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Saturday, December 10, 2011

The Hidden Tax of Overcriminalization

While Congress debates tax policy, a hidden tax has plagued our economy and capital markets the last few years - the tax caused by the creeping de facto criminalization of business

The American economy is suffering from a hidden tax in the form of overregulation, overcriminalization and an overzealous and often-inconsistent application of laws and statutes to go after otherwise-innocent businesses, owners, entrepreneurs and managers.  This raises the risk of doing business, and results in the business community demanding a higher return in order to take that risk.

People are innately risk-averse.  Risk, and pain, are felt more acutely than an equivalent level of joy or gain.  The greater the risk (e.g., the risk of financial loss or loss of freedom) perceived from engaging in an activity, the likelier that the given activity will not be engaged in, regardless of the likelihood of a substantial positive return.  Hence, there has been a downturn in business and investing activity as the capital classes become increasingly aware of the risks of being sued, investigated or prosecuted for engaging in business.

Regulatory and legal certainty is a hallmark of the rule of law that has allowed for capital expansion to fund growing economies for centuries in the Western world.  Inconsistent and arbitrary application of the laws makes it hard for anyone with money to invest for fear of losing that money, if not their freedom.

In short, the government's choices of whom to investigate, threaten, sue civilly and even prosecute are another way of picking winners and losers in our economy and society. 

There are plenty of people who desire only to know what the rules are, so that they may follow them as best as they can.  Varying, inconsistent and even illogical applications and decisions on the law by bureaucrats, investigators and prosecutors acting without the requisite experience or seasoned oversight threaten to deter lots of legal activity and raise the risk awareness of business owners and entrepreneurs who are fearful of a federal government that seems to have a grudge against certain segments of our economy.

Healthy capital markets need regulatory and legal certainty. Arbitrary, capricious and outright unfair or unjust government actions cause a reflexive, defensive posture of conserving, protecting and hoarding capital. 

Think about that the next time you wonder why small businesses cannot get a loan on good terms -- or any terms -- or why investors are unwilling to finance any young venture. 

This trend has been several years in the making and acts as a hidden tax on existing activity as well as a serious deterrent upon future activity.  No wonder our economy has been trending downward for the last four years.

Eric Dixon is a New York investigative attorney who handles policy issues, election law matters and strategic matters for business and political clients.

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