The White House added more uncertainty to President Trump's plan to fund a wall along the southern border with contradictory and ambiguous statements on Thursday — remarks that emphasized the practical difficulties for the new administration in delivering on Trump's campaign-trail promise to make Mexico pay for it.
This sounded similar to an idea being championed by House Speaker Paul D. Ryan (R-Wis.) and other House Republicans working to overhaul the tax code: a border adjustment tax.
The esoteric idea has gained notice in the House in recent months as a way for Republicans, who usually shun measures that limit free trade, to respond to Trump's complaints that companies are able to move jobs to Mexico and other countries and then sell products back into the United States tax-free.
Until recently, the border adjustment tax was not a commonly discussed idea in the United States, where companies generally pay taxes on the income they generate regardless of how much they import or export. The border tax would tax imports into the United States, but not exports. So, for example, a U.S. company selling widgets abroad would not have to pay tax on those sales. But a U.S. manufacturer who imports widgets would have to pay tax on the price of those widgets.
Because the United States imports a lot more than it exports, such a policy could raise a lot of money for federal coffers.
House Republicans had planned to use that revenue to help pay for a broader overhaul of the tax code, which would involve slashing corporate and personal income tax rates.
Amid confusion about the White House's proposal Thursday, Spicer clarified that he was only suggesting one possible way of funding Trump's proposed wall. He said tariffs, which are different from border adjustment taxes, are also a possibility.
“There have been questions about how the president could pay for the wall,” he said. “We've been asked over and over again, 'How could you possibly do this? There's no way that Mexico will pay for it.' Here's one way. Boom. Done. We could go in another direction. We could talk about tariffs.”
Trump has threatened to impose tariffs on Mexico and other countries if they don't agree to renegotiate trade deals. A tariff is different from a border adjustment tax in a few ways. One is that while a tariff imposes a fee on goods or services imported into the United States, it does not subsidize exports. In addition, while a border adjustment tax would likely affect all imports and exports, a tariff could be directed toward a specific country or product.
Another crucial difference between a tariff or a border adjustment is that border adjustments are common across the globe, and generally accepted by economists. Tariffs, by contrast, are seen as punitive.
So which one was it?
Trump has previously criticized the border adjustment tax idea as overly complicated and said he did not favor it. But Republicans took Spicer's comments to suggest that Trump was warming to the idea.
The White House's challenges in explaining how Trump would make Mexico pay for the wall — or which policy it was advocating — underscore how difficult it will be for Trump to achieve what he wants. A border tax or a tariff would not have an easy-to-predict impact on the economy — and, while it would seem like Trump is achieving his objective, neither would be an easy way to make Mexico to pay for the wall.
While a border adjustment might seem to help U.S. companies whose products compete with goods imported from abroad, the subsidy for exports would increase foreign demand for U.S.-made goods and services. As a result, economists predict that the price of the dollar on global currency markets would climb, making imports relatively cheap in the United States and canceling out the benefits for American competitors.
There is disagreement among economists and experts about how fast, or to what degree, exchange rates would adjust. Proponents, such as economist Alan Auerbach of the University of California at Berkeley, say the reaction would be swift and painless for consumers. “Exchange rates are determined in markets that move with lightning speed,” he said, adding that “the exchange rate adjustment should occur before the policy is actually adopted,” once investors see that the measure is likely to pass.
Others say the policy would offer advantages to American firms with competitors overseas.
“What would probably happen is there would be some appreciation of the U.S. dollar, but not enough to offset the effects of the tax,” said Marcus Noland, director of studies at the Petersen Institute for International Economics. “So the tax would end up, in fact, discouraging Mexican imports to the U.S. and encouraging American exports to Mexico.”
Who would pay?
While Trump and Republicans could frame the border adjustment tax as a way of forcing Mexico to pay for the wall, the reality would be more complex. For one, the tax would raise revenue overall for the U.S. government — from imports from all countries — and Congress and the administration could simply choose to direct some of it toward paying for the wall.
Second, House Republicans had planned to use the border adjustment tax to offset the cost of tax reform. If a part of those funds were redirected toward the wall, Republicans would have to find other sources of revenue — or borrow — to fund tax cuts.
“Money comes in and money goes out,” Auerbach said. “It would be pretty hard to identify what money’s used to pay for what.”
A tariff would be more disruptive. The price of consumer products that are imported from Mexico would rise, but so might the price of products that are made in America using inputs from Mexico — including motor vehicles, consumer electronics and other products.
“The price of avocados and tomatoes will rise at the grocery store. The price of autos will also rise, because about 15 percent in value added in U.S. cars comes from Mexico. So if you put a 15 percent tariff on Mexican imports, the price of automobiles in the U.S. will rise by about 3 percent,” Noland said.
“Under this proposal, we collectively will pay for the wall,” he added. Mexican producers will make less money than they otherwise would have, and American producers of competing products will earn more revenue. Some money will go to the Treasury in terms of tariff revenue. “But at the end of the day, the U.S. consumer pays for it through higher prices,” said Noland.