Description of the Tax Policy Center’s Improved Methodology for Analysis of the Taxation of Pass-Through Income

This report describes the Tax Policy Center’s (TPC’s) improved methodology for analyzing the taxation of pass-through income (income generated through business activities that is taxed at the individual level). Under current law, certain types of pass-through income are taxed at different rates than corporate or ordinary individual income, creating incentives to shift the form in which income is received. Accurate analysis of tax proposals that alter the tax rate on pass-through income therefore requires estimates of the magnitude of such income-shifting. In this project, TPC improved its estimates of the amount of income shifting from wage to pass-through form; introduced estimates of the amount of income shifting from corporate to pass-through form; and used those new estimates to analyze the effects of permanently extending the current law deduction for certain pass-through income (Section 199A).