Trump's 'Big-League' Tax Reform: Assessing the Impact and Constitutionality of the President's Proposed Changes

Abstract

This paper reviews the several proposed tax reforms articulated by President Donald Trump, both during his presidential campaign, and since taking office, in light of economic theory, and the Modigliani-Miller Irrelevance Theorem, to show that companies will adapt their polices, in light of new taxes, and that this impacts the effectiveness of reform. In support, I survey two empirical studies, one in relation to the repatriation efforts of President Bush’s Homeland Investment Act, and another in relation to unexpected changes to the taxation of Canadian income trusts to show that reform measures can lead to unanticipated results. I then apply the principles from these studies, the general economic theories and the Modigliani-Miller Irrelevance Theorem, to cast uncertainty on the net effect of Trump’s tax reforms. Next, I review the constitutionality of a proposed “border adjustment tax”, and I analyze whether this reform is a direct tax that isn’t apportioned between the States, and does not qualify as income under the 16th amendment, and is thereby unconstitutional. I show that such a constitutional challenge is a difficult undertaking given the substantive arguments in favour of constitutionality, the rarity of judicial intervention in overturning tax laws, and the wide discretion of Congress to levy taxes on income. Finally, I conclude by considering the role of economic analysis on the border adjustment constitutional question and provide an overview of the arguments, both for and against utilizing economic analysis in constitutional tax litigation, including a review of the various cases, and defining principles, with emphasis to the decisions of Judge Richard Posner, where economic analysis has been used in the statutory interpretation of tax laws.