January 26, 2017


Trump Is Not Actually Planning to Pay for His Wall With a 20 Percent Tax on Mexican Imports (Yet) (Jordan Weissmann, 1/26/17, Slate)

So how do I know Spicer was talking about an obscure change to corporate taxation rather than a big, fat tariff?

Let's look at Spicer's actual comments:

When you look at the plan that's taking shape now, using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico--if you tax tax that $50 billion at 20 percent of imports--which is by the way a practice that 160 other countries do--right now our country's is to tax exports and let imports flow freely in, which is ridiculous. By doing it that we can do $10 billion a year and easily pay for the wall just through that mechanism alone. That's really going to provide the funding.

First, he said "using comprehensive tax reform."That's a pretty clear hint that he's talking about the plan that Ryan and House Ways and Means Committee Chair Kevin Brady have concocted. Later, while clarifying, he elaborated that he was talking about "this idea that Speaker Ryan and other have floated through tax reform." Second, and just as importantly, he says 160 other countries do it. He then repeats this point: "Keep in mind: There are 160 other countries that do just this. We're one of the only major countries that doesn't treat imports this way. In fact we currently tax exports, not imports. So this gets us in line frankly with policies that other countries around the world treat our products."

Obviously, 160 other countries do not have 20 percent tariffs on imports from countries with which they have a bilateral trade deficit. What they do have are value-added taxes, or VATs, which are border-adjusted. That's because a VAT is meant to be a tax on domestic consumption--it's basically a sales tax that's collected at each stage of production, rather than just at the retail level--and it wouldn't make any sense to slap it on exports, since that would just make a country's wares uncompetitive in overseas markets.

Under World Trade Organization rules, countries are allowed to border-adjust VATs. For reasons that are kind of complicated and occssionally debated, they're not allowed to border-adjust "direct" taxes like the corporate income tax. This has long chafed Republicans, because the United States relies heavily on the corporate income tax and does not have a VAT. They believe (wrongly, in my opinion) that this puts our goods at a significant competitive disadvantage. The DBCFT is basically their attempt to skirt around those rules, which may or may not pass muster.

But if the greenback adjusts to the tax as many economists expect, it wouldn't really be a tax on Mexican (or Chinese, or German) imports either, since all those car parts and bottles of Mezcal would end up costing the same in dollar terms. Instead, the burden ends up falling on investors with foreign-denominated investments or companies with a lot of overseas profits, since the appreciating dollar would eat into their value. (So, Apple's iPhone sales in China wouldn't be as profitable.)

Transitioning from taxes on income and savings to taxes on consumption is just another way that W was way out ahead of the curve (or arc of progress?).

Posted by at January 26, 2017 6:28 PM