The border tax adjustment can’t make Mexico pay for the wall

bn-qb525_amcol1_p_20160930152858Yesterday, White House Press Secretary Sean Spicer floated an idea for making Mexico pay for the wall that President Trump wants to build along our southern border.

Although some people thought Spicer was proposing a tariff on imports from Mexico, that doesn’t seem to be what he had in mind. Spicer described his idea as part of comprehensive tax reform and said that it was consistent with what 160 other countries are doing. That sounds like the border tax adjustment included in the House Republicans’ tax reform plan and used in other countries’ value added taxes.

The House plan would impose a 20% tax on imports and provide a 20% subsidy to exports. Contrary to some supporters’ hopes, the border adjustment wouldn’t reduce the trade deficit. As I’ve explained before, the border adjustment would cause the dollar to strengthen against foreign currencies, offsetting any boost to exports or drag on imports.

However, the border adjustment would raise money in the short run. With the United States slated to run trade deficits throughout the next decade, the 20% import tax would raise more money than the 20% export subsidy would cost – $1.2 trillion more, according to the Urban-Brookings Tax Policy Center. And because we have a trade deficit with Mexico, some of the revenue would come from our trade with that country.

Despite what Spicer suggested, however, that money wouldn’t come out of the pockets of Mexicans selling goods into the United States. Fortunately, it also wouldn’t come out of the pockets of Americans buying the goods. 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 border adjustment money would really be a disguised form of borrowing – the government would have to pay it back.

The good news about the border adjustment revenue is that nobody would actually pay it. The bad news is that there wouldn’t actually be any revenue.

The border adjustment money would really be a disguised form of borrowing – the government would have to pay it back. Because exports and imports must balance in present discounted value, each dollar of current trade deficits means a dollar, plus interest, of future trade surpluses. When the trade surpluses arrived, the border adjustment would lose money, with the export subsidy costing more than the import tax raised. The money that came in during the trade deficit years would flow back out, with interest.

In economic terms, the government would borrow the money from foreign buyers of US assets. By strengthening the 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. The investors’ extra up-front costs would be disguised loans to the government; their extra payoffs, which would disappear if the border adjustment was unexpectedly shut down, would be the government’s repayments of the disguised loans. On the other side of the ledger, the government would make disguised loans to American buyers of foreign assets as the stronger dollar allowed them to buy the assets for fewer dollars; the government would collect repayments from them as they received smaller dollar payoffs.

The border adjustment money wouldn’t be paid by Mexicans who sell goods in the United States. The money wouldn’t even be borrowed from them. Instead, the money would be borrowed from foreign, including Mexican, investors who buy US assets. If the borrowed money was used to build a wall (or to lower tax rates, as House Republicans propose), someone would have to be taxed later to pay back the money.

The border tax adjustment can’t make Mexico pay for the wall.

Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

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