Professor Thompson analyzes Republican tax plan in series of Tax Notes articles, letters
December 20, 2017
December 20 UPDATE: Thompson will follow up on the Curry v. Trump theme with a look at how the final legislation will affect both men in a letter to the editor to be published in Tax Notes Today on Dec. 21 and Tax Notes on Jan. 1.
UNIVERSITY PARK, Pa. -- In a series of articles and letters in Tax Notes, Professor Samuel C. Thompson Jr., director of the Center for the Study of Mergers and Acquisitions at Penn State Law, offers commentary and analysis on the Republican tax legislation currently being debated on Capitol Hill.
In three recent postings on his SSRN page, Thompson shares the letters and articles he has published in Tax Notes over the past few years—and as recently as last month—on territorial tax systems, the border adjustment tax (BAT) and so-called “BAT-lite,” and the proposed cuts to the tax rates of pass-through entities.
In the first post, “Tax Reform: Territoriality Breeds De Facto Inverters; Trump's Proposal to End Deferral, and Logic Says Yes to Imputation,” Thompson argues against the territorial tax system that will be adopted if the Tax Cut and Jobs Act (TCAJA) passes Congress.
“[R]ather than adopting a territorial system, Congress should adopt an imputation system, which would tax foreign income of foreign subsidiaries of U.S. parent corporations on a current basis, with a foreign tax credit for foreign taxes paid,” Thompson writes. “Such a system would, inter alia, (1) level the tax playing field between foreign and domestic investment, and (2) significantly eliminate the possibilities for base erosion, which is inherent in our current deferral system and will become even more significant with a territorial system.
“From an income tax perspective, rather than putting ‘America First,’ a territorial system will put ‘America Last,’” he writes. “On the other hand, an imputation system would put America on a ‘level playing field’ with foreign countries that have lower tax rates than ours.”
He goes on to argue, in “Tax Reform: If Territoriality, then BAT Lite, the Child of the Rejected DBCFT,” that if Congress is successful in moving to a territorial system, it should also “employ robust anti-base erosion provisions to protect the U.S. tax base.”
However, even with a BAT-lite provision, Thompson writes, with a territorial system, “virtually every tax lawyer in America will be trying to figure out how to convert what would otherwise be a dollar taxed in the U.S. into a dollar taxed, if at all, abroad. This will happen because any dollar that can be taxed abroad at a lower rate than the U.S. rate (even with a 20 percent corporate rate) can be brought home tax-free.”
His third post focuses on the proposed 25 percent maximum tax on certain business income of pass-through entities, a provision designed to ease the tax burden on small business owners who “pass through” their profits and have them taxed at the individual level. The GOP tax legislation famously called out NBA star Stephen Curry as someone who would not benefit from the new pass-through provisions.
In “Tax Reform: Taxing Trump and Curry under the Republican Plan,” Thompson writes: “[U]nder the 25 percent provision, President Trump would receive a ‘huge’ tax break compared to Curry.” He also contends “that this 25 percent rate is bad tax policy and should be stricken from the TCAJA, thus taxing both Curry and President Trump at the maximum 39.6 percent rate.”
Thompson, the Arthur Weiss Distinguished Faculty Scholar at Penn State Law, is an expert on tax and merger and acquisition law. He teaches the corporate, securities, tax, and antitrust aspects of mergers and acquisitions as well as international tax and taxation of business entities. He is the author of 16 books and more than 75 articles on corporate and international tax, corporate governance, securities law, and antitrust law. His five-volume treatise, Mergers, Acquisitions and Tender Offers (PLI 2010), is updated twice each year.