A Critique of Tax Based Cost

by James P. Smith

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Examines the theoretical difficulties inherent in basing social investment decisions solely on considerations involving the additional tax payments and tax receipts the investment generates. It has often been suggested that it may be appropriate to evaluate the social costs of government investments by the tax payments required to finance the investment and to value the social benefits by the tax receipts that result from the additional income attributed to the investment. The conceptual issues raised here are quite general and could be applied to a wide variety of government financed investments, but in this paper it is applied to manpower training programs. More precisely, the paper will investigate the conditions under which the true social cost/benefit ratio is related to a cost/benefit ratio where costs are defined only as the tax dollars used to finance manpower programs and benefits are defined as the tax receipts from the net earnings gains due to the manpower program. 23 pp.

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