TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Friday, October 19, 2018

Weisbach, Hemel & Nou: The Marginal Revenue Rule In Cost-Benefit Analysis

David A. Weisbach (Chicago), Daniel J. Hemel (Chicago) & Jennifer Nou (Chicago), The Marginal Revenue Rule in Cost-Benefit Analysis, 160 Tax Notes 1507 (Sept. 10, 2018):

In April 2018, the U.S. Department of the Treasury and the Office of Management and Budget released a memorandum of agreement stating that certain tax-related regulations must be accompanied by a formal cost-benefit analysis. In this report, we propose a method of performing cost-benefit analysis of tax related-regulations. Our approach — which we call the marginal revenue rule — instructs that the social benefit of an increase in revenue generated by a tax regulation is equal to the increase in revenue resulting from reporting and behavioral changes induced by the regulation.

The total social benefit of a tax regulation thus equals the increase in revenue resulting from reporting and behavioral changes plus any non-revenue-based benefits (e.g., health benefits from a tobacco tax regulation or environmental benefits from a gas tax regulation). The social cost of a tax regulation is the increase in administrative and compliance costs resulting from the regulation as well as any non-tax-related costs (e.g., health costs, environmental costs). The net effect of the regulation is the difference between the social benefits and the costs. This approach is firmly rooted in the economic theory of taxation; it is consistent with the principles underlying the Office of Management and Budget's guidance for agency cost-benefit analysis; and it builds on the revenue estimating competencies that already exist within Treasury’s Office of Tax Analysis and other parts of the Executive and Legislative branches.

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