Ting, Jasmine Wu

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The Contemporary Tax JournalVolume 1Issue 2 Summer 2011 Article 86-2011Repeal of the IRC Section 199 DomesticProduction DeductionJasmine Wu TingFollow this and additional works at: http://scholarworks.sjsu.edu/sjsumstjournalPart of the Taxation-Federal CommonsThis Focus on Tax Policy is brought to you for free and open access by the Graduate School of Business at SJSU ScholarWorks. It has been accepted forinclusion in The Contemporary Tax Journal by an authorized editor of SJSU ScholarWorks. For more information, please contactscholarworks@sjsu.edu.Recommended CitationTing, Jasmine Wu (2011) "Repeal of the IRC Section 199 Domestic Production Deduction," The Contemporary Tax Journal: Vol. 1 :Iss. 2 , Article 8.Available at: http://scholarworks.sjsu.edu/sjsumstjournal/vol1/iss2/8Repeal of the IRC §199 Domestic Production Deduction By Jasmine Wu Ting, MST Student Introduction While the United States is slowly recovering from a prolonged recession, tax reform has been one of the most debated topics among lawmakers in Washington, D.C., particularly in 2011. In his State of the Union speech, President Obama called for reform of the corporate income tax system. He suggested the need to “get rid of the loopholes… to lower the corporate tax rate without adding to our deficit.”25 A number of provisions in the tax system narrow the tax base, distort the economic activity and increase the complexity of the tax code. President Obama's National Commission on Fiscal Responsibility and Reform, estimated that tax expenditure total about $1.1 trillion.26 Eliminating these provisions could increase tax revenues significantly and improve efficiency of the system.  One of the above mentioned expenditures is the Domestic Production Deduction (IRC §199) which results in an estimated revenue loss of $210 billion over 10 years.27 The domestic production deduction was first introduced to the tax system in 2004 allowing businesses to deduct part of their earnings from certain kinds of domestic production from their taxable income. The purpose of this provision is to encourage manufacturing production in the U.S. The scope of the definition of “production” is quite broad. Many business sectors, from software development to food processing and filmmaking, benefit from the deduction. Eliminating this provision would raise enough revenue to allow a 1.1% reduction in the corporate tax rate.28 Moreover, it would simplify the tax code because the definition of  25 President Obama, January 25, 2011; http://www.whitehouse.gov/the-press-office/2011/01/25/remarks-president-state-union-address.  26 Final report of the National Commission on Fiscal Responsibility and Reform (12/1/10), page 28; http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf.  27 U.S. Department of the Treasury, Treasury Conference on Business Taxation And Global Competitiveness, July 23, 2007, page 11; http://www.treasury.gov/press-center/press-releases/Documents/07230%20r.pdf.  28 President’s Economic Recovery Advisory Board (PERAB), The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation, August 2010, page 78; http://www.whitehouse.gov/sites/default/files/microsites/PERAB_Tax_Reform_Report.pdf.  Summer 2011 43SJSU MST Program 1Ting: Repeal of the IRC Section 199 Domestic Production DeductionPublished by SJSU ScholarWorks, 2011qualifying production and other elements of the deduction are complex which increases compliance and administrative costs.  Understandably, organizations that benefit from this provision may fight to keep it in the Code. In early 2011, President Obama unveiled his fiscal year 2012 federal budget proposal which included repeal of the Section 199 deduction for oil and natural gas companies.29 The National Association of Manufacturers (NAM) responded by stating that such repeal would increase energy costs and hurt job creation.30 On the other hand, full repeal of Section 199 has received support from some corporations. Some corporate executives testifying before lawmakers endorsed the concept of eliminating the domestic manufacturing deduction in exchange for simplifying the tax law and lowering the corporate tax rate. They stated that management could be more productive and increase hiring if it could spend less time and money on tax compliance. Walter Galvin, vice chairman of Emerson Electric, told lawmakers, “We as a country have been tinkering with credits and deductions that, while well-intentioned, have done little more than encourage complex tax planning.”31 Principles of Good Tax Policy Evaluation  The following chart explains how the principles of good tax policy apply to the proposal to eliminate the Domestic Manufacture Deduction (Section 199).  The analysis uses the ten principles of good tax policy outlined in the AICPA Statement #1, Guiding Principles of Good Tax Policy: A Framework for Evaluating Tax Proposal.   Principles of Good Tax Policy Evaluation  Principle Application Rating Equity and Fairness Similarly situated taxpayers treated similarly. The manufacturing industry has benefited from the domestic production deduction. This deduction though discriminates against other business sectors and distorts economic decisions as it does not apply to all domestic production.  Eliminating this provision will increase equity and fairness as business with similar characteristics will be treated similarly regardless of their industry sector.  +    Department of Treasury, General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals, February 2011; page 73; http://www.treasury.gov/resource-center/tax-policy/Documents/Final%20Greenbook%20Feb%202012.pdf. 30 National Association of Manufacturers, Capital Briefing, Focus: President’s Budget Plan Falls Short for Manufacturers, February 17, 2011; http://www.nam.org/Communications/Publications/Capital-Briefing/Archive/021711.aspx, 31 Brett Ferguson and Heather M. Rothman, “Lawmakers Open to Trading R&D Credit, Section 199 Deduction for Lower Corporate Rates,” BNA, June 3, 2011; http://www.bnasoftware.com/News/Tax_News/Articles/Lawmakers_Open_to_Trading_R_and_D_Credit_Section_199_Deduction_for_Lower_Corporate_Rates.asp. 44 The Contemporary Tax Journal 2The Contemporary Tax Journal, Vol. 1, Iss. 2 [2011], Art. 8http://scholarworks.sjsu.edu/sjsumstjournal/vol1/iss2/8Certainty The tax rules should clearly specify when the tax is to be paid, how it is to be paid, and how the amount to be paid is to be determined. Eliminating the domestic production deduction will increase certainty because the definition of qualifying production and other elements of calculating the deduction are complex. Taxpayers take great efforts to figure out what receipts and production can be considered in calculating the deduction. Eliminating this deduction would result in considerable tax simplification.    +   Convenience of Payment A tax should be due at a time or in a manner that is most likely to be convenient for the taxpayer. Eliminating the domestic production deduction will have no affect on the timing of payment by corporate taxpayers.  Corporations will pay their taxes at the same manner whether the deduction exists or not.    n/a Economy in Collection The costs to collect a tax should be kept to a minimum for both the government and taxpayers.   Eliminating the Section 199 provision will improve economy in collection. The IRS will collect fewer forms and need less audit time to ensure that taxpayers who claim this deduction are in full compliance with the law.   Elimination will also reduce the time taxpayers spend in producing and maintaining records needed to determine the deduction.   +  Simplicity The tax law should be simple so that taxpayers can understand the rules and comply with them correctly and in a cost-efficient manner.  Eliminating the domestic production deduction will significantly simplify the tax code. Because the scope of the definition of “production” is broad, many business taxpayers spend considerable time and money on compliance and administration each year. Eliminating this provision will be cost-efficient for taxpayers.   +   Summer 2011 45SJSU MST Program 3Ting: Repeal of the IRC Section 199 Domestic Production DeductionPublished by SJSU ScholarWorks, 2011Neutrality The effect of the tax law on a taxpayer’s decisions as to how to carry out a particular transaction or whether to engage in a transaction should be kept to a minimum.  Currently the domestic production deduction applies to both corporate and non-corporate business. If the deduction is repealed for corporate taxpayers only, businesses may be motivated to choose a non-corporate organizational form.  However, if the deduction is repealed for all business taxpayers, there will be no effect on decisions of entity form. Repeal will also reduce any effect the deduction may have on businesses practices to engage in the types of activities and distribution practices that generate a deduction.  If the deduction is eliminated and the corporate tax rate reduced below 35%, some businesses may be motivated to become corporations to benefit from the lower corporate rate (if double taxation is not a concern for them).  - If repealed for corporations only or only for specified industries.  +  If repealed for all taxpayers. Economic Growth and Efficiency The tax system should not impede or reduce the productive capacity of the economy. Eliminating the domestic production deduction would broaden the tax base and therefore raise tax revenues. Increased revenue could allow a reduction in the corporate tax rate which, in return, may improve the competitiveness for US businesses.   Removal will also reduce the incentive to invest in companies that generate this deduction.   +   Transparency and Visibility Taxpayers should know that a tax exists and how and when it is imposed upon them and others.  Eliminating the Section 199 deduction should improve transparency and visibility. Taxpayers in all businesses would then know that no such deduction exists for a business in manufacturing. Tax reporting and calculations would be more transparent and visible for taxpayers in all business sectors.  The Section 199 deduction could instead have been implemented as a tax rate reduction.  Elimination with a rate reduction will be more transparent in knowing the effective tax rate of a business.   +   Minimum Tax Gap A tax should be structured to minimize non-compliance.  Eliminating the domestic production deduction will reduce the tax gap because the complexity of the provision may lead to inadvertent errors.  +   46 The Contemporary Tax Journal 4The Contemporary Tax Journal, Vol. 1, Iss. 2 [2011], Art. 8http://scholarworks.sjsu.edu/sjsumstjournal/vol1/iss2/8Appropriate Government Revenues The tax system should enable the government to determine how much tax revenue will likely be collected and when. The Treasury Department has data from past tax returns demonstrating the lost revenue due to the provision. Thus, the government can easily determine how much tax revenue would be collected if this provision is no longer in existence.   +    Conclusion Repeal of the Section 199 domestic production deduction for all taxpayers meets all the principles of good tax policy. If the deduction is only repealed for corporations or certain industries (such as oil and gas), the neutrality principle is not met. Repeal has no effect on the convenience of payment principle.  To address the neutrality issue, Congress could apply the proposed elimination to all business/taxpayers, instead of only for corporate taxpayers or particular industries. Summer 2011 47SJSU MST Program 5Ting: Repeal of the IRC Section 199 Domestic Production DeductionPublished by SJSU ScholarWorks, 2011

Repeal of the IRC Section 199 Domestic Production Deduction

San Jose State University

The Contemporary Tax Journal
Volume 1
Issue 2 Summer 2011 Article 8
6-2011
Repeal of the IRC Section 199 Domestic
Production Deduction
Jasmine Wu Ting
Follow this and additional works at: http://scholarworks.sjsu.edu/sjsumstjournal
Part of the Taxation-Federal Commons
This Focus on Tax Policy is brought to you for free and open access by the Graduate School of Business at SJSU ScholarWorks. It has been accepted for
inclusion in The Contemporary Tax Journal by an authorized editor of SJSU ScholarWorks. For more information, please contact
scholarworks@sjsu.edu.
Recommended Citation
Ting, Jasmine Wu (2011) "Repeal of the IRC Section 199 Domestic Production Deduction," The Contemporary Tax Journal: Vol. 1 :
Iss. 2 , Article 8.
Available at: http://scholarworks.sjsu.edu/sjsumstjournal/vol1/iss2/8

Repeal of the IRC §199 Domestic Production Deduction 
By Jasmine Wu Ting, MST Student 
Introduction 
While the United States is slowly recovering from 
a prolonged recession, tax reform has been one of 
the most debated topics among lawmakers in 
Washington, D.C., particularly in 2011. In his 
State of the Union speech, President Obama called 
for reform of the corporate income tax system. He 
suggested the need to “get rid of the 
loopholes… to lower the corporate tax rate 
without adding to our deficit.”25 
A number of provisions in the tax system narrow 
the tax base, distort the economic activity and increase the complexity of the tax code. President 
Obama's National Commission on Fiscal Responsibility and Reform, estimated that tax 
expenditure total about $1.1 trillion.26 Eliminating these provisions could increase tax revenues 
significantly and improve efficiency of the system.  
One of the above mentioned expenditures is the Domestic Production Deduction (IRC §199) 
which results in an estimated revenue loss of $210 billion over 10 years.27 The domestic 
production deduction was first introduced to the tax system in 2004 allowing businesses to 
deduct part of their earnings from certain kinds of domestic production from their taxable 
income. The purpose of this provision is to encourage manufacturing production in the U.S. The 
scope of the definition of “production” is quite broad. Many business sectors, from software 
development to food processing and filmmaking, benefit from the deduction. 
Eliminating this provision would raise enough revenue to allow a 1.1% reduction in the 
corporate tax rate.28 Moreover, it would simplify the tax code because the definition of 
 
25
 President Obama, January 25, 2011; http://www.whitehouse.gov/the-press-office/2011/01/25/remarks-
president-state-union-address.  
26
 Final report of the National Commission on Fiscal Responsibility and Reform (12/1/10), page 28; 
http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1
_2010.pdf.  
27
 U.S. Department of the Treasury, Treasury Conference on Business Taxation And Global 
Competitiveness, July 23, 2007, page 11; http://www.treasury.gov/press-center/press-
releases/Documents/07230%20r.pdf.  
28
 President’s Economic Recovery Advisory Board (PERAB), The Report on Tax Reform Options: 
Simplification, Compliance, and Corporate Taxation, August 2010, page 78; 
http://www.whitehouse.gov/sites/default/files/microsites/PERAB_Tax_Reform_Report.pdf.  
Summer 2011 43SJSU MST Program 1
Ting: Repeal of the IRC Section 199 Domestic Production Deduction
Published by SJSU ScholarWorks, 2011

qualifying production and other elements of the deduction are complex which increases 
compliance and administrative costs.  
Understandably, organizations that benefit from this provision may fight to keep it in the Code. 
In early 2011, President Obama unveiled his fiscal year 2012 federal budget proposal which 
included repeal of the Section 199 deduction for oil and natural gas companies.29 The National 
Association of Manufacturers (NAM) responded by stating that such repeal would increase 
energy costs and hurt job creation.30 
On the other hand, full repeal of Section 199 has received support from some corporations. Some 
corporate executives testifying before lawmakers endorsed the concept of eliminating the 
domestic manufacturing deduction in exchange for simplifying the tax law and lowering the 
corporate tax rate. They stated that management could be more productive and increase hiring if 
it could spend less time and money on tax compliance. Walter Galvin, vice chairman of Emerson 
Electric, told lawmakers, “We as a country have been tinkering with credits and deductions that, 
while well-intentioned, have done little more than encourage complex tax planning.”31 
Principles of Good Tax Policy Evaluation  
The following chart explains how the principles of good tax policy apply to the proposal to 
eliminate the Domestic Manufacture Deduction (Section 199).  The analysis uses the ten 
principles of good tax policy outlined in the AICPA Statement #1, Guiding Principles of Good 
Tax Policy: A Framework for Evaluating Tax Proposal.   
Principles of Good Tax Policy Evaluation 
 
Principle Application Rating 
Equity and 
Fairness 
Similarly 
situated 
taxpayers 
treated 
similarly. 
The manufacturing industry has benefited from the domestic 
production deduction. This deduction though discriminates 
against other business sectors and distorts economic decisions 
as it does not apply to all domestic production.  
Eliminating this provision will increase equity and fairness as 
business with similar characteristics will be treated similarly 
regardless of their industry sector. 
 
+ 
 
 

 Department of Treasury, General Explanations of the Administration’s Fiscal Year 2012 Revenue Proposals, 
February 2011; page 73; http://www.treasury.gov/resource-center/tax-
policy/Documents/Final%20Greenbook%20Feb%202012.pdf. 
30
 National Association of Manufacturers, Capital Briefing, Focus: President’s Budget Plan Falls Short 
for Manufacturers, February 17, 2011; http://www.nam.org/Communications/Publications/Capital-
Briefing/Archive/021711.aspx, 
31
 Brett Ferguson and Heather M. Rothman, “Lawmakers Open to Trading R&D Credit, Section 199 
Deduction for Lower Corporate Rates,” BNA, June 3, 2011; 
http://www.bnasoftware.com/News/Tax_News/Articles/Lawmakers_Open_to_Trading_R_and_D_Cred
it_Section_199_Deduction_for_Lower_Corporate_Rates.asp. 
44 The Contemporary Tax Journal 2
The Contemporary Tax Journal, Vol. 1, Iss. 2 [2011], Art. 8
http://scholarworks.sjsu.edu/sjsumstjournal/vol1/iss2/8

Certainty 
The tax rules 
should clearly 
specify when 
the tax is to be 
paid, how it is 
to be paid, and 
how the amount 
to be paid is to 
be determined. 
Eliminating the domestic production deduction will increase 
certainty because the definition of qualifying production and 
other elements of calculating the deduction are complex. 
Taxpayers take great efforts to figure out what receipts and 
production can be considered in calculating the deduction. 
Eliminating this deduction would result in considerable tax 
simplification. 
 
 
 
+ 
 
 
Convenience of 
Payment 
A tax should be 
due at a time or 
in a manner that 
is most likely to 
be convenient 
for the 
taxpayer. 
Eliminating the domestic production deduction will have no 
affect on the timing of payment by corporate taxpayers.  
Corporations will pay their taxes at the same manner whether 
the deduction exists or not. 
 
 
 
n/a 
Economy in 
Collection 
The costs to 
collect a tax 
should be kept 
to a minimum 
for both the 
government and 
taxpayers. 
 
 
Eliminating the Section 199 provision will improve economy 
in collection. The IRS will collect fewer forms and need less 
audit time to ensure that taxpayers who claim this deduction 
are in full compliance with the law.  
 
Elimination will also reduce the time taxpayers spend in 
producing and maintaining records needed to determine the 
deduction. 
 
 
+ 
 
Simplicity 
The tax law 
should be 
simple so that 
taxpayers can 
understand the 
rules and 
comply with 
them correctly 
and in a cost-
efficient 
manner. 
 
Eliminating the domestic production deduction will 
significantly simplify the tax code. Because the scope of the 
definition of “production” is broad, many business taxpayers 
spend considerable time and money on compliance and 
administration each year. Eliminating this provision will be 
cost-efficient for taxpayers. 
 
 
+ 
 
 
Summer 2011 45SJSU MST Program 3
Ting: Repeal of the IRC Section 199 Domestic Production Deduction
Published by SJSU ScholarWorks, 2011

Neutrality 
The effect of 
the tax law on a 
taxpayer’s 
decisions as to 
how to carry 
out a particular 
transaction or 
whether to 
engage in a 
transaction 
should be kept 
to a minimum. 
 
Currently the domestic production deduction applies to both 
corporate and non-corporate business. If the deduction is 
repealed for corporate taxpayers only, businesses may be 
motivated to choose a non-corporate organizational form.  
However, if the deduction is repealed for all business 
taxpayers, there will be no effect on decisions of entity form. 
Repeal will also reduce any effect the deduction may have on 
businesses practices to engage in the types of activities and 
distribution practices that generate a deduction.  
If the deduction is eliminated and the corporate tax rate 
reduced below 35%, some businesses may be motivated to 
become corporations to benefit from the lower corporate rate 
(if double taxation is not a concern for them). 
 
- If repealed 
for 
corporations 
only or only 
for specified 
industries. 
 
+  If 
repealed for 
all 
taxpayers. 
Economic 
Growth and 
Efficiency 
The tax system 
should not 
impede or 
reduce the 
productive 
capacity of the 
economy. 
Eliminating the domestic production deduction would broaden 
the tax base and therefore raise tax revenues. Increased 
revenue could allow a reduction in the corporate tax rate 
which, in return, may improve the competitiveness for US 
businesses.  
 
Removal will also reduce the incentive to invest in companies 
that generate this deduction. 
 
 
+ 
 
 
Transparency 
and Visibility 
Taxpayers 
should know 
that a tax exists 
and how and 
when it is 
imposed upon 
them and 
others. 
 
Eliminating the Section 199 deduction should improve 
transparency and visibility. Taxpayers in all businesses would 
then know that no such deduction exists for a business in 
manufacturing. Tax reporting and calculations would be more 
transparent and visible for taxpayers in all business sectors. 
 
The Section 199 deduction could instead have been 
implemented as a tax rate reduction.  Elimination with a rate 
reduction will be more transparent in knowing the effective 
tax rate of a business. 
 
 
+ 
 
 
Minimum Tax 
Gap 
A tax should be 
structured to 
minimize non-
compliance. 
 
Eliminating the domestic production deduction will reduce the 
tax gap because the complexity of the provision may lead to 
inadvertent errors. 
 
+ 
 
 
46 The Contemporary Tax Journal 4
The Contemporary Tax Journal, Vol. 1, Iss. 2 [2011], Art. 8
http://scholarworks.sjsu.edu/sjsumstjournal/vol1/iss2/8

Appropriate 
Government 
Revenues 
The tax system 
should enable 
the government 
to determine 
how much tax 
revenue will 
likely be 
collected and 
when. 
The Treasury Department has data from past tax returns 
demonstrating the lost revenue due to the provision. Thus, the 
government can easily determine how much tax revenue 
would be collected if this provision is no longer in existence.  
 
+ 
 
 
 
Conclusion 
Repeal of the Section 199 domestic production deduction for all taxpayers meets all the 
principles of good tax policy. If the deduction is only repealed for corporations or certain 
industries (such as oil and gas), the neutrality principle is not met. Repeal has no effect on the 
convenience of payment principle.  
To address the neutrality issue, Congress could apply the proposed elimination to all 
business/taxpayers, instead of only for corporate taxpayers or particular industries. 
Summer 2011 47SJSU MST Program 5
Ting: Repeal of the IRC Section 199 Domestic Production Deduction
Published by SJSU ScholarWorks, 2011


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Repeal of the IRC Section 199 Domestic Production Deduction

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