The Marginal Revenue Rule in Cost-Benefit Analysis
23 Pages Posted: 15 Oct 2018
Date Written: September 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.
Keywords: cost-benefit analysis, tax regulations, marginal revenue rule, elasticity of taxable income
JEL Classification: H21, K23, K34
Suggested Citation: Suggested Citation