PERRspectives: Bush Administration Slashed Probes of Stock Fraud

December 28, 2008

Bush Administration Slashed Probes of Stock Fraud

As the fallout from the meltdown of the American financial system continues to poison the U.S. economy, the laissez-faire dogma and deregulatory zeal of the Bush administration rank high among the usual suspects responsible for it. Just days after the New York Times and the White House exchanged shots over the President's key role in the cascading calamity, a new study from Syracuse University revealed that investigations for stock fraud by the Bush SEC and Justice Department have virtually disappeared.

Following hot on the heels of the $50 billion global Ponzi scheme perpetrated by Bernard Madoff, the data show the federal government is now a paper tiger willfully declawed by the Bush administration. As the Times detailed, "federal officials are on pace this year to bring the fewest prosecutions for securities fraud since at least 1991," a jaw-dropping decline from the level of enforcement actions during the Clinton presidency:

There were 133 prosecutions for securities fraud in the first 11 months of this fiscal year. That is down from 437 cases in 2000 and from a high of 513 cases in 2002, when Wall Street scandals from Enron to WorldCom led to a crackdown on corporate crime, the data showed.
At the S.E.C., agency investigations that led to Justice Department prosecutions for securities fraud dropped from 69 in 2000 to just 9 in 2007, a decline of 87 percent, the data showed.

While the shifting of FBI and DOJ resources to anti-terrorism explains part of that staggering decline, the lax enforcement of securities laws is primarily the result of conservative doctrine, not insufficient assets. (In the wake of the Madoff scandal, the FBI is reportedly reallocating staff to battle the epidemic of financial crimes.)

Of course, the Bush administration's philosophical blind eye to rampant Wall Street corruption was just one front in the Republican class war in Washington. Starting in the mid-1990's, Congressional Republicans launched a jihad to lower taxes for the wealthiest Americans.

As David Cay Johnston describes in his book Perfectly Legal, the GOP during the Clinton administration waged an all-out war on the IRS, turning the priorities for auditing Americans upside-down. As Senator William Roth's Finance Committee held hearings in 1997 and 1998, Mississippi's Trent Lott and Alaska's Frank Murkowski decried the IRS' "Gestapo-like tactics." Don Nickles of Oklahoma raged, "The IRS is out of control!" Congress went on to pass and Bill Clinton signed the IRS Reform and Restructuring Act in 1998.

Those reforms in essence gave wealthier Americans carte blanche to cheat and fundamentally undermined tax fairness in the United States. Within one year, property seizures for unpaid taxes dropped by 98%. Liens were sliced by three quarters and levies on bank accounts by two-thirds. Johnston describes (p. 134) the overnight shift of tax policing onto poorer Americans:

In 1999, for the first time, the poor were more likely than the rich to have their tax returns audited. The overall rate for people making less than $25,000 a year was 1.36%, compared with 1.15% of returns by those making $100,000 or more...Over the previous 11 years audit rates for the poor had increased by a third, while falling 90 percent for the top tier of Americans.

That crusade accelerated under George W. Bush. Unable to permanently repeal the estate tax, the Bush administration sought to cripple enforcement. As the New York Times reported in July 2006, the IRS planned to shed almost half of the 345 lawyers assigned to monitor the gift and estate taxes paid - or not paid - by those with some of the largest fortunes in the United States. As Sharyn Phillips, a veteran I.R.S. estate tax lawyer in Manhattan put it, the cuts are a "back-door way for the Bush administration to achieve what it cannot get from Congress, which is repeal of the estate tax."

The resulting epidemic of upper-crust cheating and decline in federal tax revenue was predictable. As the Time summed it up in 2006:

Over the last five years, officials at both the I.R.S. and the Treasury have told Congress that cheating among the highest-income Americans is a major and growing problem.

For their part, Congressional Democrats sought to combat the virus of tax fraud by the wealthy and recover tens of billions of dollars owed to Uncle Sam. In February 2007, Democrats sought to beef up the ranks of IRS auditors to battle both tax cheats and the budget deficit:

House and Senate Democrats say the government could collect as much as $100 billion more a year by whittling the tax gap - the unpaid taxes, mostly on unreported earnings, that the I.R.S. estimated was about $300 billion a year.

Of course, the effort ran quick into a wall. Supported by their usual business constituencies, President Bush and a unified Republican Party stopped the attempt at tax fairness dead in its tracks.

And so it goes. The Bush administration's castration of the IRS, the SEC, the DOJ and other arms of the federal regulatory machinery predictably produced plunging revenues and a spree of stock fraud and tax evasion. Which, as Wrecking Crew author Thomas Frank suggests, means that conservative rule worked exactly as designed:

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