Efficiency and Tax Incentives: The Case for Refundable Tax Credits

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.