Wednesday, March 18, 2009
Writing good regulations -- “good” in the sense of promoting the public interest -- always presents challenges. Regulators must hit a small but important target where private conduct is brought within appropriate government control, but unnecessary compliance burdens and other deadweight costs are minimized. Even if they see the government's objectives clearly, regulators often have only a limited understanding of the underlying private activities. Moreover, regulators may be unaware of how their rules disrupt or distort those activities in socially harmful ways. Regulators occasionally hit the target exactly. More often, they miss -- though not by an intolerably wide margin (good enough for government work, as the saying goes). However, sometimes regulators miss the mark so badly that the only responsible next step is to acknowledge the failure. That is the case with the final regulations under Internal Revenue Code section 409A. Those regulations are irreparably flawed -- so flawed that the best members of the practicing bar cannot make sense of them for basic transactions. When the government issues rules that even experts cannot understand, the government should start over.