Is Sec. 199A’s Qualified Business Income Deduction Good Tax Policy?

The qualified business income deduction under Sec. 199A, which was enacted as part of the Tax Cuts and Jobs Act of 2017, was intended to provide a reduction in federal taxes for businesses operating as passthrough entities commensurate with the rate reduction allowed to corporations. While the Sec. 199A deduction does achieve its intended objective of reducing taxes on passthrough entities, it does so with unnecessary complexity. In this article, we briefly review the rules governing the deduction and evaluate it critically against nine principles of good tax policy. Our evaluation reveals shortcomings in the structure of the deduction which prevent it from achieving the goals of equity, certainty, convenience, administrative effectiveness, simplicity, neutrality, efficiency, compliance, and revenue predictability. However, with respect to the principle of visibility the deduction succeeds.