A Critique of Tax Based Cost/Benefit Ratios. The Rand Paper Series.

This paper examines the theoretical difficulties inherent in basing social investment decisions solely on considerations involving the additional tax payments and tax receipts the investment generates. Although the conceptual issues raised are quite general and could be applied to a wide variety of government financed investments, emphasis is on application to manpower training programs. Following the introductory section, major topics discussed are Some Elementary Concepts in Public Project Analysis (a review), The Case of Manpower Training, and An Assessment of Tax Based Ratios. It is concluded that the use of any tax based cost/benefit ratio is conceptually invalid in that these ratios do not serve as adequate proxies for the net increase in socially useful output received through manpower training programs and they discriminate quite arbitrarily among people based on personal characteristics and other factors that have little relation to the question of economic efficiency. (HD)