Marc Thiessen at the Washington Post suggested how President-elect Donald Trump may be able to make good on his promise to make Mexico pay for the wall along its shared border with the United States. Despite recent disavowals by Mexican President Enrique Peña Nieto, “Trump absolutely can make Mexico pay,” wrote Thiessen. The Post reporter wrote that a provision of the Republican corporate tax-reform plan being discussed in the House of Representatives would make Mexico pay through a so-called “border adjustment.”
Thiessen suggested that Trump might want to consider it, even though the president-elect has already said, “I don’t love it.” He said it is “too complicated.”
“Here is why he should: It would force Mexico to give us every penny we need to pay for the wall, and then some,” wrote Thiessen.
Steve Hays, the president and CEO of FairTax -- an organization that advocates the elimination of income taxes by replacing them with a flat tax -- told Spero News that the United States is the only country in the world without a border adjustable tax. "We need one," he wrote.
According to Thiessen, the plan would lower the corporate tax from 35 percent to 20 percent and apply the tax based on the location of consumption rather than the location of production. This “border adjustment” would thus exempt exports but tax imports. “Under the plan, all imports coming into the United States would be subject to the 20 percent tax, but exports would have the tax refunded — making them tax-free,” wrote Thiessen. By adopting the GOP plan, Thiessen wrote, Trump could get Mexico to pay for the wall without engaging in a global trade war. The writer pointed out that over 160 countries have a “border adjusted” value-added tax (VAT). So unlike tariffs, a border adjustment should be able to pass muster with the World Trade Organization.
Citing economist Martin Feldstein, Thiessen contends that the border adjustment would produce hundreds of billions in tax revenue, “not from U.S. consumers or corporations, but from our foreign trading partners. Under the border adjustment, the United States would refund the tax on exports and charge it on imports — so the net revenue would be negative if we had a trade surplus, and positive if we had a trade deficit.” He goes on to say that Feldstein calculates that because the United States has a trade deficit,”the border adjustment would bring in about $120 billion a year, or $1 trillion over a decade.”
Noting that the United States has a huge trade deficit is Mexico -- amounting to approximately to about $65 billion in 2016 -- by taxing Mexican imports are taxed at 20 percent, “the United States would raise about $13 billion a year in revenue from Mexico via the border adjustment,” Thiessen calculated. He pointed out that if the wall should cost as much as $25 billion (which is a highly inflated figure), it could be paid for within two years. And it could fund other aspects of Trump’s agenda, including increased border security and the repatriation of criminal aliens.
The beauty of the scheme, wrote Thiessen, is that “There is nothing Mexico could do about it. Mexico might find ways to retaliate over specific measures targeting it — such as increased fees for visas or taxing remittances.” Mexico would have no recourse for complaint, wrote Thiessen, because it is already one of the 160 countries that has a border adjusted VAT of its own.
Besides Trump, critics of the Republican plan include New York Fed President William Dudley. Dudley said on January 17 that he is hesitant about the GOP border-adjustment provision in the tax plan. contained in the House Republican tax plan.
After a speech to the National Retail Federation, Dudley complained that the adjustment proposal is “pretty dramatic.” Dudley predicted that it would change the value of the U.S. dollar and the price of good imported to the U.S. While fearing “unintended consequences,” Dudley said that he is not certain that it would very smoothly.
Steve Hays of FairTax, responded to a query from Spero News. He wrote:
As you know, the FAIRtax only taxes new retail goods and services in the U.S. For this reason, it is clearly border-adjustable. Our trading partners all do a similar thing with a VAT. They only add the VAT tax to goods sold in their country.
Border adjustable means that only goods sold in the originating company are subject to that country’s tax. Exports under a border adjustable VAT get back the VAT paid and are able to be sent to the U.S. at an average of 80% of the price sold in their country. When they arrive in the U.S., they are not taxed here. This is why many point to the income tax actually favoring imports. U.S. exports do not get back the taxes that have increased their cost by at least 15%-20%. They arrive in the trading partner and the VAT is added increasing the price another 20%.
The Ryan plan tries, in a very complicated way, to provide incentives to U.S. exports. Unfortunately, the GAAT has ruled that this cannot be done through the income tax and will not ultimately work.
The other fact is that taxing imports and rewarding exports will cause the dollar to be come stronger. Therefore, some of the benefits of not taxing U.S. exports will be lessened but all of the imports will be cheaper. Many feel that the dollar will rapidly become worth 20% more.
We are the only major country that does not have a border adjustable tax. We need one.