Public Law & Legal Theory
In April, Treasury and the Office of Management and Budget released a memorandum of agreement stating that tax related regulations will be subject to centralized review by OMB’s Office of Information and Regulatory Affairs (OIRA).1 Importantly, the memorandum instructs Treasury to give OIRA a formal cost-benefit analysis of any regulatory action that has an annual non-revenue effect on the economy of $100 million or more. Regulations that create interagency inconsistencies or raise “novel” legal or policy issues are also subject to OIRA review. For these “significant” regulations, the memorandum requires a less formal cost-benefit analysis.
These new mandates require Treasury and OIRA to adapt the tools of cost-benefit analysis to the tax context. The primary effect of many tax regulations is a change in the amount that taxpayers transfer to the government. Traditional cost-benefit analysis considers transfers from one party to another to be neither social costs nor social benefits. Without some way to account for the social welfare effects of changes in tax collections, however, Treasury and OIRA face the challenge of applying the new cost-benefit analysis mandate in a consistent and sensible manner.
We propose a method of performing cost-benefit analysis of tax-related regulations. Under this approach, which we call the marginal revenue rule (MRR), the social benefit of a revenue increase generated by a tax regulation is equal to the net increase in revenue resulting from reporting and behavioral changes induced by the regulation.2
David A. Weisbach, Daniel J. Hemel & Jennifer Nou, "The Marginal Revenue Rule in Cost-Benefit Analysis", Public Law and Legal Theory Working Paper Series, No. 685 (2018).