Monday, September 14, 2020
Daniel Hemel (Chicago) presents Clarifying the Role of Redistribution in Cost-Benefit Analysis virtually today as part of the San Diego-Davis-Hastings Tax Law Speaker Series:
Cost-benefit analysis is the standard method for policy evaluation across U.S. federal executive-branch agencies. Cost-benefit analysis, as traditionally implemented by federal agencies, does not explicitly account for changes in income redistribution or the resource costs of income redistribution. Rising concern about income inequality—including but not limited to income inequality across racial and ethnic groups—has focused new attention on this feature of cost-benefit analysis and has generated renewed criticism of the redistribution-neutral approach.
This paper seeks to clarify the role of income redistribution in agency cost-benefit analysis and articulate conditions under which regulatory evaluation should account for distributive consequences. In particular, it seeks to provide concrete guidance to a hypothetical incoming presidential administration regarding top-down policies for regulatory evaluation across the executive branch. Part I distinguishes among traditional (redistribution-neutral) cost-benefit analysis, wealth maximization, and social welfare analysis. It explains why traditional redistribution-neutral cost-benefit analysis and social welfare analysis are potentially justifiable methods for policy evaluation but wealth maximization is not. Part II considers three justifications for the traditional redistribution-neutral approach.
The distributive invariance argument holds that the legislature will adjust the tax-and-transfer system to offset the distributive effects of regulatory changes. The organizational design argument posits that specialized agencies lack the capacity to incorporate distributive effects into regulatory evaluations. The social envelope argument assumes that the current tax-and-transfer system strikes an appropriate balance between the resource costs and benefits of redistribution, such that reasonably small changes in the quantity of redistribution will have only second-order effects on social welfare. I conclude that—particularly in the context of an incoming U.S. presidential administration with bare-majority support in Congress for its tax-and-transfer agenda—the social envelope argument is the strongest of the three justifications, and indeed provides a generally persuasive reason for a new administration to hew to the traditional redistribution-neutral approach. Part III considers the relationship between racial and ethnic inequality and regulatory evaluation. Welfarism supplies a strong argument for race-conscious regulatory evaluation when legal or political barriers rule out the possibility of monetary reparations. For the same reason that the tax-and-transfer system is generally superior to the legal system as a mechanism for addressing income inequality, though, monetary reparations are likely to be superior to race-conscious regulatory evaluation as a mechanism for addressing persistent racial and ethnic inequalities.