- - Wednesday, May 10, 2017


Reasonable people may disagree about the wisdom of a “border adjustment” policy that promotes Buy America. But there can be no reasonable dispute that a federal public policy of Buy America enshrined in the federal tax or tariff code would pass constitutional scrutiny.

A recent column in The Washington Post authored by the renowned former U.S. Solicitor General Theodore Olson (“If retail politics doesn’t kill this $1 trillion tax, the Supreme Court should,” May 3, 2017) exhibits magnificent advocacy against border adjustment.  But it does not expound the law.

A national Buy America public policy was present at the creation of the United States.  Then Secretary of Treasury Alexander Hamilton championed high import duties to protect local manufacturing in his landmark “Report on Manufacturers.”  His protectionist soon views found expression in tariffs sponsored by congressional giants such as Henry Clay and John C. Calhoun.

The Buy America Act of 1933 required the U.S. government to prefer U.S.-made products in its purchases.  On August 15, 1971, President Richard M. Nixon imposed a 10 percent surcharge on all dutiable imports to, among other things, favor American made goods.

The economic benefits of a Buy America policy continue to be fiercely debated.  But its constitutionality is not.  Neither the free trade sympathies of Adam Smith nor the mercantilism preferences of Jean-Baptist Colbert made their way into the Constitution.  The mix of the two was left to the political arena.

Border adjustment is not a special constitutional case as Mr. Olson asserts.
The Buy America policy of border adjustment would operate through denial of federal income tax deductions for the cost of imported materials or components.  The United States Supreme Court taught in C.I.R. v. Sullivan (1958) that, “Deductions are a matter of legislative grace and Congress can, of course, disallow them as it chooses.”  One prominent example is found in 26 U.S.C. 280E, which generally prohibits deductions for expenses incurred in trafficking in controlled substances contrary to schedules I or II of the Controlled Substances Act.  The Office of Chief Counsel of the Internal Revenue Service has advised:  “It is important to understand that section 280E even disallows a deduction for expenses that are not illegal per se (e.g., salaries; rent; telephone).”

In sum, a federal income tax deduction disallowed to promote an unambiguous federal policy of Buy America easily passes constitutional muster.

Mr. Olson seeks escape from this constitutional gospel through semantical prestidigitation.  He insists that to deny a deduction is to impose a tax because it means a higher tax bill.  By that reasoning, any non-deductible expense is a separate tax.  That is not the law.  The Supreme Court elaborated in New Colonial Ice Co. v. Helvering (1934):  “The power to tax income like that of the new corporation extends to gross income.  Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can any particular deduction be allowed.”

Mr. Olson also contends that border adjustment is a “direct tax” that must be apportioned among the several states according to their respective numbers under Article I, section 9, clause 4.  He maintains that a tax on a person or their property as opposed to a tax on a specific transaction qualifies as “direct.”  But border adjustment denies deductions for specific transactions, i.e., importing goods or components.  So the denial is not “direct” even under Olson’s idiosyncratic nomenclature.  Even a tax levied for refusing to engage in a transaction, for instance, purchasing health insurance, was held not to be “direct in NFIB v. Sebelius (2012).            

Mr. Olson in substance argues for an unenumerated constitutional right to a federal income tax deduction for the cost of goods sold which ostensibly can be discerned in the penumbras and emanations of the Income Tax Amendment.  That argument might have gained traction in the psychedelic days of the 1960s, but is unconvincing today.

The U.S. Supreme Court has repeatedly instructed that form should not be exalted over substance in constitutional interpretation. Steep import duties would dent the profits margins of American importers every bit as much as a border adjustment scheme. 

Since the former would clearly be constitutional, so should be the latter.

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