Hemel: Redistributive Regulations And Deadweight Loss

Daniel J. Hemel (NYU; Google Scholar), Redistributive Regulations and Deadweight Loss:

Redistribution generates equity benefits and deadweight loss. A canonical result in economic theory holds that policymakers cannot escape the problem of deadweight loss by redistributing through non-tax rules. Nonetheless, the Office of Management and Budget released a revised framework for regulatory analysis in November 2023 that urged federal agencies to consider the equity benefits of redistribution—but not the deadweight loss of redistribution—when choosing which non-tax rules to promulgate. By omitting any consideration of deadweight loss, OMB’s framework leaves agencies vulnerable to legal attack on the ground that they have ignored an important aspect of regulatory redistribution in their decisionmaking.

This article illustrates how agencies can estimate the deadweight loss of regulatory redistribution and thereby place their redistributive rules on firmer economic and legal footing. It shows how the “elasticity of taxable income” approach—widely used by tax economists—can be modified to the regulatory context so that agencies can estimate the deadweight loss of redistributive regulations while incurring relatively modest additional analytical burdens. Explicitly incorporating deadweight loss into distributional analysis will make regulations more robust to legal challenges and will provide the public with a more accurate view of the welfare consequences of regulatory actions.