Cost-Benefit Analysis of Tax Regulations: A Case Study
From: Notice & Comment | A Blog from the Yale Journal on Regulation and the ABA Section of Administrative Law & Regulatory Practice
by Daniel Hemel, Jennifer Nou and David Weisbach
The proposed passthrough rule will likely require Treasury, the IRS, and OIRA to confront a question that has vexed tax scholars for some time: How should cost-benefit analysis be conducted for tax regulations? More precisely, how should it account for the revenue effects of tax-related changes? Guidance from the Office of Management and Budget (OMB, of which OIRA is a part) seems to instruct agencies to treat government revenue collections as “transfer payments” rather than as benefits or costs. The rationale is that “benefit and cost estimates should reflect real resource use,” while “transfer payments are monetary payments from one group to another that do not affect total resources available to society.” However, in the tax context, some increases in tax revenue do in fact reflect changes in real resource use. Under OMB’s own guidance, then, these revenue changes should be counted as a social benefit.
In sum, the extension of cost-benefit analysis to tax regulations under the April 2018 memorandum of agreement creates conceptual and technical challenges for Treasury, the IRS, and OIRA. The marginal revenue rule—which counts revenues resulting from behavioral changes but not mechanical transfers—points to a path forward. The new passthrough regulations provide the agencies with an initial opportunity to apply this approach. Some will still argue that cost-benefit analysis should not be applied to tax regulations, but hopefully all can agree that if it’s to be done, it should be done well.
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