The Trump administration has floated two very different ways to get Mexico to pay for a wall on its northern border. One is called a border tax. The other is also called a border tax. Neither would get Mexico to pay for the wall.
Got that? The clouds of confusion around President Trump’s wall-financing plan are thick, but we can at least lay out a few questions and answers about the two main concepts.
What’s a border tax?
One of the two “border tax” notions is just Trump’s coinage for what the rest of the world calls a tariff. It’s a tax on imports imposed at a certain rate on a certain product against a certain country—say, a 4 percent tariff on Belgian chewing gum. Tariffs were the biggest funding source of the federal government from its founding until the advent of the federal income tax in 1913.
So the Founding Fathers would have liked Trump’s idea?
That’s hard to know. What we can say is that since World War II, tariffs have fallen sharply around the world. That’s encouraged more international trade, allowing each country to specialize in what it does best.
Fine, but we want Mexico to pay for the wall.
Understood. If Mexicans absorb the cost of the tariff by cutting their prices to maintain market share, they’ll pay for the wall. If the tariff gets passed along in higher U.S. prices, then Americans will pay for the wall. It’ll probably be a little of each.
I thought Trump was threatening to put border taxes on American carmakers.
That’s his fresh twist. Usually, tariffs are imposed uniformly on all makers of a certain product. Trump is talking about imposing them selectively on American companies that he says are shipping jobs overseas.
We’ll see. The diagram that goes with this story shows that it’s impossible to say what’s an American-made vs. a Mexican-made product. Parts move back and forth across the border multiple times as pieces get added. Taxing imports from Mexico might cause American and foreign automakers to move production to other countries—whose plants probably would use fewer American parts.
What’s the other border tax?
It’s Trump’s shorthand for a taxation system advocated by House Speaker Paul Ryan and Kevin Brady, chairman of the House Committee on Ways and Means. It’s called a destination-based cash-flow tax.
And it’s to pay for the wall?
No. It’s a whole new system for taxing corporate profits. It has nothing to do with Mexico.
Why is it called a border tax, then?
It’s actually called a border-adjusted tax, or sometimes a border-adjustable tax, but Trump lopped off the part after the hyphen. A senior administration official told Bloomberg News that the president likes the concept but doesn’t like the word “adjustable.”
So that’s how we wound up with two different things that are both called border taxes.
Can we stop now?
It’s just getting interesting. Some backers of the border-adjusted tax say it would give American producers a leg up and shrink the trade deficit. It taxes imports while sparing American exports from tax. That’s why it’s called border-adjusted.
That does sound like an edge for Americans.
In theory there should be no advantage to the U.S. It treats foreign and domestic companies the same way: Both pay taxes on sales they make in the U.S. And while it’s true that the U.S. doesn’t tax exports, the countries that receive the exports do.
Has anyone actually tried this?
Thirty-three of the 34 countries in the Organization for Economic Cooperation and Development use value-added taxes with border adjustment. The U.S. is the one exception. The Ryan-Brady plan is similar to a value-added tax except that wages and salaries are carved out and taxed separately.
So this won’t create a fat trade surplus?
Theory says that if the U.S. starts running a big trade surplus, the dollar will automatically rise in value enough to make American exports more expensive, make imports cheaper, and bring trade back into balance.
But that’s just theory.
In reality the dollar probably wouldn’t rise enough to completely offset the border adjustment. So it really would give an advantage to U.S. exporters while raising costs for American consumers. A border-adjusted tax is “a tariff in all but name,” Barclays economists Michael Gapen and Rob Martin concluded in a January note to clients.
What about getting Mexico to pay for the wall?
Same as with the tariff. If the Ryan-Brady tax plan did raise more money—which it’s not intended to do—at least some of it would come from Americans, not Mexicans or other trading partners. On Jan. 31, Urban Institute fellow Donald Marron wrote on the Tax Policy Center website: “If President Trump wants to target Mexico alone, he needs another strategy.”
The bottom line: Trump’s two ideas to get Mexico to pay for the wall would put at least some of the tax bite on U.S. consumers.