Section 199A Deduction: Economic Effects and January 6, 2021
Policy Options
Gary Guenther
Section 199A of the federal tax code allows owners of pass-through businesses to deduct up to
Analyst in Public Finance
20% of qualified business income (QBI) from their taxable income in calculating their individual

income tax liability. The deduction was established by the 2017 tax revision (P.L. 115-97) and is
available from 2018 to 2025.

Calculating the deduction can be complicated. The maximum deduction is equal to 20% of an eligible business’s QBI,
provided the deduction does not exceed 20% of a taxpayer’s taxable income, excluding long-term capital gains. If a pass-
through business owner’s taxable income is not greater than the deduction’s lower income threshold, then the owner may
claim the maximum deduction. The lower income threshold can increase over time because it is indexed for inflation; in
2020, it is set at $326,600 for joint filers and $163,300 for all other filers. If taxable income falls between the lower income
threshold and the deduction’s upper income threshold ($426,600 for joint filers and $213,300 for all other filers in 2020),
then two other limits apply. One limit concerns businesses classified as a “selected service trade and business” (SSTB); the
other limit is based on an owner’s share of an eligible business’s W-2 wages and the unadjusted basis of its tangible,
depreciable assets (known as the wage and qualified property [WQP] limit). For QBI from SSTBs and non-SSTBs, the
maximum deduction decreases as these limits are phased in. If taxable income exceeds the upper income threshold, no SSTB
qualified business income is eligible for the deduction, and the deduction for non-SSTB QBI cannot exceed the greater of
50% of the owner’s share of a business’s W-2 wages, or 25% of those wages plus 2.5% of the owner’s share of the business’s
unadjusted basis of qualified capital assets.
This report addresses the Section 199A deduction’s possible economic effects, addressing the deduction’s impact on (1)
investment and employment, (2) horizontal and vertical equity in the federal income tax, and (3) tax administration (as it
concerns the cost to taxpayers of complying with tax laws and the cost to the federal government of enforcing such
compliance). The report ends with a discussion of policy options, as Congress considers whether the deduction should be
retained beyond 2025 and whether and how to modify it if the deduction is retained.
Regarding investment, there are no estimates of how the deduction has affected pass-through business investment. Although
the deduction seems to have improved investment incentives for numerous pass-through firms, it is not clear to what extent
that effect has carried over to actual spending on new investments. Available evidence suggests that the deduction has likely
stimulated no more than a modest rise in investment.
Regarding jobs, there are no estimates of how the deduction has affected job creation among pass-through firms. It is unclear
whether the deduction, combined with the temporary individual income tax cuts under the 2017 tax law, has boosted demand
for labor. In theory, the deduction could indirectly contribute to increases in employment over time through any new
investment and business expansion it stimulates. This process can take at least a year or two to play out.
Regarding equity in the federal income tax, the Section 199A deduction appears to reduce vertical equity, which is the
principle that someone’s tax burden should rise with income. Support for this view comes from evidence that a significant
majority of pass-through business profits go to high-income persons. The deduction also appears to reduce horizontal equity,
which is the principle that individuals with similar incomes should be taxed at similar rate s. Owing to the deduction, a wage
earner is taxed at a higher rate than a pass-through business owner with the same taxable income, everything else being equal.
Regarding tax compliance, the deduction’s complexity might produce two outcomes, with conflicting revenue effects. On the
one hand, the complexity may deter a number of eligible business owners from claiming the deduction. On the other hand,
many upper-income pass-through business owners may hire tax advisers to help them find exploitable loopholes in the
deduction’s rules.
Regarding tax administration, the Section 199A deduction’s complexity may put added pressure on the Internal Revenue
Service (IRS) to increase its resources for examinations and collections. Owing to substantial cuts in the IRS’s enforcement
budget since FY2010, audits of high-income individuals and pass-through business owners have decreased by large margins,
raising questions about the ability of the IRS to adequately enforce as complicated a tax preference as the Section 199A
deduction.
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Section 199A Deduction: Economic Effects and Policy Options

Introduction
A key aim of the tax revision enacted in December 2017 (P.L. 115-97, often referred to as the Tax
Cuts and Jobs Act, or TCJA) was to reduce the federal tax burden on corporate and noncorporate
businesses. Many of the reduction’s backers predicted that it would give businesses an added
incentive to hire more workers and invest more in tangible and intangible depreciable assets. The
law sought to reduce the business tax burden in two ways.
For corporations, the law permanently cut the top income tax rate for firms subject to the
corporate tax (also known as Subchapter C corporations) from a top rate of 35% (with a
graduated rate structure) to a single rate of 21%, a 40% decrease. Corporate profits that are not
retained by the business are taxed twice: once at the corporate level and a second time at the
individual level when profits are distributed to shareholders as dividends or long-term capital
gains.
The 2017 tax revision temporarily lowered the tax burden on noncorporate (or pass-through)
businesses by cutting every individual income tax rate except the lowest rate (10%) and creating a
new deduction under Internal Revenue Code (IRC) Section 199A for pass-through business
profits.1 The deduction is intended to lower effective tax rates for pass-through business profits by
as much as 20%.2 For pass-through business owners taxed at the highest statutory rate, the
maximum deduction and the individual income tax rate cuts lower the top effective rate from
37% to 29.6%, which is about 25% below the top statutory rate under pre-TCJA tax law. Both the
individual rate cuts and the deduction are scheduled to expire at the end of 2025. Pass-through
business profits are taxed only at the individual level of owners.
This report addresses the Section 199A deduction’s possible economic effects. More specifical y,
it mainly addresses the deduction’s impact on (1) investment and employment, (2) horizontal and
vertical equity in the federal income tax, and (3) tax administration (as it concerns the cost to
taxpayers of complying with tax laws and the cost to the federal government of enforcing such
compliance). The report ends with a discussion of policy options for Congress, as it considers
whether the deduction should be retained beyond 2025 and whether and how to modify it if the
deduction is retained.

1 For more details on the structure of the Section 199A deduction, see CRS Report R46402, The Section 199A
Deduction: How It Works and Illustrative Exam ples, by Gary Guenther.
2 Effective tax rates (ET Rs) serve a crucial purpose in the analysis of the economic effects of tax provisions. T hey
measure an individual’s or corporation’s tax burden, which is the percentage of taxable income that is actually taken by
taxes. An ET R does this by applying to a taxpayer’s statutory tax rate any tax preferences the taxpayer could claim in
determining taxable income. As such, the effective rate is typically lower than the statutory rate, because tax
preferences are intended to increase the welfare of designated groups or to encourage individuals or businesses to
engage in certain activities. T hese preferences can take the form of tax credits, special deductions, exclusions, deferrals,
and preferential tax rates.
Generally, an ET R can be average (AET R) or marginal (MET R). In the case of businesses, the former shows the tax
burden on a firm’s taxable income from old and new investments, whereas the latter shows the tax burden on an
additional dollar of income from new investments only. Both approaches are used in this report. Each is clearly labeled
when it is used.

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Section 199A Deduction: Economic Effects and Policy Options

Structure of the Deduction
In general, Section 199A permits individuals, trusts, and estates with pass-through business
income to deduct up to 20% of their qualified business income (QBI) in determining their federal
income tax liability. Current law requires pass-through business owners to report their share of
net income on their individual tax returns, regardless of whether the income is distributed to
them. In general, QBI is equivalent to net income for a pass-through business. The deduction is
available from 2018 to 2025, after which it expires. The deduction is claimed on Form 1040 after
an eligible taxpayer takes either the standard deduction or the sum of her or his itemized
deductions. General y, use of the deduction depends on a pass-through business owner’s taxable
income, the nature of her or his business, and the owner’s share of the business’s W-2 wages and
the original cost (or unadjusted basis) of the business’s depreciable capital assets.3
The maximum deduction is the lesser of
 20% of an owner’s QBI, or
 20% of taxable income, excluding any net capital gains.
Two other limitations may apply to the maximum deduction, reducing the amount of the
deduction that may be taken. They are
 A wage and qualified property limitation (WQP), which reduces the maximum
deduction an owner may claim based on the owner’s share of a business’s W-2
wages and the unadjusted basis (or original cost) of its qualified assets); and
 A specified service trade or business (SSTB) limitation, which reduces the
maximum deduction an owner may claim for qualified income from SSTBs. An
SSTB is any trade or business primarily engaged in accounting; health; law;
actuarial science; athletics; brokerage services; consulting; financial services; the
performing arts; investing and investment management; or trading or dealing in
securities, partnership interests, or commodities. An SSTB can also be a trade or
business whose principal asset is the reputation or skil of one or more of a firm’s
owners or employees.
The SSTB and WQP limitations begin to apply when a pass-through owner’s taxable income
exceeds a lower income threshold, and they phase in until taxable income exceeds an upper
income threshold. When this happens, the deduction is subject to the limitations’ full impact.
The deduction applies to an owner’s QBI, which is the net result of combining an eligible
business’s items of income, deduction (excluding the Section 199A deduction), loss, and gain in a
tax year. Only income items connected to a trade or business conducted in the United States
(including Puerto Rico) are eligible for the deduction. QBI does not include
 wage income;
 reasonable compensation received by an S corporation shareholder for services
provided to the business;
 guaranteed payments to a partner from a partnership for services provided to the
business; or
 investment income unrelated to a pass-through business.

3 W-2 wages are the total wages paid by a company that are subject to withholding, elective deferrals, and deferred
compensation. T he unadjusted basis of depreciable, tangible assets refers to the cost of such assets when a company
acquires them.
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Economic Effects of the Deduction
This section analyzes the Section 199A deduction’s economic impact under six categories:
investment, employment, equity, tax administration and compliance, budgetary impact, and
industry effects.
Investment
Proponents of the 2017 tax law’s business tax cuts have maintained that they are a key to faster
and more robust economic growth in the long run.4 The linchpin of this process is increased
investment in more productive capital. In the proponents’view, these cuts should lead many firms
to invest more in tangible and intangible assets than they otherwise would. This added investment
would expand the firms’ capital stock, everything else being equal, and equip workers at these
firms with more productive capital assets, enhancing their productivity. According to proponents,
rising productivity would result in greater output, higher real wages, and faster job growth, a
process that would not necessarily be immediate.5
Taxes directly affect investment through their impact on the user cost of capital and business cash
flow. The user cost of capital represents the after-tax rate of return an investment has to earn to
attract investors. It takes into account the real interest rate, economic depreciation for assets
acquired through an investment, the marginal effect of taxes, and the opportunity cost of using
funds for that purpose. In this case, the opportunity cost is equivalent to the rate investors could
earn from an index fund whose ratio of debt to equity matches the debt-to-equity ratio for
financing a new investment.
The deduction, combined with the reduced individual income tax rates under the 2017 tax law,
reduces the user cost of capital for eligible pass-through businesses, expanding the portfolio of
investments a firm could profitably undertake. As such, the law improves investment incentives
for these firms. The boost, however, may be limited by the temporary nature of the reduction in
effective tax rates for pass-through business income.
An indicator of the extent to which income taxes affect investment incentives is the effective tax
rate (ETR) for the returns to a specific investment. The ETR for a new investment is the
difference between its pretax rate of return and its after-tax rate of return, divided by the pretax
rate of return. It is generated on the basis of assumptions about real interest rates, method of
financing, desired after-tax rate of return for an investment, and individual and corporate tax
rates. Under current federal tax law, ETRs vary by type of asset, method of financing, and form of
business organization. A reduction in an investment’s ETR enhances a firm’s incentive to
undertake the investment.
As Table 1 shows, the 2017 tax revision lowered ETRs for corporate and noncorporate
investments in a range of tangible assets, financed either by equity alone or by a typical mix of
debt and equity.6 The reduced ETRs for noncorporate investment reflect the combined effect of
the Section 199A deduction, the individual income tax rate cuts, and the availability of 100%
expensing for tangible assets with a recovery period of 20 years or less (e.g., off-the-shelf

4 See Scott Hodge, “T he Positive Economic Growth Effects of the T ax Cuts and Jobs Act,” written testimony of Jane
Gravelle before the Joint Economic Committee, Tax Foundation, September 6, 2018, pp. 2-3.
5 See Council of Economic Advisers, The Growth Effects of Corporate Tax Reform and Implications for Wages,
Executive Office of the President, October 2017).
6 CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G. Gravelle
and Donald J. Marples, p. 17.
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software and equipment). These estimates apply to every provision in the 2017 law that affects
after-tax returns on investment, which means that they do not clarify to what extent the deduction
itself lowered ETRs. For investments financed by a typical mix of debt and equity, the 2017 tax
law provided a stronger tax incentive for pass-through businesses to invest in tangible assets like
structures and equipment, but not in the development of intangible assets like patents.
Table 1. Effective Tax Rates by Type of Asset
Pass-through
Pass-through
Corporations:
Corporations:
Firms: Pre-TCJA
Firms: Current
Asset
Pre-TJCA Law
Current Law
Law
Law
100% Equity Financed
Equipment
13.4%
0.0%
14.4%
0.0%
Public Utility
14.2
0.0
15.2
0.0
Structures
Nonresidential
30.8
18.5
32.1
26.2
Structures
Intangibles
-63.3
-63.3
-63.3
-63.3
Debt and Equity Financed
Equipment
-0.9
-9.6
-0.6
-14.3
Public Utility
-0.9
-9.6
-0.6
-14.3
Structures
Nonresidential
19.2
10.7
20.2
15.7
Structures
Intangibles
-116.3
-95.4
-111.2
-109.0
Source: CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G.
Gravel e and Donald J. Marples, Table A-1.
Notes: The calculations are based on corporate tax rates of 34.14% under pre-TCJA law (including the now-
repealed Section 199 production activities deduction) and 21% under current law; pass-through tax rates of 37%
under pre-TCJA law and 30% under current law (based on information from the Congressional Budget Office); a
real after-tax rate of return of 7% for equity; an interest rate of 7.5%; a 2% inflation rate; and a debt financing
share of 36%.
It would be incorrect to conclude from the estimates in Table 1 that the 2017 tax revision in
general and the Section 199A deduction in particular have uniformly increased the incentive to
invest among pass-through firms. Depending on the nature of the asset and how an investment is
financed, the deduction can diminish or enhance that incentive.
On the one hand, the deduction operates as a temporary tax cut for pass-through firms. As such, it
might act as a disincentive to invest at the margin in the case of a fully debt-financed investment
in assets eligible for 100% expensing, such as equipment and certain commercial building
improvement property. In this case, the reduced tax rate from the deduction has the unintended
effect of discouraging new investment by decreasing the value of deductions for interest
payments. According to one estimate, the 2017 tax revision increased the weighted average ETR
for al noncorporate investments financed entirely from debt from 19% under previous law to
25% under current law, nearly a 32% increase.7

7 Jason DeBaker and Roy Kasher, “Effective Tax Rates on Business Investment Under the T ax Cuts and Jobs Act,”
American Enterprise Institute, AEI Economic Perspectives, May 2018, T able 2, p. 4.
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On the other hand, the deduction has nearly the opposite incentive effect in the case of a fully
equity-financed investment in assets whose cost cannot be expensed, such as structures and land.
The reduced ETR from the deduction bolsters the incentive for pass-through businesses to invest
in those assets, because the value of interest deductions plays no role.
The Section 199A deduction is not an efficient way to spur new investment. It boosts the
incentive to invest for many pass-through businesses at the cost of lowering the tax burden on
returns from investments firms made before the deduction was enacted. This reduction represents
a windfal gain that does not necessarily encourage firms to make new investments, although it
might expand the cash flow of firms claiming the deduction.
Evidence of the 2017 Tax Revision’s Impact on Investment
Though the 2017 tax revision arguably has enhanced—to varying degrees—investment incentives
among many pass-through firms, it is unclear to what extent those firms have invested in more
depreciable capital assets than they otherwise would have done since 2018. There are no publicly
available estimates.
Some insight into the deduction’s investment effects might be gained from the few available
studies of the investment effects of the entire 2017 tax revision. Because the law has increased the
investment incentives of many corporations and pass-through firms, it seems reasonable to
assume that their investments have trended similarly since 2018. But the magnitude of those
investments has varied widely. According to data from the Federal Reserve Bank of St. Louis,
nonfinancial corporate gross business fixed investment was 4.8 times greater than nonfinancial
noncorporate gross business fixed investment in 2019.8
A 2019 study by the International Monetary Fund (IMF) found that U.S. investment in tangible
and intangible business assets (also referred to as nonresidential fixed investment) at the end of
2018 was 4.5% greater than many economic forecasters had anticipated one year earlier. In
addition, growth in U.S. nonresidential fixed investment was faster than growth in such
investment in other advanced countries in the same period. The IMF researchers attributed much
of this stronger-than-expected growth to an increase in aggregate demand in 2018, combined with
forecasts of continued robust demand growth in the next few years.9 In their view, reductions in
the user cost of capital from the 2017 tax revision played a “relatively minor role.”
A 2019 Congressional Research Service report on the 2017 tax revision’s economic effects
arrived at a similar conclusion. It argued that the rise in business investment in the first half of
2018 (see Table 2) was likely due to forces that had little to do with the investment incentives in
the 2017 tax law. According to the report, the 7% rise in nonresidential fixed investment in 2018
“may not have primarily reflected the ‘supply-side effects’ of the act.”10
The report cited several reasons why the law’s investment incentives were unlikely drivers of this
growth. First, growth rates in nonresidential fixed investment and its components tend to be
volatile, making it difficult to determine why they performed as they did from one quarter to the
next. Second, the fastest growth in investment since the enactment of the 2017 law happened
during the first two quarters of 2018, a result that is difficult to reconcile with the longer planning

8 See https://alfred.stlouisfed.org/series?seid=NNBGFNQ027S and https://fred.stlouisfed.org/series/
BOGZ1FA105019005Q.
9 Emanuel Kopp et al., U.S. Investment Since the Tax Cuts and Jobs Act of 2017 , International Monetary Fund, IMF
Working Paper WP/19/120, May 2019.
10 See CRS Report R45736, The Economic Effects of the 2017 Tax Revision: Preliminary Observations, by Jane G.
Gravelle and Donald J. Marples.
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timelines typical for new investments. Third, reported growth in investment in equipment,
structures, and research and development (R&D) in 2018 and 2019 did not match expectations
based on estimated changes in the user cost of capital under the 2017 tax revision. According to
the report, the user cost of capital declined by 2.7% for equipment, 11.7% for structures, and
3.4% for R&D. Yet R&D investment in 2018 and 2019 grew by 14.0%, followed by growth rates
of 10.1% for equipment and 3.1% for structures. If the 2017 tax law’s investment incentives were
the primary driving force for these increases, investment in structures would have grown at the
fastest rate, and R&D investment would have grown at the slowest rate.
A 2020 report by Jason Furman further questioned the idea that the 2017 tax revision has spurred
a large increase in new business investment, on the grounds that data on domestic investment
since 2016 do not validate that idea. Furman noted that nonresidential fixed investment grew at a
faster annual average rate (3.9%) in the eight quarters before the 2017 tax law was passed than it
did in the subsequent eight quarters (2.8%).11
As did the CRS report, Furman also noted that there was no correlation between estimated
reductions in the user cost of capital under the 2017 tax law and the performance of the
components of nonresidential fixed investment. In the eight quarters after the 2017 law was
enacted, investment in intel ectual property was 2.4 percentage points higher than it was in the
previous eight quarters, even though such investment had the smal est reduction in ETR (5
percentage points). By contrast, investment in the components with the largest reductions in ETR
(16.9 percentage points for software and equipment and 10.8 percentage points for nonresidential
structures) decreased by 2.9 percentage points, as measured by the difference between their
combined annual average growth rate in 2016-2017 and in 2018-2019. Furman concluded that
these results offered “no support for the view that the tax rate cuts and full expensing in the 2017
tax law had stimulated substantial increases in business investment.”
Table 2. Percentage Change in U.S. Real Nonresidential Fixed Investment from the
Previous Quarter
Year
1st Quarter
2nd Quarter
3RD Quarter
4th Quarter
2016
-0.6(%)
4.0(%)
5.6(%)
0.7(%)
2017
6.6
4.4
2.4
8.4
2018
8.8
7.9
2.1
4.8
2019
4.4
-1.0
-2.3
-2.3
2020
-6.7
-29.2
28.5a
NA
Source: Bureau of Economic Analysis
Notes: Nonresidential fixed investment covers acquisition by the private sector of nonresidential structures,
equipment, and intel ectual property products such as patents or trademarks.
a. Preliminary.
The three studies suggest that the Section 199A deduction has delivered no more than a modest
boost to noncorporate business investment since 2018. This stimulus is difficult to parse from
available data on domestic business investment. An exploration of the impact of the deduction’s
temporary status on pass-through business investment may provide useful information for
policymakers.

11 Prepared testimony of Jason Furman, in U.S. Congress, House Committee on Ways and Means, The Disappearing
Corporate Incom e Tax, hearings, 116th Cong., 2nd sess., February 11, 2020 (Washington, DC: GPO, 2020), table 2, p. 8.
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Employment
The deduction is not a subsidy for job creation, so its direct effect on the labor market is likely to
be minimal. In general, job creation depends on several forces. In the short run, the rate of job
creation is linked to the level of economic output: when gross domestic product rises over an
extended period, the rate of job creation eventual y wil increase. Technical change in the
workplace is also linked to job creation: the better the fit between numerous firms’ skil and
knowledge requirements and individuals’ work skil s and experiences, the faster the rate of job
creation in the short run.
In the long run, investment can play a critical role in job growth. Investment in this case refers to
the acquisition and improvement of physical and human capital. Firms that equip their employees
with more productive physical capital and provide them with the requisite training, at their
expense or the expense of another entity such as local, state, or federal governments, can expect
rises in worker productivity. Productivity growth is a key element in long-term growth in output,
wages, and jobs. It can take some time for this process to play out.
The combined effect of the Section 199A deduction and the individual income tax rate cuts under
P.L. 115-97 is to increase investment incentives and cash flow for most pass-through firms.
Economic theory holds that a firm is more likely to take advantage of these tax reductions when
demand for its output is growing than when demand is fal ing. This suggests that demand growth,
rather than enhanced investment tax incentives, is a more potent driver of job creation in the
private sector over time. From this perspective, a better predictor of the jobs created by the 2017
tax revision is its overal impact on consumer spending, which typical y accounts for between
65% and 70% of U.S. gross domestic product.
Some have argued that job creation is “the strongest and most coherent policy rationale for the
TCJA in general and for the Section 199A deduction in particular.”12 Yet that perspective is not
reflected in the deduction’s structure. Specifical y, three of the deduction’s features arguably
restrain its job-creating potential. First, pass-through business owners with taxable incomes below
the lower income threshold can benefit from the deduction without creating a single job. Second,
owners of SSTBs with taxable incomes above the upper income threshold cannot benefit from the
deduction, regardless of how many jobs they create. Third, high-income owners of non-SSTBs
can benefit from the deduction without creating a single job if they invest enough in qualified
capital assets.
Tax Administration and Taxpayer Compliance
The Section 199A deduction has implications for the cost and complexity of tax administration
and taxpayer compliance.
Tax Administration
The Internal Revenue Service (IRS) is responsible for implementing and enforcing the deduction.
This involves two essential tasks: (1) establishing regulations for using the deduction and
explaining them clearly to taxpayers; and (2) enforcing taxpayer compliance with those rules,
mainly through audits.

12 Rodney P. Mock and David G. Chamberlain, “Section 199A: Job Creator or T ax Giveaway?” T ax Notes, December
10, 2018, p. 1309.
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There are no known estimates of the cost to the IRS of administering the deduction, but it may be
significant. Extensive audits may be necessary to ensure that claims for the deduction are
legitimate and correct in amount for the following reasons:
 the complexity of the deduction’s final regulations (TD 9847);
 remaining uncertainties about the specific activities that do and do not qualify for
it; and
 a lack of clarity among pass-through business owners about how the rules may
affect them and the deduction’s potential benefits.
Health care is one of the industries likely to attract added scrutiny from the IRS. For example, as
pointed out in TD 9487, the legitimacy of claims for the deduction by assisted living facilities and
outpatient surgery centers appears to depend on the balance between income they earn as health-
care providers and income they earn from nonmedical services provided to residents or patients.
The validity of such a claim is likely to hinge on relevant facts and circumstances.
Some are concerned that the IRS lacks the resources needed to audit claims for the deduction at a
rate that might deter tax evasion or questionable tax avoidance. It is uncertain whether Congress
wil provide those resources in the next few years. Since 2010, the IRS’s enforcement budget has
scarcely grown in current dollars and has shrunk about 30% in inflation-adjusted dollars. This
reduction in real resources has led to declines and sharp fluctuations in key enforcement
indicators, such as IRS audit rates for high-income individuals.13
Taxpayer Compliance
The Section 199A deduction’s complexity and continuing uncertainty about eligibility may have
two effects on pass-through business owners. First, these considerations may deter large numbers
of eligible taxpayers from claiming the deduction. Such an outcome may have suppressed claims
for the deduction in the 2018 tax year, when lower-income pass-through business owners did not
benefit from the deduction to the extent they should have.
In a report on filing for the 2018 tax year, the Treasury Inspector General for Tax Administration
(TIGTA) found that 887,991 tax returns, processed as of May 2, 2019, did not claim the Section
199A deduction, even though the filers appeared to be eligible for it, according to information
reported in the returns.14 Each return included a form associated with a pass-through business
(Schedule C or Schedule F) showing a profit. Moreover, al the returns reported taxable income at
or below the lower income threshold for 2018: $315,000 for joint filers and $157,500 for al other
filers.
It is not clear why so many eligible taxpayers did not claim the deduction when they were eligible
to do so. IRS managers contacted by TIGTA suggested several possible explanations for this
failure:
 taxpayers did not understand that they were eligible to claim the deduction;

13 Between FY2008 and FY2018, IRS staffing levels for exams and collection dropped by 25%, and for prefiling
assistance and education by 23%. During the same period, the audit rate for individual tax returns with business income
of $200,000 or more fell from 3.1% in FY2008 to 1.9% in FY2018. Most pass-through business profits are earned by
individuals reporting relatively high levels of business income. In FY2008, visits to T axpayer Assistance Centers and
taxpayer assistance calls totaled 99.3 million; in FY2018, by contrast, the total was 57.8 million.
14 U.S. Department of the T reasury, T reasury Inspector General for T ax Administration, Results of the 2019 Filing
Season, ref. no. 2020-44-07, January 22, 2020, p. 14.
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 software they used to prepare their returns was unclear about what constitutes
QBI;
 some trade or business income was earned outside the United States; and
 taxpayers elected not to claim the credit because it seemed too difficult to
calculate.
According to TIGTA, the findings indicated that the IRS needed to boost its outreach and
education efforts regarding the deduction’s availability.
A second effect of the complex rules for the deduction is their compliance cost. It may be high
enough to convince some eligible business owners not to take the credit. Although there are no
known estimates of the cost of taking the deduction, it could vary considerably among pass-
through business owners. Among the factors to consider when filing a claim are the number of
trades and businesses someone owns, the eligibility of each one under Section 199A, and the
amount of each eligible business’s W-2 wages and unadjusted basis of qualified property
al ocable to the owner. The recordkeeping needed to substantiate a claim for the deduction might
be the biggest obstacle for many smal business owners.15
In general, eligible taxpayers with taxable incomes at or below the lower income threshold for the
deduction may face the lowest compliance cost in using the Section 199A deduction. For many of
them, taking the deduction may be as simple as calculating 20% of their combined QBI and 20%
of their taxable income less any net capital gain, and claiming the smal er of the two amounts.
The compliance cost is likely to increase when an owner’s taxable income lies between the lower
income threshold and the upper income threshold. In this case, the SSTB and WQP limits for the
deduction phase in, making the deduction’s calculation more complicated.
For taxable income above the upper income threshold, no deduction is al owed for SSTB profits,
and the deduction for a non-SSTB is limited to the greater of 50% of the firm’s W-2 wages
attributable to a business owner, or 25% of those wages plus 2.5% of the owner’s share of the
business’s unadjusted basis of qualified property.
Numerous high-income owners of SSTBs, or of a mix of SSTBs and non-SSTBs, may hire tax
planners to find ways to benefit from the deduction that may or may not strictly comply with the
law and IRS regulations. Some planning strategies might entail combining or separating pass-
through businesses to qualify for the deduction. Tax planning of this sort can be expensive. In
general, large pass-through businesses may find it easier than smal ones to afford tax counsel to
help them restructure their operations so they can claim the deduction, or claim a larger
deduction. Disparities in access to effective tax planning arguably represent one way in which the
Section 199A deduction unintentional y picks winners and losers among pass-through business
owners.
Complexity
The complexity of a tax system cannot be measured directly. But, as the Joint Committee on
Taxation explained in a 2015 report, complexity of this sort can be assessed indirectly by
applying several factors. The key ones are (1) complexity in the economy, which often sets the

15 One example of this challenge is the difficulty some tax practitioners have had tracking the various losses (e.g.,
passive-activity-loss and disallowed business deduction carryforwards) that can reduce current -year QBI. For more
details, see Eric Yauch, “ T racking Losses and Undue Complexity—Is 199A Even Worth It,” Tax Notes, March 19,
2020.
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stage for the adoption of complicated tax rules; (2) enactment of tax benefits as incentives for
engaging in desired activities; (3) repeated extension of temporary tax provisions; (4) frequent
changes in tax law; (5) statutory tax provisions that leave the determination of key issues to the
IRS instead of Congress; and (6) lack of clarity in tax law.16
In this analytical framework, most would agree that the Section 199A deduction is a complex tax
provision. It is temporary (the deduction expires at the end of 2025); Congress has given the IRS
broad authority to set rules for the deduction; and there is a lack of clarity in some of the rules
governing the use of the deduction, impeding its uptake.
Equity Effects
Public finance economists analyze the federal income tax’s equity effects from two perspectives:
vertical equity and horizontal equity. Vertical equity refers to the rise in someone’s taxes as her or
his income goes up. Under a progressive income tax, households are taxed according to their
ability to save and consume, and tax burdens rise with income. Horizontal equity requires that
taxpayers with similar abilities to save and consume have similar tax burdens.
Horizontal Equity
The deduction diminishes horizontal equity in the federal income tax in two ways. First, it
reduces horizontal equity in the taxation of wage earners and pass-through business owners by
lowering the tax burden of owners by up to 20% relative to the tax burden of individuals with the
same income, but from wages.17
To il ustrate this point, assume that a sole proprietor and an employee have the same taxable
income ($100,000 in 2020), and that the former’s income comes solely from QBI for a retail
business she owns and the latter’s income is from wages only. Under the federal individual
income tax rate schedules for 2020, the sole proprietor is eligible for the maximum Section 199A
deduction, which reduces her top marginal tax rate from 24% to 19.2% (24% x 0.8). By contrast,
the employee cannot claim the deduction, making him subject to a top marginal tax rate of 24.0%.
Under pre-TCJA tax law, both taxpayers would have been subject to the same marginal rate.
Second, the deduction diminishes horizontal equity by excluding SSTB profits received by high-
income individuals. The exclusion may be intended to prevent the sheltering of income by upper-
income professional service providers whose income bears a similarity to wage income.
Nonetheless, it means that SSTB owners cannot benefit from the deduction because their taxable
income is too high, whereas non-SSTB owners with similar taxable income can benefit. Thus,
under current law, a high-income SSTB owner and a high-income non-SSTB owner with the
same taxable income and the same QBI would face different effective tax rates on the returns
from their investments.
Vertical Equity
Among income groups, available evidence indicates that high-income persons are likely to
capture much of the overal tax benefit from the Section 199A deduction. Such an outcome would
be consistent with what is known about the distribution of pass-through business profits among

16 Joint Committee on T axation, Complexity in the Federal Tax System , JCX-49-15, March 6, 2015.
17 Andrew Velarde, “Passthrough Abandonment of Horizontal Equity Means It’ s Game On,” T ax Notes, May 18, 2018.
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households ranked by income. It would also suggest that the deduction does little to promote
vertical equity among individual taxpayers.
The evidence comes from several sources. According to a 2015 report by Michael Cooper et al.,
69% of pass-through business income went to the top 1% of households ranked by income in
2011.18 A more recent analysis by the Tax Policy Center (TPC) estimated that the top 1% of
taxpayers received 52% of pass-through business income in 2017. Half of that share (or 26% of
pass-through business income) was captured by the top 0.1% of taxpayers.19
More recent studies by the TPC and the Joint Committee on Taxation (JCT) further support the
view that high-income households are likely to disproportionately benefit from the deduction.
The TPC estimated that 90.2% of the total benefit from the Section 199A deduction in 2018
accrued to taxpayers in the top 20% of households ranked by income; the top 1% received 55.4%
of the benefit; and the top 0.1% captured 27.6%.20
The JCT has issued two estimates of the deduction’s distributional effects. Both come to the same
conclusion: although most claims for the deduction wil come from lower-income individuals, the
bulk of the tax savings wil go to higher-income individuals. In April 2018, the committee
estimated that 44% of the benefit from the deduction was likely to go to persons with incomes of
$1 mil ion or more in 2018, and that their share would rise to 52% by 2024.21 In both years,
however, taxpayers with gross incomes between $50,000 and $200,000 would account for 64% of
claims for the deduction.
Then in March 2019, the JCT estimated claims for the deduction in 2019.22 The committee
concluded that 68.4% of taxpayers with pass-through business income would be eligible for the
deduction, and that the deduction would apply to most (91.5%) of that income. The ineligible
income would result from the application of the SSTB and WQP limits. According to the analysis,
more than 95% of taxpayers claiming the deduction in 2019 would have taxable incomes below
the lower income threshold, leaving a smal minority (4.9%) of claims subject to the SSTB and
WQP limitations. Nevertheless, the JCT estimated that taxpayers with incomes above the lower
income threshold would realize 66% of the tax savings from the deduction that year.
According to individual income tax return data for 2018, there were 18.7 mil ion claims for the
deduction worth a total of nearly $150 bil ion.23 The average deduction was almost $8,000, but
the amount varied considerably among income groups. For taxpayers with AGIs below $200,000,
the average deduction came to $3,136. The average amount rose to $15,396 for taxpayers with
AGIs between $200,000 and $1 mil ion. Of the 356,000 taxpayers with AGIs above $1 mil ion
who took the deduction, the average amount was $157,257. The average deduction rose to $1.04
mil ion for the 15,000 taxpayers with AGIs above $10 mil ion who claimed it.

18 Michael Cooper et al., “Business in the United States: Who Owns It, and How Much T ax Do T hey Pay?” Tax Policy
and the Econom y, vol. 30, no. 1 (October 2015), p. 94.
19 Urban-Brookings T ax Policy Center, T able T 17-0080: Sources of Flow-T hrough Business Income by Expanded
Cash Income Percentile, March 20, 2017.
20 Urban-Brookings T ax Policy Center, T able T 18-0213: Tax Benefit of the 20 Percent Deduction for Qualified Pass-
T hrough Business Income, October 16, 2018.
21 U.S. Congress, Joint Committee on T axation, Tables Related to the Federal Tax System As in Effect 2017 through
2026, JCX-32-18 (Washington, DC: April 23, 2018), T able 3, p. 4.
22 Joint Committee on T axation, Overview of Deduction for Qualified Business Income: Section 199A, March 2019.
23 Martin A. Sullivan, “Economic Analysis: 19 Million T axpayers T ake the Passthrough Deduction,” T ax Notes,
September 14, 2020.
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Impact on Federal Budget
Because the deduction reduces the tax burden on many pass-through business owners, its net
effect on federal revenue is likely to be negative, relative to baseline revenue projections without
the deduction.
The JCT estimated that the deduction would result in a $414.5 bil ion revenue loss from FY2018
to FY2027. This represented more than 28% of the total revenue loss in that period of $1.455
tril ion from the 2017 tax revision.24
According to a 2019 TPC analysis, the Section 199A deduction is likely to rank third in size
among al business tax expenditures from FY2019 to FY2022.25 The rankings were based on the
estimated cumulative revenue loss for each tax expenditure identified by the JCT. The three-year
total for the deduction was $225.8 bil ion, exceeded only by the depreciation of equipment in
excess of the alternative depreciation system ($253.2 bil ion) and the reduced tax rate on active
income of controlled foreign corporations ($309.2 bil ion).
The Section 199A deduction provides an incentive for high-income wage earners to become pass-
through business owners, and for C corporations to reorganize as pass-through businesses.
Although there are no estimates of the revenue effect of either change in tax status, some shift
among taxpayers from wage earner to independent contractor and from C corporation to pass-
through entity may occur from 2018 to 2025. Whatever shift materializes is likely to have
implications for the deduction’s revenue effect over time.
Impact Among Industries
At least one publicly available study has examined the Section 199A deduction’s implications for
industries. The Treasury Department’s Office of Tax Analysis (OTA) has assessed to what extent
taxpayers who reported pass-through business income on their 2016 tax returns would have
benefited from the deduction if it had been available that year. 26 The study was based on a sample
of 780,000 taxpayers deemed representative of taxpayers who reported pass-through business
income to the IRS for 2016. OTA identified the industries that would have realized the greatest
tax savings from the deduction. A key assumption was that pass-through business owners would
not have altered their economic decisions in 2016 in response to the deduction.
According to the study, an estimated 17.8 mil ion businesses would have been eligible for the
deduction in 2016.27 Nearly 62% of them would have realized tax savings from the deduction.
The tax savings would have totaled $34.5 bil ion (2018 dollars), after al owing for the SSTB and
WQP limitations. Without the limitations, the tax savings would have been 82% larger. Taxpayers

24 U.S. Congress, Joint Committee on T axation, General Explanation of P.L. 115-97, JCS-1-18 (Washington: GPO,
December 2018), pp. 434-441.
25 Frank Samartino and Eric T oder, What Are the Largest Business Tax Expenditures? T ax Policy Center, July 17,
2019. T he study defined a business tax expenditure as a tax provision that affects the measurement of taxable business
income, such as special deductions, deferrals of income recognition, or credits that businesses or their own ers may
claim against their business tax liabilities.
26 Lucas Goodman et al., Simulating the 199A Deduction for Pass-through Owners, T reasury Department Office of Tax
Analysis, Working Paper 118, May 2019. (Hereinafter referred to as Goodman et al., Sim ulating the 199A Deduction
for Pass-through Owners.)
27 Goodman et al., Simulating the 199A Deduction for Pass-through Owners, p. 18.
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in the top 5% of income would have received about 72% of the total tax savings, with 47% going
to taxpayers in the top 1% and 23% to taxpayers in the top 0.1%.
The tax savings from the deduction with the SSTB and WQP limitations would have been largest
for (1) professional services, (2) real estate, (3) construction, (4) retail trade, and (5)
manufacturing.28 A somewhat different ranking resulted when the tax savings were calculated
without those limitations: (1) professional services, (2) real estate, (3) health, (4) finance and
insurance, and (5) construction. Not surprisingly, the impact of the limitations varied among
industries. For example, the tax savings with the two limitations were 54% lower than the tax
savings without the limitations for professional services, but for retail trade the difference was
10%. This variation reflected differences among industries in (1) the percentage of firms
classified as an SSTB, (2) the income distribution of pass-through business owners, and (3) the
mix of depreciable, tangible assets and labor.29
Industries also differed in the percentage of firms that would have benefited from the Section
199A deduction. Without the two limitations, this percentage ranged from 43.6% for mining, oil,
and gas to 73.2% for non-SSTB professional services. Three other industries had percentages
above 70%: education (72.6%), wholesale trade (71.4%), and manufacturing (71.3%).
Some of the industries with large tax savings (e.g., professional services) contained many SSTBs.
The OTA authors attributed this outcome to two other findings. These industries had some
subindustries with few SSTBs. In addition, most pass-through business owners in these industries
who benefited from the Section 199A deduction had taxable incomes below the lower income
threshold, al owing them to claim the maximum deduction.
The deduction’s disparate effect among industries raises the question of whether it picks winners
and losers among pass-through businesses. Some argue that the deduction does so in two ways.
One pathway involves access to professional tax advice for claiming the deduction, which tends
to be costly. Business owners who cannot afford such advice may be at a disadvantage relative to
owners who can afford it. A second pathway is the denial of the deduction to professional service
firms owned by higher-income persons. Lower-income owners of the same kinds of businesses
can benefit from the deduction, in many cases without the SSTB and WQP limits, whereas
higher-income owners cannot. There is no apparent economic justification for conditioning the
use of a business tax preference (like the deduction) on the taxable income of business owners.
Worker Classification and Independent Contractors
The Section 199A deduction applies to qualified business income, not wage income. As a result,
the deduction has the potential to spur an increase in the number of individuals classified as
independent contractors. Starting in the 1980s, many larger U.S.-based companies began to
restructure their businesses around “core competencies,” which were activities that were likely to
produce the largest returns for stockholders. Other activities (e.g., facilities maintenance,
accounting, human resources, and janitorial services) were outsourced to subcontractors
(including independent contractors). Some have cal ed this restructuring workplace fissuring,

28 It may come as a surprise that the OT A analysis found that professional services would have realized the largest tax
savings (with and without limitations) from the deduction, if it had been available in 2016. T he industry encompasses
firms primarily engaged in law, accounting, and consulting, each one considered an SST B. But Goodman et al. found
that professional services included subgroups that were not deemed SST Bs, such as computer and specialized design
services and advertising. T hey also noted that many SST B owners had taxable incomes below the 2018 lower income
threshold for the deduction, allowing them to claim the maximum deduction.
29 Goodman et al., Simulating the 199A Deduction for Pass-through Owners, p. 17.
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which refers to a process that al ows an employer to obtain needed services by hiring outside
suppliers rather than using its own employees, possibly cutting labor costs. This process can lead
to individuals who work as contractors or temporary workers receiving lower wages and reduced
benefits (including worker training) for performing essential y the same services that they did for
former employers and other firms.30
There are several reasons why it is unlikely that the Section 199A deduction wil spur an increase
in persons classified as independent contractors.
First, the final regulations for Section 199A clarified the circumstances under which someone
who worked as an employee and then switches to an independent contractor could benefit from
the deduction. An individual who works as an independent contractor and provides essential y the
same services to a former employer or a related entity is presumed (under the regulations) to be
providing services as an employee. Consequently, this person cannot claim the Section 199A
deduction. This presumption can be chal enged (or rebutted), but the burden of proof is on the
self-employed person. She or he must prove to the IRS (e.g., through records such as partnership
agreements and work contracts) that she or he did not work as an employee for at least three years
after her or his most recent employer stopped treating the individual as an employee for the
purpose of the federal payroll tax.
Second, only independent contractors with taxable incomes below the lower income threshold
($326,300 for joint filers and $163,300 for al other filers in 2020) can claim the maximum
deduction.
Third, the tax savings from the deduction may be insufficient to offset the potential disadvantages
of working as an independent contractor. These disadvantages include few legal protections for
many independent contractors regarding the minimum wage, overtime, sexual harassment, and
workplace safety. Employers that provide benefits to employees (e.g., paid family and medical
leave, unemployment insurance, workers’ compensation, health insurance, and retirement benefits
to full-time employees) are not required to provide them to independent contractors. And
independent contractors must pay the entire 15.3% payroll tax, whereas employees share the tax
equal y with employers, each paying 7.65%.
Fourth, the Section 199A deduction offers employers no safe harbor for classifying workers as
independent contractors. This means that a company can classify an employee as an independent
contractor for tax purposes only if the worker’s relationship with the company satisfies a 20-
factor test focused on the degree of control the company has over the services an independent
contractor provides and the company’s method of payment for those services.31
Policy Options
As noted earlier, the Section 199A deduction is due to expire at the end of 2025. Congress has a
variety of options regarding the deduction. These include
 al owing the deduction to expire, as scheduled, at the end of 2025;
 permanently extending the deduction without changes;

30 David Weil, “How T o Make Employment Fair in An Age of Contracting and T emp Work” Harvard Business
Review, March 24, 2017, https://hbr.org/2017/03/making-employment-a-fair-deal-in-the-age-of-contracting-
subcontracting-and-temp-work.
31 For details on this test, see IRS, “Understanding Employee vs. Contractor Designation,” July 20, 2017, at
https://www.irs.gov/newsroom/understanding-employee-vs-contractor-designation.
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 permanently extending the deduction and modifying its structure; and
 repealing the deduction and replacing it with a less complicated system for taxing
noncorporate business income.
Permanently Extend the Deduction with No Changes
Many of the firms that now benefit from the Section 199A deduction might ask Congress for a
permanent extension. A key consideration with this option is the revenue cost of such an
extension. A 2020 TPC study estimated a permanent extension of the deduction in its current form
would reduce tax revenue by a total of $1.7 tril ion from 2026 to 2040.32 Income shifting would
account for $279 bil ion (or 16.4%) of that amount. This shifting reflects the incentives the
deduction gives wage earners and corporations to switch to pass-through status to take advantage
of lower tax rates on pass-through business profits.
Retain the Deduction with Design Changes
Another policy option is to permanently extend the Section 199A deduction with changes to its
structure intended to expand its potential economic benefits at a lower compliance cost. In one
example of such an approach, the Tax Foundation would make two changes in the deduction.33
First, the deduction would be made available to al owners of pass-through firms on the same
terms. Second, the deduction would be based on a firm’s investment in a tax year.
Under the proposal, pass-through business owners would have two choices for calculating their
Section 199A deduction: (1) a “simplified deduction,” or (2) a deduction based on the amount of
new investment in a year. Those choosing the former would be al owed to deduct 100% of their
QBI up to a fixed amount, indexed for inflation—for example, $6,000 for joint filers and $3,000
for al other filers. Those choosing the latter would be al owed to deduct 20% of their QBI as they
can under current law. But QBI in this case would be based on the adjusted basis of qualified
property a business acquired during the year. An owner would calculate her or his share of the
total amount of this property at the end of the year for each business she or he owns and multiply
the aggregate amount by a fixed rate of return. The resulting dollar amount would determine an
owner’s QBI eligible for the deduction. In this scenario, the deduction would encourage firms to
expand their capital stock over time.
Others have suggested retaining the deduction but modifying it to enhance its job-creation
potential. Among the options are to (1) require that pass-through business owners pay W-2 wages
in order to be eligible for the deduction, and (2) al ow al pass-through business income
(including SSTB income)
Replace the Deduction with a Different System for Taxing Business
Profits
Congress might also choose to replace the deduction with a new system for taxing noncorporate
business profits. Such a revision could serve a variety of policy aims. The choices include
simplifying business taxation, removing the incentive in current law for pass-through businesses

32 Benjamin Page, Jeffrey Rohaly, T hornton Matheson, and Aravind Boddupalli, Tax Incentives for Pass-through
Incom e, T ax Policy Center, July 15, 2020, p. 8.
33 Scott Greenberg and Nicole Kaeding, Reforming the Pass-Through Deduction, T ax Foundation, Fiscal Fact No. 593,
June 2019, pp. 22-23.
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to reclassify wages as profits eligible for the deduction and for workers to become independent
contractors, raising more revenue, and providing larger subsidies for business activities (R&D
investment) that may speed up economic growth and productivity growth.
Eric Toder of the TPC has proposed two options for altering the current system of noncorporate
business taxation.34 One option would be to repeal the deduction and tax al privately held C
corporations as pass-through entities. Noncorporate business profits would be taxed at the same
rates as wage income. Special rules would be needed to tax the accumulated profits of C
corporations required to switch to pass-through status. The profits of publicly traded C
corporations would continue to be taxed at the current rate of 21%, and their owners would
continue to face a second level of tax on any dividends they receive and long-term gains they
realize.
A second option would be to tax wage income and pass-through business profits at the same rates
but to continue to tax privately held C corporations as they are currently taxed.35 Privately held C
corporation profits would be al ocated to stockholders and taxed under the individual tax, whether
or not they are distributed. This tax treatment already applies to pass-through business profits.
The income tax for publicly held C corporations would operate as a withholding tax for which
shareholders would claim a credit when they file their individual tax returns. A two-level income
tax would stil apply to the profits of publicly traded C corporations distributed to shareholders.
Toder’s proposal would not equalize the tax treatment of pass-through business profits and
publicly held C corporation profits. Achieving complete neutrality would require taxing income
received by shareholders from publicly held C corporations on an accrual basis to prevent
shareholders from accumulating tax-preferred income within corporations.
Some proposals would do more than modify the taxation of pass-through business profits. For
example, Jason Furman advocates making broader changes in business taxation to raise more
revenue, lay the foundation for more robust U.S. economic growth in coming years, and simplify
tax compliance for smal business owners. His proposal cal s for the following permanent
changes in business taxation:
 expanding 100% expensing al owances to include structures and al intangible
assets, make this treatment permanent, and disal ow al interest deductions linked
to new investment;
 increasing the corporate tax rate to 28%;
 requiring al large firms to file as a C corporation, while giving smal er firms the
choice to file as a C corporation or a pass-through entity;
 eliminating the Section 199A deduction;
 closing “corporate loopholes, including tax extenders”; and
 enhancing the R&D tax credit under Section 41 by increasing the rate of the
alternative simplified credit from 14% to 20%.36

34 Eric T oder, “Eliminate the Deduction for Qualified Business Income and Require Most Firms T o Be T axed as Pass-
throughs,” T ax Policy Center, TaxVox Blog, June 4, 2018.
35 Ibid.
36 Prepared testimony of Jason Furman, in U.S. Congress, House Committee on Ways and Means, The Disappearing
Corporate Incom e Tax, hearings, 116th Cong., 2nd sess., February 11, 2020 (Washington, DC: GPO, 2020).
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Furman’s proposal would introduce more stability in the taxation of business profits than current
law provides. It also would establish greater neutrality in the taxation of business investment
returns, increase tax incentives for investing in R&D, and eliminate the current tax incentive for
using debt to finance new investments. But by increasing effective tax rates for pass-through
business profits by as much as 20%, his proposal would risk lowering tax incentives for pass-
through business investment at least through the end of 2025.
The policy issues associated with the Section 199A deduction, coupled with the backing it enjoys
within certain segments of the noncorporate business sector, raise the possibility that Congress
may face pressure to retain the deduction, but with changes in its structure that make it easier to
claim, available to more businesses, less prone to gaming, and perhaps a more robust tool for
encouraging new investment and job creation among pass-through firms. A likely consideration in
any action Congress takes is the revenue cost. Whatever action Congress chooses to take may
have significant implications for businesses that account for considerable shares of domestic
business income and employment.37

Author Information

Gary Guenther

Analyst in Public Finance

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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37 According to data compiled by the T ax Foundation, in 2014, pass-through firms represented 86% of all U.S. firms
and employed 57% of the U.S. private-sector workforce; in 2012, pass-through firms (as a whole) earned 48% more net
income than C corporations did: $1.63 trillion compared to $1.10 trillion. See Scott Greenberg, “ Pass-T hrough
Businesses: Data and Policy,” Tax Foundation, January 17, 2017, https://taxfoundation.org/pass-through-businesses-
data-and-policy/.
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