To Achieve Economic And Job Growth First Remove The Regulatory Barriers

Tuesday, October 4, 2011 - 01:00

We face a depressing reality. Hope for economic recovery recedes as export growth is hindered by the Eurozone crisis and the slowing pace of growth in developing countries. Our divided government is paralyzed - unable to take any effective measures. Rather than offer constructive messages in the lead-up to the 2012 presidential elections, candidates carefully craft their speeches to avoid offending their political "bases."

Our readers and Internet viewers wield immense influence - and it can be used to good effect to promote job growth while satisfying important political constituencies.Exploring constructive action is the focus of this and our November issue.

One such action would be to limit regulations only to those absolutely needed and to confine their scope, thereby reducing the burden on business. Present economic conditions clearly indicate that it is untimely to saddle businesses with a massive onslaught of regulations implementing legislation such as Dodd-Frank and the Patient Protection and Affordable Care Act - particularly given that those regulations may be promulgated and enforced by newly created regulatory bodies eager to enhance their power.

New regulations may implement a political agenda; for example, the SEC's original Proxy Access Rule, which was revoked by the DC Circuit for being "arbitrary and capricious." The court reasoned that the Rule opened the door for unions and union pension funds to place representatives on company boards, allowing them to foster a biased agenda potentially at odds with shareholder interests.

Whistleblower regulations are another example of the SEC's insensitivity to the effects of its regulations on job growth. Foreign businesses will be reluctant to set up facilities in a country where employees - after becoming aware of a potential violation - have no obligation to report under their company's internal compliance system. Further, whistleblowers have a vested interest (a 10 to 30 percent bounty) in not reporting incidents timely because delayed action allows violations to fester and penalties to mount.

This is not to say that all regulatory agencies are bad. Some administrative agencies seek to provide sufficient guidance to compliance and treat fairly those who come under its scrutiny. For all the difficulties inherent in an IRS audit, there is no lack of information available to taxpayers that are eager to comply with its requirements. In his article in the Virginia Tax Review (Fall 2009), Mortimer M. Caplin, former IRS Chief, remembered John F. Kennedy's visit to the IRS in May, 1961 and quoted our late President's message on that historic day:

"I hope you will impress upon the agents of the Internal Revenue Service how much we are dependent upon them, on their courtesy, on their efficiency, on their integrity, on their fairness."

Mort Caplin took this message to heart. To remind agents of their duties, this advice is now inscribed on a bronze plaque that hangs outside a conference room at the IRS's national office building. His article discussed Rev. Proc. 64-22, which outlines important concepts that, in truth, should apply to the operations of all administrative agencies, federal and state. These precepts include: encouraging self-assessment within a culture that properly informs affected parties of their rights and responsibilities; safeguarding the integrity of our laws via proper enforcement; improving audit processes by establishing guidelines to increase uniformity; eliminating the quota concept; and clearly demarcating the responsibility between "rulings on the one hand and legislation and regulations on the other."

Proper enforcement of regulations naturally implies responsible adherence to the law - not an "arbitrary and capricious" application of the law.

In this month's issue, distinguished law firms report on regulatory burdens placed on business by Dodd-Frank, defense export controls and immigration compliance. As to Dodd-Frank (page 14): "To comply with (only ten percent of the required regulations as yet finalized), the financial industry will need to spend 2,260,631 hours annually." In the case of defense exports (page 16), the Directorate of Defense Trade Controls has "nearly unfettered authority in this domain." As to immigration compliance (page 12): "I-9 audits have increased by about 337 percent from fiscal year 2008 to fiscal year 2010." Such developments illustrate what appears to be a general trend toward overwhelming business with complicated regulations that slow job growth.

At a state level, the situation is even worse because agencies sometimes take actions that block job growth. Take New Jersey, for example. The Department of Labor and Workforce Development (DLWD) - in defiance of Governor Christie's call for transparency - makes it impossible for businesses to safely provide work for independent contractors (ICs). It refuses to issue rules or provide guidance on acceptable interpretations of the statutory ABC test for classification as an IC because it considers "each case to be unique, which therefore must be decided on its own facts."As a result of this uncertainty, small businesses are effectively denied the use of ICs needed to supplement their core competencies and are disabled from serving - which they have in past recessions - as the principal engines of economic recovery and job growth.

Governor Christie has done much to identify the problem with state agencies and to develop policies to mitigate red tape, which discourages doing business in New Jersey. You can make a difference by calling your elected state and federal representatives and asking them to support similar policies that are designed to free business from the shackles of misguided regulation.