H.R. 9: The Small Business Tax Cut Act
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Description
The act provides a deduction up to 20 percent for qualified business income for certain U.S. businesses, limited to 50 percent of wages paid. Only businesses with fewer than 500 full-time equivalent employees are eligible for the deduction. For a complete description of the bill, see Joint Committee on Taxation report JCX-30-12.
Modeling Assumptions
The distributional estimates are based on the official revenue estimate from the Joint Committee on Taxation (JCT). We allocate the total deduction between C corporations and pass-through entities, and, for pass-through entities, among individuals receiving different forms of pass-through income. We base those allocations on three sources: 1) individual tax return data; 2) data from the Census Bureau’s Statistics of U.S. Businesses (SUSB), a published Treasury report on the shares of business income reported on individual income tax returns that come from a qualifying trade or business, and 3) published IRS data on income of C corporations.We adjust the total deduction amount so that the revenue estimate from the Tax Policy Center (TPC) microsimulation model matches that from JCT.
We base estimates for pass-through entities on individual tax return data in the TPC model. Qualified small business income derives from reported net positive income from sole proprietorships (schedules C and F), partnerships, and S corporations. We make adjustments to exclude income from sole proprietorships that do not report deductions for wages paid and to adjust partnership income for the fraction not attributable to a trade or business.1 We use SUSB data to adjust income amounts for the fraction of business activity in firms with more than 500 employees.2
We base the estimate for C Corporations on published IRS data, adjusted using SUSB data on the fraction of business receipts by C corporations with fewer than 500 employees, and grown to 2012 levels. We assume that the tax savings for C corporations benefit capital owners in proportion to their income from capital reported on individual tax returns.
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1 We base these adjustments on data reported in Knittel, Matthew, Susan Nelson, Jason DeBacker, John Kitchen, James Pearce, and Richard Prisinzano, “Methodology to Identify Small Businesses and Their Owners,” Office of Tax Analysis Technical Paper 4, U.S. Department of Treasury, April 2011, available at http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/OTA-T2011-04-Small-Business-Methodology-Aug-8-2011.pdf. 2 We use the enterprise level employment splits from the SUSB, which is based on employment in mid-March. Data by legal form of organization is available for the period 2007-2009, available at http://www.census.gov/econ/susb/index.html.
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