Putting the Public Benefit in Cost Benefit Analysis of Tax Regulations: A Response to Hemel, Nou and Weisbach

Abstract

In a recent blog post and forthcoming Tax Notes article, Profs. Daniel Hemel, Jennifer Nou and David Weisbach have argued for a new way of calculating the costs and benefits of tax regulations. Hemel and his colleagues then propose a method for Treasury and IRS to calculate the social costs and benefits of tax regulations that affect revenue collections. This method, which they call the “marginal revenue rule,” builds upon recent work by economists Martin Feldstein, Raj Chetty, Michael Keen, and Joel Slemrod. They argue that revenues resulting from behavioral changes should be counted toward the social benefits of a tax regulation, whereas other revenues (what economists refer to as “mechanical transfers”) should not. For non-revenue costs and benefits, cost-benefit analysis of tax rules should proceed along the same lines as that for non-tax regulations. We write not to debate the advantages or disadvantages of the marginal revenue rule, but rather to address the underlying assumption by both Hemel et al and OMB/OIRA that “mechanical transfers” (revenues that do not result from behavioral changes) should be excluded from both the cost and the benefit side of cost/benefit analysis. In other words, a dollar in the hands of the taxpayer is worth exactly as much as a dollar in the hands of the government. However. ignoring the benefit that results from government spending of tax dollars in a cost/benefit analysis is clearly wrong, and results in anti-tax bias, given the wide acceptance of the cost associated with taxes.