The Marginal Revenue Rule in Cost-Benefit Analysis

23 Pages Posted: 15 Oct 2018

See all articles by David A. Weisbach

David A. Weisbach

University of Chicago - Law School; Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP)

Daniel Jacob Hemel

University of Chicago - Law School

Jennifer Nou

University of Chicago - Law School

Date Written: September 10, 2018

Abstract

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

Weisbach, David and Hemel, Daniel Jacob and Nou, Jennifer, The Marginal Revenue Rule in Cost-Benefit Analysis (September 10, 2018). Tax Notes, Vol. 160, No. 11, pp. 1507-1528 (Sept. 10, 2018); University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 859; U of Chicago, Public Law Working Paper No. 685. Available at SSRN: https://ssrn.com/abstract=3254325

David Weisbach (Contact Author)

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States
773-702-3342 (Phone)
773-702-0730 (Fax)

Center for Robust Decisionmaking on Climate & Energy Policy (RDCEP) ( email )

5735 S. Ellis Street
Chicago, IL 60637
United States

Daniel Jacob Hemel

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

Jennifer Nou

University of Chicago - Law School ( email )

1111 E. 60th St.
Chicago, IL 60637
United States

HOME PAGE: http://https://www.law.uchicago.edu/faculty/nou

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