This week, Assaf Harpaz (Georgia, Google Scholar) reviews a new work by Mirit Eyal (Alabama, Google Scholar), Taxation as Public Hedging (Jan. 20, 2026).
Tax systems regulate taxpayer behavior by offering credits, deductions, exemptions, and exclusions for activities deemed socially favorable. In Taxation as Public Hedging, the author suggests that tax expenditures can also be conceptualized as a framework for allocating social risks. Preferential tax provisions operate as a mechanism through which governments absorb financial risk in support of socially beneficial activities. Yet by doing so, governments also subsidize the costs of negative externalities produced by private actors, thereby positioning the public as an involuntary insurer. To manage these risks, the author proposes incorporating ESG-based indicia into the design of contingency, recapture, and risk-pooling instruments.
The article begins by introducing the theoretical framework: tax incentives can be conceived as a form of insurance that protects against underinvestment in strategic national priorities. By providing tax incentives, like R&D credits or the Investment Tax Credit for renewable energy projects, the government effectively provides insurance to firms by absorbing the downside risk of projects that might otherwise fail. These incentives operate as ex ante protection for activities that advance innovation development as a public good and national priority. However, if tax expenditures are conceived as implicit insurance, the government’s current deployment of tax instruments fails to provide meaningful or coherent risk-sharing. In what the author refers to as “incomplete hedging,” these incentives lack the ability to capture and distribute negative externalities inherent in such activities. For example, nuclear weapons, AI systems, or climate control technologies carry significant potential for public harm. Likewise, R&D tax incentives may contribute to market monopolies, data privacy concerns, or other shared social challenges.
The article proceeds to analyze taxation as a form of hedging. In contrast with insurance, which functions by pooling risk and transferring losses once adverse events occur (ex post), hedging operates to internalize both the positive and negative externalities (ex ante). Hedging is concerned with symmetry: requiring that tax policy aligns public exposure to the risk associated with the reward. The argument rests on the premise that society over-incentivizes technological development relative to its actual social value. None of the current innovation tax benefits hedge against negative externalities created by firms claiming such tax benefits. In addition, these benefits do not contain a proper accountability mechanism to ensure that the publicly beneficial behavior is indeed correlated to the tax incentive.
The author proposes that tax incentives should develop beyond conventional insurance mechanisms to function as tools of public hedging. On the supply side, the author suggests employing corrective instruments to increase firms’ safeguards and deter negative externalities. These would largely take the form of clawback provisions, structured risk-pooling arrangements, and enhanced ex ante and ongoing oversight. On the demand side, the author calls for framing tax conduct as part of corporate responsibility. Specifically, the author recommends incorporating ESG-triggered accountability into tax policy. The author argues that ESG averages can be deployed within tax policy to identify when publicly subsidized activity systematically produces social harm.
This project builds on the author’s substantial body of work on the relationships between AI, tax expenditures, and the public good. This contribution is exceptionally timely given the tax incentives that support the recent escalation of electricity demand driven by Big Tech’s AI data-center expansion, provided as context at the beginning of the paper. The author may consider how broadly the hedging framework can apply to other tax expenditures, beyond R&D and other innovation incentives. For instance, whether hedging can be conceptually useful to understanding negative regulations, such as excise taxes that disincentivize taxpayers from engaging in undesirable behavior.
The article concludes with an appendix, setting forth a model legislative proposal titled “Innovation Incentives ESG Accountability and Recapture Act of 2026.” By doing so, the proposal makes innovation incentives contingent on ESG performance, including a measured and predictable recapture mechanism.
Here’s the rest of this week’s SSRN Tax Roundup:
Tarun Jain (Supreme Court of India), Virtual Permanent Establishment: Indian High Court Rejects Clamour to Expand Tax Treaty Contours(Jan. 17, 2026)
Ayhan Karagoz (Independent), Audit-Ready Contractor and Professional Service Payments: A Documentation & Controls Playbook—Lessons from a High-Scrutiny Audit Environment, Year-End FX Valuation, Evidence Standards, and Cross-Border Performance Risk(Jan. 21, 2026)
Nakije Kida (AAB College), Application and Effect of VAT Tax in the Republic of Kosovo: Application of VAT in Over 150 Countries Worldwide and Kosovo (Jan. 16, 2026)
Orly Mazur (SMU), Policy Options to Address the “Robot Threat”, SMU Dedman School of Law Legal Studies Research Paper No. 717; in Taxation of Data and Artificial Intelligence (Xavier Oberson & Alara Efsun Yazıcıoğlu eds., Schulthess, forthcoming 2026) (Jan. 16, 2026)
Lauren Shores Pelikan (Missouri), Toddlers, Investors, and Tax Policy, University of Missouri School of Law Legal Studies Research Paper No. 2026-08; 99 Southern California Law Review __ (forthcoming 2026) (Jan. 20, 2026)
Kerry A. Ryan (Saint Louis), Checking In on Checking Out of the QTIP Regime (Jan. 20, 2026)
