Evaluating the Cost-Effectiveness of Individual Income Tax Incentives

Bradley T. Heim

National Tax Journal, 2025, vol. 78, issue 1, 115 - 167

Abstract: This paper examines the cost-effectiveness of individual income tax incentives in the United States. Basic theory is presented to show how income tax incentives can be evaluated in a cost-effectiveness framework using existing estimates of responsiveness. The paper then uses the extant literature to calculate effectiveness-cost ratios for major incentives. About half are found, at least tentatively, to not be cost-effective, including incentives for housing, education, employer-sponsored health insurance, and retirement savings in recent years. The paper finally examines the extent to which the Tax Cuts and Jobs Act likely altered the cost-effectiveness of individual income tax incentives.

Date: 2025
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