Big Brother Vs. Underfunded Enforcement

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On July 5, 2014, in an opinion piece entitled “The Real Internal Revenue Scandal,” the editorial board of The New York Times noted that “every dollar spent on internal revenue service enforcement yields $6 in additional revenue.”

I suspect that the SEC would make the same claim, that for every dollar spent on staff attorneys in the Division of Enforcement, the SEC recovers a multiple of that number.

So if the hiring of more IRS agents or SEC enforcement staff attorneys is revenue positive for the federal government, why doesn’t it hire more IRS agents and SEC staff attorneys? The obvious answer is that the public and the Congress are more concerned about creating a “big brother” type environment than with enforcing the laws in a legitimate manner that would generate revenue for the government.

Tax Day New York. April 17, 2012

(Photo credit: Michael Fleshman)

Let’s look at a hypothetical. I think we can safely assume that E-Z Pass could easily track how long it would take to get from Point A to Point B on an interstate highway traveling at the exact speed limit. Assume further that E-Z Pass could then figure out whether the driver of that car had to exceed the speed limit in order to get from Point A to Point B. Finally, assume that E-Z pass could then send the driver of the car a ticket for speeding if it went from Point A to Point B in a faster time than the speed limit would permit.

What would be the consequence of E-Z Pass doing this? People would not exceed the speed limit!  (Or alternatively, drivers would deliberately stop along the way and then speed). One might conclude that getting people to obey speed limits would be a good thing since it saves lives. And someone has made a conscious decision about what the correct speed limit should be for that track of highway. So why doesn’t the government use E-Z Pass to stop speeding? Because people want to speed!

Well, some people may want to pay less taxes than they lawfully should and other people (or the same people) may want to break the securities laws to get rich. But that doesn’t mean that the government shouldn’t use its resources to enforce the tax and securities laws, as long as such enforcement results in a net positive for the public fiscal interest.

Those legislators who condemn over-regulation may be horrified at the prospect of more IRS agents and more SEC enforcement attorneys. But if it is true that the hiring of more such agents and attorneys is a net plus in terms of revenue-generation, the “big brother” argument rings hollow. It does not follow that because some IRS agents and some SEC enforcement attorneys may be overly aggressive, the percentage of overaggressive agents and attorneys increases with overall size. Therefore, the best argument against hiring more agents and attorneys is that we don’t really want to catch all of the wrongdoers, otherwise, the government would appropriate more money to catch more bad guys. That is not a particularly compelling argument.

Topics:  Compliance, Enforcement, Enforcement Actions, SEC

Published In: Securities Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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