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The federal government has a wide range of instruments by which it can influence the nation's higher education system to produce socially desired outcomes. The challenge facing policymakers and planners is to maximize these socially desirable outcomes by selecting a desirable mix of programs and distributing among them scarce financial resources. This paper will attempt to (a) outline the bases for a policy development process that maximizes the desired program selection, and (b) identify possible roles of tax instruments in federal higher education policy.