Eliminate the Section 199A Pass-Through Deduction

The Tax Cuts and Jobs Act of 2017 introduced the Section 199A pass-through deduction, and the One Big Beautiful Bill Act extended it permanently. It provides a 20 percent deduction for qualified business income earned by pass-through business owners. For single filers earning above $201,775 (joint filers above $403,500; both inflation-adjusted), the deduction is subject to limitations. If income is derived from certain types of service businesses, the deduction phases out and is disallowed. For others, the deduction is limited based on the amount of wages paid and the original cost of business property. While complex, the phaseouts are designed to limit the benefits of the deduction that go to highly compensated labor, rather than true business income.

This option repeals the pass-through deduction. Eliminating the pass-through deduction would raise the cost of capital in the noncorporate sector, thus reducing incentives to invest. Reduced capital investment would lower the capital stock, wages, and economic output.

On a conventional basis, this option would decrease the primary deficit by $835.7 billion over the budget window. Long-run GDP would fall by 0.5 percent, while long-run GNP would fall by 0.3 percent. On a dynamic basis, the primary deficit would decrease by $505.9 billion from 2027 through 2036, $329.8 billion less than the conventional estimate. Incorporating changes in interest costs, the publicly held debt-to-GDP ratio would be lower than baseline, reaching 173.4 percent by 2056.

On average, in 2036, taxpayers would see decreases in their after-tax incomes of 0.4 percent. The top quintile of taxpayers would experience a 0.5 percent decrease, whereas the bottom quintile would experience a 0.1 percent decrease. On a long-run dynamic basis, taxpayers would see a 0.8 percent decrease on average.