Each year the federal individual income tax code provides over $500 billion worth of incentives intended to encourage socially beneficial activities, such as charitable contributions, homeownership, and education. This is an enormous investment, exceeding our budget for national defense and amounting to about 4% of Gross Domestic Product (GDP). The design of these tax incentives is an immensely important policy matter. Yet despite their efficiency rationale, little attention has been paid to the question of what economic efficiency implies about the form these tax incentives should take.

Currently the vast majority of tax incentives operate through deductions or exclusions, which link the size of the tax preference to a household's marginal tax bracket. Higher-income taxpayers, who are in higher marginal tax brackets, thus receive larger incentives than lower-income taxpayers. This Article argues that providing a larger incentive to higher-income households is economically inefficient unless policymakers have specific knowledge that such households are more responsive to the incentive or that their engaging in the behavior generates larger social benefits. Absent such empirical evidence, all households should face the same set of incentives...