminal offense in Switzerland until 1990. Before that, Swiss banking secrecy laws were even impregnable to foreign authorities pursuing members of the mafia. In the meantime, however, it has become easier to crack the country's once hermetically sealed vaults.

A treaty with the European Union "to combat fraud" is expected to come into effect by the end of the year. When that happens, Switzerland will "also provide administrative and legal assistance in cases of tax evasion in the area of value-added tax," says Robert Waldburger, a professor of tax law and former deputy director of the Swiss Tax Administration. German tax investigators will then be able to contact their Swiss counterparts directly and discuss the necessary account information.

The new rules will be especially detrimental to small and mid-sized companies. Their private illicit earnings are often derived from undeclared company sales, for which they also failed to pay value-added tax.

Is Swiss banking secrecy headed for the history books? And are Steinbruck and other finance ministers fighting a paper tiger? Almost, but not entirely. According to Waldburger, "the automatic exchange of information," in other words, the disclosure of account details, "would spell the real demise of Swiss banking secrecy." But the treaty on the taxation of interest between Switzerland and the EU still prevents this from happening.

After years of negotiations, the EU member states agreed that the Swiss could levy a source tax, a sort of withholding tax, which would increase over time, on the interest earnings of foreign customers, and turn over this source tax to the EU states without including customer data. However, the tax is easily circumvented with special financial products and letterbox companies, because it does not apply to legal [i.e., it does not apply to trusts, companies, etc.] persons.

But this is precisely what EU member states Austria, Luxembourg and Belgium are also doing. For this reason, a uniform EU directive to strengthen the interest taxation directive is not in sight. When finance ministers met in Brussels last Wednesday, Steinbruck encountered strong resistance to his demands. Austrian Finance Minister Wilhelm Molterer has said that banking secrecy is "not up for discussion."

In the United States, on the other hand, the Swiss banking industry could run into difficulties sooner. For years, the U.S. Senate has been conducting its own detailed inquiries into the issue of tax evasion. Senators have summoned key representatives of the industry, including tax advisors, accountants, lawyers and bankers, to the Capitol in Washington for lengthy hearings.

We would wager that these representatives were operating inside the U.S. for the most part, and thus had little choice but to heed the Senators' call.

These hearings have produced reports, some of them hundreds of pages long, on the "tax shelter industry" and "its tools, methods of obfuscation and those pulling the strings." UBS was mentioned early in the Senate documents as an offender. With relish, the senators cited a letter written by an insider to UBS management. According to the letter, the bank offers "U.S. taxpayers illegal tax evasion models," part of a system that costs American tax authorities "several hundred million dollars a year."

Of course, others -- the auditors at KPMG -- invented the system on which this is based. After admitting to charges of criminal tax fraud conspiracy, they only managed to avoid further criminal prosecution in the U.S. in 2005 by paying $456 million (€294 million) in fines and penalties.

By this point, the UBS executives should have known that they were likely to face significant problems in the United States. Many of the "tax optimizers" advised by KPMG had maintained accounts with the Swiss bank. The trail had been set. All the American officials had to do was to follow it.

Three U.S. authorities are now conducting investigations against the Swiss portfolio managers: tax investigators from the U.S. Justice Department, the Securities and Exchange Commission (SEC), headed by Christopher Cox, and New York Attorney General Michael Garcia. All are now hunting down the Swiss.

Political conflict is also on the horizon. An aggressive bill to combat tax evasion, the "Stop Tax Haven Abuse Act," was introduced in the U.S. Congress last year. The legislation provides for tough measures against 34 tax havens, including Liechtenstein, Luxembourg and Switzerland. The bill has stood little chance of becoming law until now. But that could quickly change after the presidential election in November. Once of the bill's three sponsors is Senator Barack Obama, who is currently favored to win the White House.

The devil will be in the "tough measure" details, if this bill comes to pass. It is one thing to bully a small, island tax haven into doing the U.S.'s bidding. It is another to take on the richest countries in Europe, however small they may be.

GERMANY OFFERS “BLACK MONEY” DATA, INDIA DITHERS

Germany is offering to share its data haul from Liechtenstein with India, apparently gratis. But India is taking its time in formally responding to the offer, perhaps because the information that would thereby be revealed could be embarrassing to certain politicians and whonot.

NEW DELHI: Investigators in India might have their best chance yet to trace those Indians who have stashed away millions in the tiny tax haven of Liechtenstein, a small landlocked country between Austria and Switzerland, provided the Manmohan Singh government asks for the information on offer. The dope on hundreds of rich Indians who have black money parked in Liechtenstein could be made available to the authorities here as the German government, which has obtained a list of account holders at Liechtenstein's LTG Bank, is willing to part with the names.

Several countries including the U.S., the UK, Canada, Italy, Norway, Sweden, Finland and Ireland have already used the opportunity to zero in on their citizens who have evaded taxes and smuggled their wealth to the principality, the 6th-smallest country in the world. But Transparency International says India has maintained "a stoic silence over the issue and has not approached the German government for this data."

Expressing concern over the Indian government's apparently lackadaisical attitude in getting after offenders who have cheated the tax authorities of millions of dollars is quite surprising and the Indian chapter of TI -- an organization campaigning to reduce corruption -- has urged the government to take all necessary steps to seek the data.

Normally one would expect the Tax Justice Network, which never met a tax it did not like as long as it was fairly (by their standards) administered, to be leading the charge here. Transparency International's interest here, one might think, is that corrupt Indian government workers are secreting away their ill-gotten stash and a chance to expose them is being missed. But TI displays a somewhat uncomfortable affinity for the idea of taxation per se in this news item. If regulations and government revenues were minimized, the chances for corruption would also be minimized. Why is TI not advocating this course of action, then?

Admiral R H Tahiliani, chairman if TI India and a former navy chief, said: "This money belongs to the people of India and it is possible that it has been tucked away in this distant country by those who have acquired it illegally and are now evading taxes. There should be complete transparency and accountability about this money and it is for the government to find this out and inform people." ...

Indeed, the offer looks too good to refuse. It is a bit like being served secrets on a platter and if the government does not waste time looking a gift horse in the mouth, it could get data that might otherwise never be accessed given the laws that protect tax havens that often require specific proof of criminality. ...

Suspecting that the government's chariness could stem from fears that influential politicians and industrialists might be compromised by the Liechenstein data, TI has, in a statement, said: "It is alleged that this money belongs to rich and powerful politicians, industrialists and stock brokers and that is why the reluctance on the part of government of India (to get details from Germany)."

A not implausible conjecture.

Liechtenstein, like Switzerland, St. Kitts, Canary Islands, Antigua and Bahamas, has been a haven for wealthy people to hide their ill-gotten wealth away from the prying eyes of tax authorities. Referring to reports, TI mentioned that German intelligence agency -- BND -- has details of about 800 clients of LTG Bank -- run by Liechtenstein's ruling dynasty -- and prosecutors are using this information to target suspected tax evaders.

"The ministry of finance and PMO have, however, not shown much interest in finding out about those who have their lockers on the secret banks of Liechtenstein which prides itself in its banking system," TI said.

Referring to such banking systems, TI also said that secretive and non-transparent tax havens could be used for money that is related to drugs and terrorism. These accounts have been frequently used to channel money for purchase of arms.

It was inevitable that this addendum would be thrown in, however unrelated to the main subject.

CHINA LIFTS BANKS’ RESERVE REQUIREMENTS UP TO 17.5%

To enforce an artificially low dollar/yuan exchange rate, the People's Bank of China has had to print a lot of yuan, thus flooding the Chinese financial system with reserves and creating manias in stocks, real estate, and capital spending. Showing that they at least understand how fractional reserve banking works, the Chinese central bank has raised the banks' reserve requirements, attempting to reduce the multiplier effect even as it expands the monetary base. It is a hopeless cause ... which will not keep the PBoC from trying.

China told lenders to set aside more money for a fifth time this year to cool inflation that is close to an 11-year high in the world's fastest-growing major economy. Banks must put aside a record 17% of deposits as reserves starting June 15, which rises to 17.5% from June 25, the People's Bank of China said ... The current requirement is 16.5%.

China's banking system is being flooded with cash from a trade surplus, foreign investment and speculative money betting on a rising yuan. The government is trying to slow inflation from April's 8.5 % pace without triggering a slump in the economy that contributes the most to global growth. ...

[The] move will drain about 422 billion yuan ($60 billion) from the financial system. Local-currency deposits stood at 42.2 trillion yuan at the end of April. Banks in areas severely affected by the May 12 earthquake are excluded from the changes, the central bank said.

China's economy, the world's 4th largest, expanded 10.6% in the first quarter from a year earlier, the 9th quarter of growth above 10%. The trade surplus has pumped $58 billion into the financial system in the first four months and foreign direct investment has injected $35 billion. The extra cash may fuel higher inflation and adds to the risk of asset bubbles.

The benchmark CSI 300 Index of shares has tumbled 35% this year after gaining 162% in 2007, on concern that a global slowdown and tightening measures at home may dent company profits. House prices in China's 70 major cities rose 10.1% in April from a year earlier, slowing for a third month after the government raised mortgage rates and imposed stricter down payment requirements.

April's inflation was close to February's 8.7% pace, the fastest since May 1996. It is also more than 3 percentage points above the government's 4.8% target for this year. In addition, China's strongest earthquake in 58 years that hit the Sichuan province on May 12 has disrupted food supplies and is likely to escalate inflation.

Besides reserve requirements, China has allowed the yuan to appreciate versus the U.S. dollar this year to reduce import costs. It has resisted raising interest rates after six increases in 2007 as the U.S. Federal Reserve cut borrowing costs. A widening of rates between the two countries may attract more capital inflows into China.

BIG TROUBLE FOR PHILIPPINE ECONOMY AS PRICES SURGE, SAY ANALYSTS

The Philippines recently have been one of many economic stars among emerging economies. Now as the great worldwide credit bubble manifests as raging commodity inflation, the country's prospects suddenly look less promising.

The Philippine economy faces a "perfect economic storm" of inflation at 9-year highs as food and oil prices soar, rising interest rates and slowing growth, analysts said. They said inflation was unlikely to ebb soon after hitting an annual rate of 9.6% in May, leading the central bank to hike borrowing costs last [week] for the first time since 2005. ...

Official data showed food prices rose 14% in May as rice, the national staple, rocketed 31.7% and corn 27.1%. Petrol, kerosene and diesel prices have also surged. "If inflation pressures persist into next year and it feeds into further price increases, or leads to an economic slowdown and job losses, then we may start to see unrest," warned political risk consultant Roberto Herrera-Lim. "It is when you combine the two -- job losses and inflation -- then things become troublesome," Herrera-Lim, the Southeast Asian analyst for New York-based firm Eurasia Group, said in an interview published on the ABS-CBN television web site.

The government has already announced measures to ease the pain on the country's poor, such as a one-off 500-peso ($11) subsidy to help pay electricity bills, which will cost around $45 million. It has also announced a $68 million quarterly fuel subsidy for the public transport sector and loans to help convert buses and taxis to alternative fuels. Meanwhile, farmers are to be given fertiliser subsidies and poor students scholarships, with the government going to the international debt market to raise $750 million to help pay for it all.

But at the same time economic growth is slowing, falling to an annual rate of 5.2% for the first quarter compared with 7.2% for all of 2007. Last year's economic performance was the best in 31 years and inflation in 2007 was just 2.8%.

The government has now abandoned hopes of balancing the Philippine budget this year for what would have been the first time in a decade. "Giving away cash grants for food and electricity consumption, subsidies for farmers and the transport sector and borrowing from abroad to pay for them show desperation," said Diokno. "It doesn't help the situation in the long run." Rommel Macapagal, chairman of Westlink Global Equities, said the government's handouts were short-term solutions. "The problem is that it can do very little about rising fuel and food costs on its own because it is a worldwide problem." Other experts warned inflation could rise into double digits, potentially heralding still higher interest rates.

Cayetano Paderanga, an economist at the University of the Philippines, said it was too late to stop inflation hitting double-digits. "The inflation rate will still go up before it goes down and there is a very good chance that it will breach 10 percent," he told the Philippine Daily Inquirer newspaper, adding it would then be increasingly difficult to control.

"Ten percent is an important threshold. Beyond this level, the psychology of the people changes and it becomes more difficult to control their expectations of price increases." It could create a situation like "stagflation," he said, where economic growth slows but inflation stays high, posing a severe test for policymakers.

U.S. CONGRESS BARS CONTRACTORS AVOIDING TAX BY USING OFFSHORE SHELL COMPANIES

Bill targets Halliburton subsidiary KBR, other Iraq contractors.

KRB and other federal government contractors have been hiring Americans working overseas via offshore shell companies. These nominally foreign entities do not have to pay or deduct Social Security and Medicare taxes for these employees. The U.S. House and now the Senate have passed a bill which closes that "loophole."

It is unclear to us where the incidence of the additional taxes will fall. If the contracting is competitive -- as one of the effected firms seems to claim -- then it could get passed right back to the federal government in the form of higher bids. It could also come out of the hides of the employees, although we doubt they would absorb all of it. On the other hand, if the contractors are really operating under sweetheart "no bid" contracts, the bill is a way of siphoning some of the excess profits back into the Treasury. In any case, the bill is more bluster than substance.

The Senate [on May 22] passed by unanimous consent a bill prohibiting federal contractors from avoiding Social Security and Medicare taxes by hiring workers through offshore shell companies. Earlier [in the] week, the House of Representatives also voted unanimously to ban the practice, used by former Halliburton subsidiary KBR to avoid payroll taxes for more than 10,000 American workers in Iraq. The bill, which appears to have veto-proof support, now goes to President Bush. The White House has not indicated whether he supports it.

Senator John F. Kerry, a Massachusetts Democrat who cosponsored the bill with Senator Barack Obama of Illinois, said the money gained by closing the payroll tax loophole will help pay the cost of a tax relief package for veterans ... "We cannot allow federal contractors to set up shell corporations in tax shelters and shirk their responsibility to pay payroll taxes for their American employees," Obama said in a statement.

Kerry drafted the payroll tax provision after The Boston Globe reported in March that Houston-based KBR had avoided hundreds of millions of dollars in payroll taxes for 10,000 American employees in Iraq by hiring them through shell companies based in the Cayman Islands.

Under federal law, companies and their employees split the cost of Social Security and Medicare taxes, which amount to 15.3% of an employee's wages. But some U.S. defense contractors working overseas sought to avoid that tax by setting up offshore entities to hire the workers. The practice prevented those workers from being able to collect unemployment benefits and resulted in losses for Social Security and Medicare.

KBR appears to be the largest offender in Iraq, but others also use the practice. In March, one other major defense contractor in Iraq surveyed by the Globe acknowledged using the practice. But subsequent investigations found that MPRI, a Virginia-based contractor, hires about 400 Americans through a subsidiary based in Bermuda.

DynCorp International, a defense giant, employs 750 to 1,000 American police trainers in Iraq through a wholly owned subsidiary based in a tax-free zone in the United Arab Emirates. A DynCorp recruitment advertisement for those police training positions states that "no federal income or Social Security taxes are withheld" from their $134,110 annual salaries. In a recent interview, DynCorp spokesman Douglas Ebner defended the practice as "integral to being competitive in the current contracting environment. This is a legal way of reducing costs."

But that would change under the new law, which would oblige foreign subsidiaries of U.S. federal contractors to pay Social Security and Medicare taxes for their American employees. The law would give companies 30 days to comply.

"I'm very pleased," said Representative Richard Neal, a Massachusetts Democrat who championed the measure in the House, alongside Representative Rahm Emanuel, an Illinois Democrat, and Representative Brad Ellsworth, an Indiana Democrat. "This whole issue now of closing tax loopholes in the search for revenues is very important. I think there is a sense that you can't argue for tax havens and two-and-a-half billion a week for the war in Iraq and be consistent."

"While honest taxpayers played by the rules, KBR ... exploited a tax loophole that weakens Social Security and Medicare," Emanuel said. "The president has ignored these abuses of the tax code for too long. I sincerely hope he will sign this legislation and close this egregious loophole."

ACADEMICS CALL FOR SHAKE-UP OF UK CORPORATE TAXATION

Economics Nobel Prize winner James Mirrlees was commissioned by UK think tank the Institute for Fiscal Studies "to identify the characteristics of a good tax system for any open developed economy in the 21st century, to assess the extent to which the UK tax system conforms to these ideals, and to recommend how it might realistically be reformed in that direction." A worthy undertaking, to be sure.

Some of the resulting report suggestions are pretty interesting, aided by evidently not being overly burdened by the existing tax regime in their investigation. The main initial state dependence exhibited is the usual academic penchant for "revenue neutrality" in their taxation scheme change recommendations. (We would not want tax collections to go down, would we? Funds-dispenser-dearest might get angry.)

Corporation tax should be reformed or replaced by a higher VAT rate, offset by lower National Insurance contributions, to reduce disincentives to invest in the UK, according to two studies commissioned by the Mirrlees Review of the British tax system, which is being chaired by Nobel prize-winner Professor Sir James Mirrlees for the Institute for Fiscal Studies. The studies both argue that globalization and the growth of the financial sector require a new approach to the taxation of profits in a small open economy.

Unlike most EU governments, the UK currently taxes dividends received by UK-resident firms from their foreign subsidiaries as well as profits earned in this country. This creates a disincentive to locate headquarters in the UK.

Not to mention the incentive to move out of the UK, as a couple of large UK companies have publically announced they would recently.

Rachel Griffith (IFS and University College London), James Hines (University of Michigan) and Peter Birch Sorensen (University of Copenhagen) recommend moving to a "source-based" corporation tax that exempts dividends paid to UK companies by their foreign subsidiaries.

They also recommend exempting from taxable profits the normal rate of return (such as might be earned on a risk-free government bond), arguing that this Allowance for Corporate Equity ("ACE") approach would encourage investment and would thus increase national income and real wages.

This is an innovative suggestion, although it has been tossed around in academic circles forever. It attempts to approximate a levy on true economic profits, i.e., returns in excess of the opportunity cost of capital.

The Government has already said that it wishes to move from a "credit" to an "exemption" system for foreign dividends, but the authors warn that the proposals published by the Treasury in 2007 are handicapped by the proposed treatment of intangible assets held by UK multinationals offshore. They argue that these proposals would add a further burdensome layer of anti-avoidance rules.

To discourage investors from hiding their wealth in foreign tax havens, the authors recommend exempting interest income from personal tax, and allowing shareholders to deduct an imputed normal return on the basis of their shares before imposing tax on dividends and capital gains.

These guys appear to be taking seriously the results of their economic welfare optimization models, which are in Prof. Mirrlees's bailiwick.

Abolishing the personal dividend tax credit and aligning the combined tax rates on corporate and shareholder income with that on labor income could then avoid some of the incentives to choose the legal form of a business based on tax reasons identified in their contribution to the Mirrlees Review by Claire Crawford (IFS) and Judith Freedman (Oxford University).

The legal paper-pushers will not like that idea.

Alan Auerbach (University of California at Berkeley), Michael Devereux (Oxford University and IFS) and Helen Simpson (Bristol University and IFS) argued meanwhile that taxable profits would be lower under an ACE than under the existing corporation tax.

This means that a higher statutory tax rate would be required to bring in the same revenue, increasing the potential gains to multinational companies from shifting their profits to jurisdictions with lower statutory tax rates.

These authors suggest moving to a form of "destination-based" corporate tax, levied where the sale of a good or service is made to the final consumer. They argue that this would remove distortions to the location of investment, and substantially reduce the opportunity for companies to shift profits between countries. The authors suggest that moving to a destination basis could be achieved by introducing border adjustments, similar to VAT, in which exports of goods and services become tax-exempt, and imports of goods and services are taxed.

Yes, we must make sure the revised scheme is "revenue neutral."

A similar result could be achieved by replacing corporation tax with an increased rate of VAT, partially offset by reducing National Insurance contributions. This reform might be hampered by EU restrictions on increases in the VAT rate, by EU rules requiring the financial and some other sectors to be exempt from VAT, and by the risk of increasing the scope for carousel fraud.

The Mirrlees Review team also asked leading international experts to comment on the proposals made by authors of the two papers.

One of the commenters points out, reasonably enough, that "moving to a destination-based corporation tax or to greater reliance on VAT might encourage people to shift their earnings and spending to other jurisdictions." But that extra variable might have made the models too complicated, so it was assumed away. ;)

BANKRUPT CAYMAN ISLANDS HEDGE FUNDS LOSE BID TO SHIELD THEIR ASSETS

This article provides a more extensive analysis than the one on the same subject we posted last week. As we saw it, the principal issue concerned form vs. substance, whatever the applicable area of law that applied. This opinion does not change, but there are some interesting details of the case that are worth examining.

Bear Stearns Companies' bankrupt hedge funds cannot shield their U.S. assets from lawsuits while they liquidate in the Cayman Islands, a federal judge has ruled, upholding a bankruptcy court decision. U.S. District Judge Robert Sweet in Manhattan found ... that the lower court was correct to deny protection from creditors under Chapter 15 of the U.S. Bankruptcy Code because the Cayman Islands were not their "center of main interest." The funds are winding down under the supervision of liquidators there, where the Bear Stearns units are based.

"The process by which the financial problems of insolvent hedge funds are resolved appears to be of transcendent importance to the investment community and perhaps even to the society at large," Sweet wrote in an order. The decision may be used as precedent in future rulings on whether hedge funds based abroad that have U.S. operations can claim similar protections.

Under Chapter 15, a company must have a "center of main interest" outside the U.S. to qualify for protection. Alternately, it can have a "nonmain" center of interest, or one that has substantial, though not primary, operations. Lawyers for New York-based Bear Stearns ... argued the funds had assets and two directors in the Cayman Islands.

Sweet cited the bankruptcy court's findings that Bear Stearns Asset Management, the fund's investment manager, is located in New York, as is its administrator, which runs back-office operations and manages its books and records. All of the funds' assets were also in New York prior to a transfer made after its bankruptcy filing. The two directors who were based in the Cayman Islands "have not been shown to have had any substantial involvement in the business," Sweet wrote.

This post-bankruptcy filing funds transfer is analogous to a fraudulent conveyance, where a party moves funds out of reach of known creditors in an attempt to evade paying them off. The later is, as a rule, illegal. Since the funds were being moved to establish "main interest" rather than to evade the reach of the courts, it is apparently not a substantive issue here. Clearly the move came a bit late in the day to provide any help to the Bear Stearns case whatsoever.

Jay Westbrook, a professor at the University of Texas, and other authors of Chapter 15 filed a brief with the court saying the funds had no true operations in the Cayman Islands, and that, because the funds invested in securities related to subprime mortgages, their bankruptcies should be handled in the U.S. Westbrook said today that the ruling is likely to stop companies based in "haven countries" for tax or secrecy reasons from attempting to seek protection under Chapter 15.

Basis Yield, a bankrupt Cayman fund owned by Australia-based Basis Capital Funds Management Ltd., withdrew its request for Chapter 15 bankruptcy in April. There are currently no Chapter 15 petitions for Cayman-based funds pending in federal court in Manhattan

Bear Stearns's lawyers argued that, because the funds were registered in the Cayman Islands, they should automatically be considered to have their center of main interest there. They called denial of Chapter 15 protection a breach of "comity," the principle of cooperation with foreign courts. "The bankruptcy court correctly held that principles of comity do not figure in the recognition analysis," Sweet ruled.

The funds filed for bankruptcy in July, citing volatility in the mortgage market. U.S. Bankruptcy Judge Burton Lifland in Manhattan, denied them Chapter 15 protection. Lifland said the funds had a mere "letterbox" in the Caymans, while operations, documents and creditors were all in New York. Lifland helped write the Chapter 15 statute.

Although not directly applicable, it seems to us that some of the revealed principles undergirding the case are generally applicable to the onshore/offshore dividing line in any multinational operation. Having official headquarters and directors is not sufficient. There must be genuine administrative, sales, etc. functions performed from the offshore jurisdiction. Banking out of the jurisdiction would obviously help the cause.

BERMUDA FUND LIQUIDATED AS INVESTORS LOSE OUT

The referenced fund was engaged in a couple of irregularities: (1) Canadian investors were given to believe that they were investing in a domestic fund, but illegal transfers to offshore entities were made. (2) Risky futures trading strategies were a radical departure from historical conservative stock and options trading, again contrary to investor expectations. Of course the losses from the trading are irrecoverable. Unfortunately, the offshore transfers are MIA with little hope for recovery.

A Bermuda-registered fund linked to Montreal's Triglobal Capital Management Inc. is in liquidation and investors have little hope of anything but a minimal recovery, judging from a report by a Canada-government appointed administrator. The Bermuda-registered Tricap Futures Fund Ltd. was the smallest of three offshore funds linked to the Montreal company and was reportedly valued at $3 million.

According to the Montreal Gazette, administrator Jean Robillard said no money has been traced from the largest of the funds, Cayman Islands-based Focus Management Inc. The outlook does not appear much better for two other funds, Ivest Fund Ltd. and Tricap Futures Fund Ltd. The total invested in the three funds was at least C$86 million.

Mr. Robillard would not venture an estimate on how much investors of the various funds will recover, but did say: "My experience is that when you leave North America and go into the islands, you usually have a lot of trouble recovering funds."

In December, the quasi-judicial Bureau de décision et de révision en valeurs mobilières froze the assets of Triglobal and associated companies and imposed a securities trading ban on the companies and several individuals involved in the group. The Autorité des marchés financiers, Quebec's financial watchdog, has said its investigation found client money had been invested illegally in the offshore funds.

In the report issued last week, Mr. Robillard states he has found no financial statements for Focus, but 136 people have come forward and confirmed they invested $36 million in the fund. Mr. Robillard, an accountant at Raymond Chabot Grant Thornton, said an additional $30 million flowed into Focus from Bahamas-registered Ivest.

"Up to now, nothing has been recovered or even traced by the provisional co-liquidators (of Focus)," Mr. Robillard said in his report. The co-liquidators "are continuing their investigation into transfers made and certain companies involved. Nevertheless, given the size and quantity of transactions ... at this stage, it appears difficult for the co-liquidators to hope for a substantial recovery of funds."

In the case of Ivest, the report states that 101 people had invested about $48 million in the fund as of September 2007, according to a register of investors obtained by the administrator. The report indicates that besides money transferred to Focus (a total of $30 million between 2004 and 2007), Ivest fund lost $16.1 million U.S. last year on risky futures trading.

Those futures bets were a radical departure from the more conservative trading of stocks and options in previous years that produced gains for Ivest of $2.4 million in 2004, $7.3 million in 2005 and a loss of $400,000 in 2006. The liquidators are investigating the 2007 losses, which represented almost all the available money in the fund. Another $1.5 million of Ivest money was loaned to three companies.

WIPING YOUR DISK DRIVE CLEAN

When you get rid of an old PC, whether via sale, donation, or even disposal, you should wipe the hard disk drive clean so that whatever information you want to keep confidential stays confidential. As this article explains, this is no easy matter. "Deleting" a file really just deletes the pointer to the file. The data is not effectively removed until every bit of the space it was occupying on the drive has been overwritten. And the more times it is overwritten, the less likely a determined electronic forensicist can recover it. Motivations along that line drove Richard Nixon secretary Rose Mary Woods to alleged erase part of the famous Watergate tape -- it of the 18 1/2 minute gap -- five to nine separate times.

The program suggested for thoroughly wiping one's hard drive is a Unix/Linux utility called wipe. Even if you are a Windows user, you can boot from a Linux live CD and follow the instructions from the article.

An alternative program which works to the same end is called Boot and Nuke. During the setup you create a bootable floppy disk, CD or USB device containing a minimal Linux distribution. The drive wiping routine is automatically invoked after boot-up. Wiping a 40GB hard drive using eight erasure passes took over 24 hours when we tried it. Effective security requires some patience.

Everybody who owns a computer will someday need to dispose of a disk drive. Before you do, it is a good idea to cleanse the drive, so no one can read your sensitive information. Deleting files and reformatting is not sufficient. Determined effort can still reveal data from a drive even after it appears to be gone. To do a more thorough job, I suggest using wipe.

You need to take special pains because files that are "deleted" are not really gone. Most operating systems, including Linux and its ext2 filesystem, just delete the pointer to a deleted file; the data still exists on the drive. It is not effectively removed until every bit of the space it was occupying on the drive has been overwritten. Even then there are ways, albeit difficult, to analyze the drive and extract data. The only way, short of melting the drive, to ensure the data is gone for good is to overwrite the drive several times with random data.

Several Linux utilities can cleanse files and drives, and all do the same thing. Wipe has more options than some of the other tools, including the ability to erase a block of data on a partition.

If the target drive is installed in a working system, the easiest way to clean it is to run wipe off of a Linux live CD. Knoppix, the granddaddy of Linux live distributions, comes with a ready-to-use version of wipe. To get started, download and burn the latest version of Knoppix, then put the CD in the CD drive of the target machine and boot. If all goes well, Knoppix should boot and present the KDE interface.

wipe is not the only utility for cleansing files and disk drives. shred is another, it can do anything that wipe can do. Another tool is the secure-delete suite, which comes with four separate programs: srm, smem, sfill, and sswap. ... All of these tools essentially do the same thing, and they all do it well.

Launch Konsole, KDE's terminal emulator, using the icon in the bottom toolbar. Find the partition names of the target hard drive by listing all of the disk devices in the /dev directory. For IDE drives, run ls /dev/hd*. For SCSI drives, use ls /dev/sd*. The command should list several items. The primary drive is typically /dev/hda or /dev/sda. There will be an item in the output for every partition on the device.

It should go without saying that running wipe will nuke everything on the target file system. Everything beyond this point is destructive, so make sure anything important is backed up.

Wipe's developers suggest only wiping one partition at a time, so for every partition, including the swap partition, run the command sudo wipe /dev/partition. Use the sudo command so that there are no permission errors. The wipe process will take several hours to complete for a moderate-sized hard drive. If you want it to go faster you can tell it how many passes you want it to make by using the -Q option with a number less than the default of 4. However, the more passes wipe makes, the better the protection, at least in theory.

If the target drive is not in a working machine, you can place it in a USB enclosure and attach that to a Linux machine. Note that most window managers will automatically mount external USB storage devices when they are attached; unmount the drive before running wipe. If wipe is not already installed on the machine, install it using your distribution's package manager. Next, launch a terminal session, find the device, and run wipe on each partition, using the command above.

Using wipe does not absolutely guarantee that data on the drive cannot be recovered, but it goes a long way in making it difficult.

LEGISLATING TYRANNY

This excerpt from the second edition of The Tyranny of Good Intentions: How Prosecutors and Bureaucrats Are Trampling the Constitution in the Name of Justice, by Paul Craig Roberts and Lawrence M. Stratton, lays out just how far the rule of law has deteriorated in the post-9/11 United States.

It has always been the case that if "they" were out to get you, your only real defense was having good political connections. But the ease with which the executive branch of the U.S. can lock you up and throw away the key has reached unprecedented levels. The Bush administration and allies program to effect this was facilitated by the failure of Congress and the courts to provide their originally conceived check and balance to executive branch overreach, and instead to join in an unholy conspiracy to systematically undo centuries of civil liberties jurisprudence.

The George W. Bush administration responded to the 9/11 attack on the World Trade Center and Pentagon with an assault on U.S. civil liberty that Bush justified in the name of the "war on terror." The government assured us that the draconian measures apply only to "terrorists." The word terrorist, however, was not defined. The government claimed the discretionary power to decide who is a terrorist without having to present evidence or charges in a court of law.

Frankly, the Bush administration's policy evades any notion of procedural due process of law. Administration assurances that harsh treatment is reserved only for terrorists is meaningless when the threshold process for determining who is and who is not a terrorist depends on executive discretion that is not subject to review. Substantive rights are useless without the procedural rights to enforce them.

Terrorist legislation and executive assertions created a basis upon which federal authorities claimed they were free to suspend suspects' civil liberties in order to defend Americans from terrorism. Only after civil liberties groups and federal courts challenged some of the unconstitutional laws and procedures did realization spread that the Bush administration's assault on the Bill of Rights is a greater threat to Americans than are terrorists.

The alacrity with which Congress accepted the initial assault from the administration is frightening. In 2001, the USA PATRIOT Act passed by a vote of 98 to 1 in the Senate and by 357 to 66 in the House. The act was already written and waiting on the shelf before the 9/11 attack. Indeed, the FBI and Department of Justice have tried for years to introduce PATRIOT Act provisions into the law. That act was introduced immediately after the attacks, and few members of Congress read its contents prior to passing it.

Federal courts declared some provisions of the legislation to be unconstitutional. Vague language criminalizing "expert advice or assistance" as material support for terrorism was thrown out, as were gag orders and "National Security Letters" used to obtain private information without judicial oversight. Despite challenges from the American Civil Liberties Union and resolutions passed in 8 states and 396 cities and counties condemning the act for its attack on civil liberties, Congress reauthorized the act in March 2006, making most of it permanent and sending a clear signal that the "war on terror" takes precedence over civil liberty.

The PATRIOT Act's infringements of civil liberty are serious, but they pale by comparison to the Bush administration's assertion of executive power to set aside habeas corpus protection for both citizens and noncitizens declared by the executive branch to be "enemy combatants." The Bush administration claimed and exercised the power to hold indefinitely anyone so designated without access to legal representation. In other words, the Bush administration claimed the discretionary and unaccountable power to imprison whomever it wished.

In keeping with its self-declared powers, the Bush administration quickly rounded up hundreds of detainees whom it claimed -- without evidence -- to be "enemy combatants." Four detainees, Rasul, Hamdi, Padilla, and Hamdan, consisting of a British citizen, two American citizens, and an Afghan, respectively, challenged the administration in federal court cases that reached the Supreme Court.

In Rasul v. Bush the Supreme Court ruled in June 2004 that, contrary to Bush administration assertions, the courts have jurisdiction over Guantánamo and that detainees must be allowed to challenge their detention.

Also in June 2004, the Supreme Court ruled in Hamdi v. Rumsfeld that Hamdi, an American citizen, was deprived of due process and had the right to challenge his detention. However, the ruling was far from a clean sweep for civil liberty. Both noted civil libertarian Harvey Silverglate (Reason, January 2005) and John Yoo, a Department of Justice apologist for the new tyranny, agree that the Supreme Court decision left flexibility and room for the government to maneuver and prevail in the end.

In December 2003, an appellate court ruled that U.S. citizen José Padilla could not be denied habeas corpus protection. To forestall another Supreme Court ruling against the Bush administration, the administration withdrew Padilla's status as "enemy combatant" and filed criminal charges that bore no relationship to the administration's original assertions that Padilla was plotting to explode a "dirty bomb" in an American city. As Harvey Silverglate has documented (Boston Phoenix, September 16, 2005), the Padilla case is also an extraordinary story of "forum shopping" (picking a court where judges are friendly to its case) by the Department of Justice.

Forced by the federal judiciary to release José Padilla from years of illegal detention or to put him on trial, the Bush administration had to scramble to put together some kind of charges. The best that the Bush administration could do was to charge Padilla not with any terrorist acts, but with wanting to be a terrorist -- a "terrorist-wannabe" to use the words of Andrew Cohen (WashingtonPost.com, August 16, 2007).

By the time Padilla went to trial, he had been demonized for years in the media as an "enemy combatant" who intended to set off a radioactive bomb. Peter Whoriskey (Washington Post, August 17, 2007) described the Padilla Jury as a patriotic jury that appeared in court with one row of jurors dressed in red, one in white, and one in blue. It was a jury primed to be psychologically and emotionally manipulated by federal prosecutors. No member of this jury was going to return home to accusations of letting off the "dirty bomber."

Evidence, of which there was little, if any, played no role in the case. The chief FBI agent, James T. Kavanaugh, testified in court that the intercepted telephone conversations were innocuous and contained no references to terrorism or Islamic extremism, but the jury was not listening. The judge allowed prosecutors to show the jury a 10-year-old video of Osama bin Laden that had no relevance to the case, but which served to arouse in jurors fear, anger, and disturbing memories of September 11, 2001. The jury convicted Padilla on all counts, despite the total absence of any evidence that he had ever committed a terrorist act or had agreed to commit such an act.

By convicting Padilla, the jury opened Pandora's box and created a Benthamite precedent for imprisoning U.S. citizens on the suspicion that they might commit a terrorist act.

In July 2006, in Hamdan v. Rumsfeld, the Supreme Court ruled that Bush's military tribunals violate U.S. military law and the Geneva Conventions.

Republicans, who tend to regard civil liberties as devices that coddle criminals and terrorists, turned to legislation in attempts to subvert the Supreme Court's defense of the U.S. Constitution. In November 2005, the Senate Republicans passed an amendment to the Defense Authorization Act offered by Lindsay Graham of South Carolina authorizing the president to deny habeas corpus protection to Guantánamo detainees. The fact that it was known by this time that the vast majority of the detainees were hapless individuals who were captured by Afghan warlords and sold to the Americans, who were paying a bounty for "terrorists," carried no weight with the Republican senators.

The Republicans replied to Hamdan v. Rumsfeld with the Military Commissions Act passed in September 2006 and signed by Bush in October. The act strips detainees of protections provided by the Geneva Conventions: "No alien unlawful enemy combatant subject to trial by military commission under this chapter may invoke the Geneva Conventions as a source of rights." Other provisions of the act strip detainees of speedy trials and of protection against torture and self-incrimination. This heinous law has a breathtaking provision that retroactively protects torturers against prosecution for war crimes.

The act explicitly denies habeas corpus protection and access to federal courts to any alien detained by the U.S. government as an "enemy combatant" and any alien awaiting determination of his status. The act reads: "No court, justice, or judge shall have jurisdiction to hear or consider an application for a writ of habeas corpus filed by or on behalf of an alien detained by the U.S. who has been determined by the U.S. to have been properly detained as an enemy combatant or is awaiting such determination."

This act is as atrocious a piece of legislation as the world has ever seen. It permits people to be sentenced to death on the basis of hearsay, secret evidence, and on a confession extracted by torture. Indeed, detainees could be shot in the back of the head without undergoing the kangaroo tribunal and no one would ever know or be held legally responsible.

A number of legal experts have concluded that there is no assurance that the act cannot be applied to U.S. citizens. Although language in the act refers to "alien unlawful enemy combatant," other language in the document does not limit the act's applicability only to aliens. Legal scholars have warned that the legislation defines enemy combatant in such broad language that the act applies to any person whom the executive branch declares has purposefully and materially supported hostilities against the United States. No evidence for the charge is necessary. By seizing the power to decide who is and who is not an "enemy combatant," the executive branch has seized the power to decide who shall and who shall not be permitted the protections guaranteed by the U.S. Constitution. The Bush administration has resurrected the dungeons and torture chambers that Blackstone's Rights of Englishmen banished from the English-speaking world.

It is too early to know how the act will be interpreted and applied to American citizens or whether it can be challenged and overturned on constitutional grounds, but forebodings are severe. What we can say is that the act is draconian and dangerous legislation that is completely unnecessary. If the U.S. government has enough correct information to designate a person truthfully to be an enemy combatant, the U.S. government has enough information to put the person on trial in open court with all the rights guaranteed by the Constitution to defendants. The U.S. government only needs indefinite detention, torture, and secret evidence when it has no evidence. Every American should be concerned that John Yoo, one of the Justice Department authors of this totalitarian legislation, is now a law professor at the University of California. Liberty has no future in America if law schools provide legitimacy to those who would subvert the U.S. Constitution.

The Assault on the Constitution

We concluded the first edition of this book with a call for "an intellectual rebirth, a revival of constitutionalism." Alas, far from a rebirth of constitutionalism, we are witnessing a rending that we would not have imagined. On January 17, 2007, the attorney general of the United States, Alberto Gonzales, declared in testimony before the Senate Judiciary Committee that "the Constitution doesn't say every individual in the United States or every citizen is hereby granted or assured the right of habeas." The chairman of the committee, Arlen Specter (R-Pennsylvania) was incredulous when Gonzales insisted that "there is no express grant of habeas in the Constitution."

In June 2007, Dick Cheney astonished Americans with his claim that the Office of Vice President is independent of both the executive branch and Congress and is accountable to neither.

Americans should pay attention to the power that the Bush administration is claiming over them. If Americans are not protected by habeas corpus, the government can pick us up at its will and cast us into dungeons for the rest of our lives without ever giving any accountability of its action. If the Constitution does not grant habeas corpus protection, the administration is under no compulsion to provide indictments, evidence, and trial. The government can simply imprison at will.

The Bush administration is using every strategy to push aside the remains of the legal principles that shield the people from arbitrary government power. It is a short step from denying Americans' constitutional right to a public trial by an impartial jury to denying every other constitutional right. Clearly, on the basis of an indefinite "war" against an indefinite "terrorist enemy," the Bush regime is attempting to claim powers that are not limited by the Constitution, Congress, or the courts. It is a life-and-death matter for Americans to understand that the Bush administration is seeking to undermine all rights by shutting off the procedural avenues for enforcing rights.

Few Americans seem alarmed. Conservative attorneys, such as members of the Federalist Society who present themselves as defenders of "original intent," are pushing for more power to be concentrated in the executive. One of the tools used to obtain this goal is Bush's misuse of "signing statements." Scholars, such as Phillip J. Cooper of Portland State University writing in the September 2005 issue of Presidential Studies Quarterly, warn that Bush uses signing statements not only as illegal line-item vetoes that evade congressional override but also as "wide-ranging assertions of exclusive authority and court-like pronouncements that redefine legislative powers under the Constitution. They reveal a systematic effort to define presidential authority in terms of the broad conception of the prerogative both internationally and domestically under the unitary executive theory."

Signing statements deserve a closer look than they are receiving. There is no provision in the Constitution for signing statements. Courts often look to congressional debates and proceedings to ascertain legislative intent when a statute's meaning is not obvious. The Bush administration is endeavoring to establish the judicial practice of also looking to the president's signing statements in the same way, an absurd idea as the president does not enact legislation. President Bush's use of signing statements signals the refusal of the executive branch to abide by the rule of law, a frightening prospect.

A growing number of thoughtful Americans believe, rightly or wrongly, that the "war on terror" is a hoax that is providing cover for what former President Nixon's White House counsel, John W. Dean, says is an assault on American liberty by "authoritarian conservatives." Time will tell whether Americans will continue to tolerate the neoconservatives' wars and attacks on civil liberty.

The Case of Sami Al-Arian

The demise of the Rights of Englishmen, the unaccountability of police and prosecutors, the witch-hunt atmosphere created by the "war on terror," the government's need to find terrorist suspects in order to maintain the public's alarm, and the sadistic and bigoted attitudes of many prison guards and even federal prosecutors and judges toward Muslims have resulted in the use of law for persecution. The case of Sami Al-Arian, who was a professor of computer science at the University of South Florida, is a pure example of the use of law as a weapon for persecution.

Most Americans know only the Israeli side of the Israeli-Palestinian conflict. The Palestinian side is rarely heard. Even prominent Americans, such as former president Jimmy Carter, who point out that there are two sides to the story, are subjected to demonization and name-calling. Sami Al-Arian was gaining success as a voice for a more even-handed Middle East policy. He spoke to intelligence personnel and military commanders at MacDill Air Force Central Command. He gave interviews. He even invited the FBI to attend meetings where he spoke.

This was too much for the Israeli Lobby, which has enjoyed a total monopoly on the explanation of the Israeli-Palestinian conflict in the United States. The hysteria following 9/11 created the opportunity to destroy Sami Al-Arian. Alexander Cockburn (CounterPunch, March 3, 2007) reports that "at the direct instigation of Attorney General Ashcroft" trumped-up terrorism and conspiracy charges were leveled at Al-Arian.

The neoconservative media and right-wing talk radio went to work on Al-Arian. Pushed by Gov. Jeb Bush, the university fired him. He was arrested and deemed too dangerous for bail. He was held in solitary confinement for two and a half years while the federal government tried to manufacture some evidence against him. Wikipedia reports that "Amnesty International said Al-Arian's pre-trial conditions 'appeared to be gratuitously punitive' and stated 'the restrictions imposed on Dr. Al-Arian appeared to go beyond what were necessary on security grounds and were inconsistent with international standards for humane treatment.'"

The government failed to produce any evidence. The jury acquitted Al-Arian on all serious charges and voted 10–2 for acquittal on all other charges. The jury acquitted him despite U.S. District Court judge James Moody's many biased rulings against Al-Arian.

Knowing that Al-Arian and his family could not stand the strain of solitary confinement for another two and a half years while a new case was prepared, the U.S. Department of Justice announced that it would retry him. His attorney urged him to make a plea in order to end the ordeal.

Al-Arian's plea is innocuous and bears no relationship to the serious charges on which he was tried. According to Wikipedia, as part of the plea agreement "the government acknowledged that Al-Arian's activities were non-violent and that there were no victims to the charge in the plea agreement."

Under the plea agreement, Al-Arian's sentence amounted essentially to time served, but he was double-crossed by Judge Moody, who according to Alexander Cockburn used "inflamed language about Al-Arian having blood on his hands" (a charge rejected by the jury) and handed down the maximum sentence.

The "terrorist" prosecutors had yet more in store for Al-Arian. In October 2006, federal prosecutor Gordon Kromberg, reportedly "notorious as an Islamophobe," demanded, in violation of the plea agreement, that Al-Arian testify before a grand jury in Alexandria, Virginia, investigating an Islamic research center. According to Wikipedia, "in a verbal agreement that appears in court transcripts, federal prosecutors agreed [as part of the plea agreement] that Al-Arian would not have to testify in Virginia."

Al-Arian's lawyers saw Kromberg's subpoena of their client as a setup, and Al-Arian refused to testify. On January 22, 2007, Al-Arian was brought before a federal judge on contempt charges. He described to the judge the extraordinary abuse he had suffered at the hands of federal prison officials. The guards and officers all felt free to abuse Al-Arian, because they had heard the lie on right-wing talk radio and from neoconservative media that he was a terrorist who hated Americans. The hostile judge sentenced Al-Arian to 18 months more on a civil contempt charge for refusing to testify about a case that he knew nothing about.

Kromberg contrived to put Al-Arian in a situation in which truthful answers in court under oath could be turned into a perjury charge by offering the defendants reduced charges in exchange for their testimony that Al-Arian was involved with them in some alleged activity and lied under oath. Alternatively, Al-Arian would be cited for civil contempt for refusal to testify. The ease with which Kromberg violated the plea agreement and abused the prosecutorial power in full view of federal judges should give pause to every American.

When a university professor, who has done nothing but try to correct the one-sided story Americans are fed about the Israeli-Palestinian conflict, can be treated in this way by the U.S. Department of Justice, civil liberty in the United States is in a precarious condition.

The ease with which Al-Arian was transformed into a terrorist should be a lesson to us all. People in charge of Homeland Security are no less inclined than police and prosecutors to make expansive interpretations of their mandate and what constitutes terrorism and suspect behavior. On May 28, 2007, the Associated Press reported that the Alabama Department of Homeland Security had included among terrorist groups listed on its Web site environmentalists, antiwar protesters, abortion opponents, and gay- and animal-rights advocates. It is an ancient practice of government to hype fear in order to gain arbitrary power that can be turned against anyone. Perhaps this expansive definition of terrorist explains the eighty thousand names on the government's no-fly list.

Another problem with arbitrary and undefined power is that it ends up being exercised by people who tend to receive low marks for good judgment and intelligence. English film director Mike Figgis was held for five hours in an interrogation cell at Los Angeles International Airport because U.S. immigration officers are unfamiliar with the professional language of television show producers and lacked the common sense to avoid a misunderstanding. When asked the reason for his visit, Figgis said: "I'm here to shoot a pilot." "Shoot," of course, means to film, and "pilot" is the first episode of a new TV show. The people providing our security concluded that Figgis had voluntarily confessed to a plot to come to America in order to murder an airline pilot. Figgis survived his assumption that people in Los Angeles understood movie talk, but the desire of people empowered to thwart terrorism to use their power is great. Any excuse will do.

Sliding Toward Dictatorship

The assaults of the Bush regime on civil liberty, the Constitution, and the separation of powers are more determined and more successful than its military assaults on the Middle East, which provide the "war time" justification for the attack on civil liberty in the United States. The regime and its supporters are determined to raise the president to dictatorial powers, at least in times of war, the initiation of which is being turned into a presidential prerogative.

On May 9, 2007, President Bush signed the National Security and Homeland Security Presidential Directive. If in the president's opinion a "catastrophic emergency" occurs, the directive places all governmental power in the hands of the president, effectively abolishing the checks and balances in the Constitution. Underlying this directive is the "unitary executive" doctrine, a theory pushed by the Federalist Society, an important source of law clerks, DoJ appointees, and judicial nominees for the Republican Party. The doctrine, supported by Supreme Court justices such as Samuel Alito, claims that the executive power of the president is completely separate and independent of the legislative and judicial powers and not subject to infringement by them. The manner in which this doctrine is being institutionalized is creating the additional claim that executive power is the supreme power. In effect, unitary executive theory is elevating the president to a dictator with the power to ignore or suspend laws.

The unitary executive doctrine is a direct attack on the constitutional separation of powers established by the Founding Fathers. One of the alleged advantages of the unitary executive is that the president can act more quickly and efficiently if he is not subject to interference from Congress and the judiciary. However, as Justice Louis Brandeis explained in 1926, "the doctrine of the separation of powers was adopted by the convention of 1787 not to promote efficiency but to preclude the exercise of arbitrary power. The purpose was not to avoid friction, but, by means of the inevitable friction incident to the distribution of the governmental powers among three departments, to save the people from autocracy."

News reports that the Bush administration has contracted with Halliburton to build detention centers in the United States at a cost of $385 million revive memories of the World War II detention of Japanese American citizens. It has not been explained who are the intended detainees for the new detention centers. Do the American people want to trust with detention centers an executive branch, which claims the power to set aside habeas corpus, statutory law, due process, and the prohibition against torture?

Polls show that 36% of the American public and more than half of New Yorkers lack confidence in the 9/11 Commission Report. Despite a significant percentage of the public's disbelief in the explanation of the event that took America to war in the Middle East, Congress and the media continue to tolerate the Bush administration's aggressive rhetoric, which seeks to widen the "war on terror" from Afghanistan and Iraq to Iran, Syria, and Lebanon. The diligence with which Vice President Cheney and the neoconservatives press for an attack on Iran, and the extreme position that the Bush administration has taken on executive power, raise the question whether the Bush administration has an agenda that takes precedence over America's constitutional democracy.

Never in its history have the American people faced such danger to their constitutional protections as they face today from those in the government who hold the reins of power and from elements of the legal profession and the federal judiciary that support "energy in the executive." An assertive executive backed by an aggressive U.S. Department of Justice and unobstructed by a supine Congress and an intimidated corporate media has demonstrated an ability to ignore statutory law and public opinion. The precedents that have been set during the opening years of the twenty-first century bode ill for the future of American liberty.

OBAMA CAPITULATES – TO THE ISRAEL LOBBY

Isreal is mounting a full-court press on rabidly pro-Israel President Bush to attack Iran. If this does not succeed, Israel Prime Minister Olmert threatens to take unilateral action, which would almost certainly draw in the U.S.

Justin Raimondo once saw Barack Obama as a relatively sane voice among the mainstream alternatives -- and thus providing a worthwhile goal on the other side of the Bush presidency, an administration that was not so war-happy. But Obama's speech this week in front of the American Israel Public Affairs Committee (AIPAC) effectively dashed those hopes. No matter who wins the U.S. presidential election this November, we see that a full-fledged member of the war party will take office.

The extent of the conflagration that a strike against Iran could escalate to is speculation at this point, but given that nuclear weapons have been mentioned in the past and the potential for counterstrikes against Middle East oil fields, the "prospect of a much more terrible conflict than we have ever known" is staring us in the face. We are left with the forlorn hope that cooler heads behind the scenes will prevail.

Israel Prime Minister Ehud Olmert's visit to the U.S. is part of a concerted effort, by the Israeli government and its American lobbyists, to convince U.S. lawmakers -- and, most of all, President George W. Bush -- that the time to attack Iran is now. The Israeli newspaper Yediot Achronot reports that Olmert will tell Bush "time is running out" on diplomacy and that he had better launch an attack.

In his speech to the American Israel Public Affairs Committee (AIPAC) conference, Olmert's message was harsh and unrelenting: Iran, he said, "must be stopped by all possible means" from acquiring a nuclear capability. Yes, sanctions must be tightened, but these are only "initial steps": what is needed, he averred, are "more drastic and robust measures" -- and that can only mean one thing.

Israel would rather not act alone, but Olmert signaled that he was willing to do so if pushed: "Israel will not tolerate the possibility of a nuclear Iran, and neither should any other country in the free world," he declared, in what was clearly a threat of unilateral action. Citing Israel's record in regard to Iraq in the eighties and Syria last year, Tim Butcher warned in the Telegraph: "The speech shortens the odds significantly on military action against Iran's nuclear program."

The U.S. would almost certainly be drawn into the conflict if Israel carried out its threat, and Olmert knows that. So does Bush, who, in any case, may not need much persuading. After all, in his speech to the Israeli parliament last month, the President declared:

"Permitting the world's leading sponsor of terror to possess the world's deadliest weapons would be an unforgivable betrayal for future generations. For the sake of peace, the world must not allow Iran to have a nuclear weapon."

For the sake of peace, we must make war: a familiar refrain that echoes down through the years, mocking the living and the dead.

The clock is ticking, and time is running out for the War Party: they must get in their licks before the most pro-Israel president, ever, leaves office. As Butcher writes: "Among Israeli supporters of military action against Iran there is concern something must be done before Mr. Bush's end of office next January as Mr. Bush is perceived as closer to Israel than any potential successor."

Do not look to Barack Obama for deliverance from this looming conflict. In his speech to AIPAC, he clearly signed on to the Lobby's latest project, departing from his prepared text to declare:

"I will do everything in my power to prevent Iran from obtaining a nuclear weapon. Everything in my power. Everything."

"Everything" includes murdering tens of thousands of Iranians, mostly civilians -- driving the price of oil up above $300 a barrel and destroying the df economy -- and involving us in a war that will make the Iraq conflict look like a Sunday school picnic. And for what?

The irony, of course, is that Iran is nowhere near obtaining nuclear weapons, as the President's own intelligence agencies recently informed him: but no matter. That's a small obstacle to those who disdain "the reality-based community," and see themselves as Making History while the rest of us watch, helpless and aghast. As Ha'aretz recently reported:

"Olmert will try to convince Bush to set aside the National Intelligence Estimate on Iran's nuclear program in favor of data presented by Israel, and determine the administration's policy on Iran accordingly."

The coming war with Iran has nothing to do with "weapons of mass destruction" -- no more than the invasion of Iraq ever did. It is all about preserving Israeli hegemony in the Middle East by wiping any and all recalcitrant Arab-Muslim states off the map. First Iraq, then Iran -- and Syria will have its turn soon enough, along with poor prostrate Lebanon, once the jewel of the eastern Mediterranean and now an economic and political basket case. It is almost certain we will be at war with Iran before a new President is inaugurated: now that Obama has capitulated to the Lobby, nothing but Divine Providence can stop it.

God help us all.

I have to say I was wrong -- dead wrong -- about Obama. In my eagerness to find a bright spot in a rapidly darkening world, I grasped on to his alluring rhetoric and his at-times trenchant critique of the Bush foreign policy, like a sinking man holding on to a life-jacket. But looking for hope in all the wrong places does not create opportunities for peace -- it only prolongs our illusions. We must face the prospect of a much more terrible conflict than we have ever known, and look it squarely in the face, without flinching or looking for false messiahs. I know many of you are disappointed, and some of you are now exclaiming "I told you so!" All that we can do now is hope, and pray, that our country -- and the Iranian people -- will somehow survive the coming catastrophe.

SHORT TAKES

Moscow to be Global Financial Center, City’s Mayor Says

Moscow will be among the world's five largest financial centers by 2025, the Russian capital's Mayor Yury Luzhkov said during [an] international conference on Moscow's prospects as an international financial center. For this purpose, a program for the city's development must be devised, Luzhkov said. He also suggested establishing an agency for the development of an all-Russian international financial center. Moscow meets all the requirements for playing a key role in the international financial system, as over 75% of Russian commercial banks are located in the city, Luzhkov noted.

He added that, in order to achieve this target, several steps would be taken, such as increasing spending on road infrastructure, developing Moscow's airports, and completing the construction of an international business center Moscow City.

Wherever the money and expertise is, financial centers ultimately spring up. Resource-rich Russia has benefited greatly from the boom in oil, metals and other commodity prices. Mr. Luzhkov is assuming that the boom continues. It would also help if Russia sticks to some reasonable facsimile of the rule of law, e.g., by not expropriating the property of foreign investors after they have made major capital expeditures in Russian projects.

Austria and Luxembourg Block Tax Haven Clampdown

Recent tax evasion controversies have mainly centered on Switzerland and Liechtenstein's roles. But any changes in the European rules concerning reporting requirements for tax haven clients would need the agreements of Austria and Luxembourg as well.

European Union Tax Commisioner Laszlo Kovacs said ... that there is support among European finance ministers for a tightening on tax haven rules, but it will take some time for new regulations to be passed as Austria and Luxembourg are dragging their heels.

EU minsters met in Brussels to discuss proposals on how to improve the 2005 directive. Any change in the rules would require unanimous backing from EU member states, and the German Finance Minister Peer Steinbrueck acknowlegded that Austria and Luxembourg are reluctant to sign up because it would put an end to their secretive banking practices.

At the moment, the savings tax directive requires EU members to share tax information with one other on interest income kept by account holders from other EU countries, according to online French daily AFP. However, there are special arrangements for Austria, Belgium and Luxembourg under which they impose a witholding tax rather than exchanging information.

The EU has similar bilateral agreements with a clutch of countries known for their banking secrecy laws, including Switzerland and Liechtenstein. Kovacs said at the meeting: "What was emphasized by a number of ministers was to extend the scope of the directive which is rather limited now."

An interim report from the commission is due by September 30. EU ministers launched a push to for a review on the tax directive after Liechtenstein and Berlin were caught up in controversy over hiding taxes in February.

UK Tax Havens Missing from “Safe List”

A recent EU list of countries with "best" anti-money laundering controls did not include the Caymans or Bermuda, and gave the Channel Islands and the Isle of Man qualified status only. Critics have excoriated Bermuda and other British overseas territories in the past, so this is not truly new news. What the quid pro quo for getting on the approved list will be remains to be seen.

A new list has been devised which names countries with the best anti-money laundering controls but it excludes British tax havens. The document was drawn up by EU member states and was devised to allow countries to analyze the number of checks they need to carry out on financial transactions from those areas, reports the Financial Times.

Critics have noted that British-linked tax havens are not present on the list. Overseas territories such as Bermuda and the Cayman Islands are absent on the list while the Channel Islands and the Isle of Man are only given a qualified status.

According to the newspaper, the Treasury said: "It's still an ongoing list and this is just the start. First roll call doesn't mean you never get on"

New Isle of Man Financial Crime Laws Move Closer

The Isle of Man is introducing its own version of the notorious U.S. forfeiture laws which, bottom line, make it easier for governments to confiscate property without due process of law. This does not seem like progress to us.

Updated laws which would allow the Manx courts to confiscate the proceeds of crime are making their way towards the statute book. The Proceeds of Crime Bill also seeks to update anti-money laundering legislation, and bring the Isle of Man into line with other jurisdictions.

The bill includes a "civil forfeiture" scheme, which would make it possible to recover assets bought with illegally-earned cash. The Bill is being steered through Keys by Treasury member Phil Braidwood, who says it is an important change ...

KPMG Hired for Jamaica Offshore Center Study

Jamaica would like to get establish a presence as an offshore financial center. Jamaica is unlikely to be a major player any time soon, but it does have some interested parties ready to go once the OFC is operational.

Jamaica has contracted the consultancy arm of auditing firm KPMG to undertake an assessment of the local market for the establishment of an international financial services center (IFSC). According to Minister without Portfolio in the Ministry of Finance Senator Don Wehby, several potential investors have already indicated their readiness to invest in Jamaica, once the offshore center is operational.

Jamaica Trade and Invest (JTI), which is acting as the secretariat for the IFSC project, said KPMG Consulting "has been tasked to assess the market conditions and recommend the legislative and regulatory adjustments required."

"Phase one of the undertaking will involve the engagement of public- and private-sector stakeholders so as to encourage their taking up of opportunities in a Jamaican IFSC," Senator Wehby said in the JTI-issued release.

An IFSC advisory committee is already in place, headed by tax expert Eric Crawford, a partner in PricewaterhouseCoopers. The Government has allocated $15 million to fund phase one of the project. KPMG is expected to complete its assessment of the market and recommend a proper regulatory and legislative framework by July 14.

Scotland Attempts to Quell Fears of what Independence Would Mean for Financial Sector

On the interesting question of just how likely is Scottish independence, this article is silent. But the advocates of independence are looking ahead to the extent that they are examining alternative financial regulatory regimes.

John Swinney ... revealed that an independent Scotland could retain a UK-wide system of regulation for the financial services industry. In words that will be seen by some as a move to assuage fears over independence, Swinney conceded there could be a case for one regulatory regime for the British Isles.

Speaking at a Global Financial Services Week event, Swinney said that continuing with the current regulatory regime was "one option" being studied by the Scottish National Party. The Cabinet secretary for finance's remarks came amid continued concern at the highest levels in the financial services industry north of the Border over the prospect of independence.

Many fear that an extra tier of regulation -- on top of the rules imposed by Westminster and Brussels -- would create an even more costly compliance bureaucracy But asked if there could be a unified system of regulation continued after independence, Swinney replied: "That certainly would be one of the options."

Swinney conceded that companies worried by the prospect of independence and regulation could, if they choose, opt to leave Scotland. However, he maintained: "We would have to take decisions about the way in which financial regulation was handled as an independent country. We would take those decisions with the principles of business competitiveness very much in mind. The last thing we would want to do is to in any way undermine the competitiveness of the financial service industry in Scotland. Making the sector more competitive is a key aspiration of the Scottish Government and would be our aspiration in any changed constitution circumstance."

Swinney's response was welcomed by John Campbell, the chairman of Scottish Financial Enterprise, the industry's representative body. Asked if he foresaw another tier of financial services regulations arising out of independence Campbell said: "I would hope not, full stop." Campbell refused to be drawn into the political debate over independence but he appeared to signal that the industry's main concern was regulation. ...

SNP sources explained that, alongside the idea of continuing with a British system, the party is also considering a Scottish model. A source said that the party was looking at mirroring the regulatory regime in Ireland.

The Scottish financial sector's share of the [UK] Financial Services Authority costs were around £23 million a year but the equivalent service in Ireland costs the industry just £13 million, the SNP claimed. A separate Scottish financial services authority could operate on a similar basis to "the successful Irish model".

UK Treasury To Delay Foreign Profit Tax Plans

A couple of British companies have announced they plan to corporately expatriate, due to the onerous UK tax regime. Apparently the message is sinking through to HM Treasury, and they are postponing plans for making the situation worse.

The UK Treasury has reportedly decided to postpone making a decision on the structure of the new foreign profits tax regime, amid protests from multinationals that the UK's corporate tax regime is becoming unbearably complex.

Citing a source close to the Treasury, the Times reported on 2nd June that Chancellor Alistair Darling is now very unlikely to announce the foreign profit tax reform proposals at the end of July as originally planned, in order to allow the government to consult further on the plans. ...

The Treasury had envisaged that legislation changing the foreign profit tax regime would be pushed through in 2009, but the delay means that any changes would be unlikely to be legislated until 2010, by which time Prime Minister Gordon Brown could be fighting a general election campaign.

The government initially announced that it would consult on the taxation of foreign profits as far back as the 2006 Pre-Budget Report, but waited until June 2007 to publish a joint HM Treasury and HM Revenue & Customs document which kicked-off an "informal" discussion between government and business.

This document loosely proposed an exemption regime for many foreign dividends, a simplified credit regime, a new Controlled Companies (CC) regime, retention of the UK's interest rules, repeal of the Treasury Consents rules, and additional anti-abuse rules.

However, a succession of UK-based multinationals have been warning recently about the increasing complexity of the UK tax system, and some contend that the proposals as they stand may simply add to corporate tax compliance burden. Indeed, some companies, such as Shire and WPP, have voted with their feet by announcing plans to relocate for tax purposes from the UK to Ireland.

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