Border Tax Won’t Make Mexico Pay For Wall
The Trump administration has floated the idea that the border wall on the US-Mexico would be paid for with a 20-percent tax on Mexican imports.
It’s not clear at this point, it should be noted, whether that idea is still on the drawing boards.
While some interpreted the statement by President Trump’s press secretary Sean Spicer as a suggestion for the imposition of additional tariffs, he actually couched the idea as being part of a comprehensive tax reform, making the US tax regime consistent with what 160 other countries do. Viewed in that way, the idea is of a piece with the tax reform plan being promoted by House Republicans which would shift taxation from production to consumption, a move that would also subsidize exports.
A report report published by the American Enterprise Institute noted that, despite the hopes of proponents, the border adjustment wouldn’t reduce the trade deficit. “The border adjustment would cause the dollar to strengthen against foreign currencies,” the report said, “offsetting any boost to exports or drag on imports.”
But the border adjustment would raise money in the short run. According to the Urban-Brookings Tax Policy Center, the 20 percent import tax would raise $1.2 trillion more than the 20-percent export subsidy would cost over a decade. Because the US runs a trade deficit with Mexico, some of the revenue would come from US trade with Mexico.
Many pundits have pointed out that the money wouldn’t come out of the pockets of Mexicans selling goods into the US—contradicting the notion that Mexico would be paying for the wall—but out of the pockets of Americans buying Mexican goods. The AEI report contradicts that notion as well, saying that nobody would actually pay the border adjustment tax.
“Thanks to the offset from the stronger dollar, the border adjustment wouldn’t change the peso prices received by Mexican sellers or the dollar prices paid by American consumers,” the report noted. “The border adjustment money would really be a disguised form of borrowing—the government would have to pay it back.”
That’s because once trade surpluses arrive, the export subsidy would cost more than the import tax raises. “The money that came in during the trade deficit years would flow back out, with interest,” the report concluded.
That’s because, thanks to a stronger dollar, “the border adjustment would force foreign investors to pay more (in their own currencies) to buy US assets while giving them bigger payoffs (in their own currencies) from the assets.” That amounts to disguised loans to the government. The extra payoffs would amount the government’s repayments of the loans.
“If the borrowed money was used to build a wall (or to lower tax rates, as House Republicans propose),” the report concluded, “someone would have to be taxed later to pay back the money.”