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How Do Business Owners Respond to a Tax Cut? Examining the 199A Deduction for Pass-through Firms

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  • Lucas Goodman
  • Katherine Lim
  • Bruce Sacerdote
  • Andrew Whitten

Abstract

We measure the short- and medium-run responses of businesses and their owners to Section 199A, a deduction that reduced the effective tax rate on most U.S. pass-through business income beginning in 2018. Using tax records of individuals and businesses, we compare taxpayers with exogenously differing levels of exposure to the deduction, exploiting limitations within the statute. We find evidence of a 3 to 4 percent increase in reported business income eligible for the deduction during 2018 and 2019 for the more-exposed group relative to the less-exposed group. We also find some evidence of effects on specific hypothesized margins of adjustment. Partnerships reduced ineligible forms of compensation paid to owners by approximately 10 to 15 percent, in line with the incentives created by Section 199A, but S corporations did not reduce wages to owners. We find no evidence that Section 199A encouraged movements from employee to contractor status or increased contractor activity. Finally, we find little evidence of changes in real economic activity as measured by physical investment, wages to non-owners, or employment.

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  • Lucas Goodman & Katherine Lim & Bruce Sacerdote & Andrew Whitten, 2021. "How Do Business Owners Respond to a Tax Cut? Examining the 199A Deduction for Pass-through Firms," NBER Working Papers 28680, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:28680
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    Cited by:

    1. Cloyne, James & Kurt, Ezgi & Surico, Paolo, 2025. "Who gains from corporate tax cuts?," Journal of Monetary Economics, Elsevier, vol. 149(C).
    2. Francesco Furno, 2021. "The Macroeconomic Effects of Corporate Tax Reforms," Papers 2111.12799, arXiv.org.
    3. Christine L. Dobridge & Joanne W. Hsu & Mike Zabek, 2024. "Personal Tax Changes and Financial Well-being: Evidence from the Tax Cuts and Jobs Act," Finance and Economics Discussion Series 2024-029, Board of Governors of the Federal Reserve System (U.S.).

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    JEL classification:

    • H0 - Public Economics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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