What is the purpose of tax deductions? A common view among tax law scholars is that tax deductions are required to properly measure income. I present an alternative theory of tax deductions, relying on standard economic efficiency grounds. I develop a model which highlights the fact that economic activities have costs and benefits, but an income tax system taxes only some of those benefits. The efficient deduction rule allows the deduction of a share of the cost equal to the share of the benefit that is taxed. I also show that the deadweight loss due to a departure from the efficient deduction rule increases quadratically with the departure, making larger departures from the rule much more costly than smaller ones. I then review various tax deduction rules in the Internal Revenue Code, analyzing each rule under the two theories of tax deductions, and demonstrating that the efficiency theory is useful both for teaching tax deductions and as a guide to optimal tax policy.