51 Pages Posted: 5 Aug 2017
Date Written: August 2, 2017
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 how corporate decision-making adjustments in the face of new taxation measures will impact the effectiveness of reform. In support of these principles I survey two “quasi-natural” 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 proposed tax reforms. Further, I review the constitutionality of a proposed “border adjustment tax,” which favours exporters over importers, and I analyze the issue of whether such a tax is unconstitutional as an unapportioned direct tax not otherwise covered by the 16th amendment. While such a constitutional challenge should be considered non-frivolous, it is nevertheless a challenging undertaking given the various 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.
Keywords: tax law, law and economics, Donald Trump, tax reform, border adjustment, statutory interpretation, economic analysis, constitutionality, constitutional law
JEL Classification: K34
Suggested Citation: Suggested Citation
Clements, Ryan J., Trump's 'Big-League' Tax Reform: Assessing the Impact and Constitutionality of the President's Proposed Changes (August 2, 2017). Available at SSRN: https://ssrn.com/abstract=3012637