Appendix to 'The Marginal Revenue Rule in Cost-Benefit Analysis'

Abstract

This document is an appendix to "The Marginal Revenue Rule in Cost-Benefit Analysis," Tax Notes (Sept. 10, 2018). In that publication, we proposed a method of performing cost-benefit analysis of tax related-regulations. The approach — which we called the marginal revenue rule — instructs that the social benefit of an increase in revenue generated by a tax regulation is equal to the net increase in revenue resulting from reporting and behavioral changes induced by the regulation. The total social benefit of a tax regulation equals the net 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 net 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. Tax regulations will often affect the total amount of revenue that the government collects. In analyzing the welfare effects of tax regulations that raise or reduce revenue, regulators must decide when — if ever — a transfer of money from a taxpayer to the government should be counted as a net social benefit or cost. In "The Marginal Revenue Rule in Cost-Benefit Analysis¸" we argued that the most transparent approach to the problem is to consider a dollar to be worth the same in private hands and in government hands, and then to estimate the efficiency effects of the proposed regulation under that assumption. The marginal revenue rule allows regulators to identify circumstances in which increases or decreases in taxes paid do affect social welfare, notwithstanding the equal weight placed on revenue in public and private hands. Regulators would then report the efficiency effects of the proposed regulation (estimated via the marginal revenue rule) and would separately state the distributional and revenue effects. This Appendix provides a further discussion of the assumption that revenue is worth the same in public and private hands.

Keywords: cost-benefit analysis, tax regulations

JEL Classification: K34, K23, H20, H21, H26