An Inconsistency in the European Union Guidelines for Cost-benefit Analysis of Investment Projects

European Union Guidelines are the cornerstone of project evaluation in Europe. An important aspect of this method is the exclusion of taxation. The Guidelines advise to discard from the calculation the loss from reduced fuel taxation, while benefits are computed based on consumers' surplus. We argue that when applied to projects that shift demand from a highly taxed mode to a slightly less taxed one, the proposed method violates the principle of net-of-taxes computation. Finally, we show numerous analytical, practical, and informative advantages of including taxation, and dismiss the claim that 'taxes should be excluded because they are a transfer'.