President Trump has floated the idea of a border tax or border “adjustability” with Mexico to raise the revenues needed to fund construction of a border wall along America’s southern border, but the leader of the nation’s largest grassroots taxpayers group says the president must be careful not to punish American consumers.
“This is a very confusing and intricate issue, probably the most complex aspect of the tax reform discussion right now,” said National Taxpayers Union President Peter Sepp.
Among his first actions as president, Trump authorized construction of the border wall and once again vowed that Mexico would pay for it. After the Mexican president dismissed the idea, Trump and White House Press Secretary Sean Spicer have both discussed the idea of a border tax on Mexican imports as high as 20 percent.
But Sepp says it is unclear whether they are referring to an actual border tax or a concept known as border adjustability.
“What we’re really doing here is reading tea leaves. This is a tea cup that goes very deep. We’re having a difficult time telling exactly what the administration wants to do here,” said Sepp.
The answer it critical because Sepp says the difference between a straight tax and border adjustability is significant. He says an actual border tax would not be good news for working Americans, since Mexico can simply pass along their higher costs to the people who buy its products.
“Taken in isolation, a border tax, where you have a trade deficit with a given country, you slap a tax on its goods coming into the country that’s aimed specifically at them, that could result in consumers having to pay more out of their own pockets here in the United States,” said Sepp.
Border adjustability is different.
“What (adjustability) tries to achieve is if you send something out of the United States for export and sell it abroad, it is not subject to U.S. tax. If you are bringing in goods, either finely finished goods or raw materials, to make something in the United States, you’re not allowed to deduct it anymore under border adjustability. It’s supposed to be a border-neutral way of handling economic activities,” said Sepp.
Sepp says that concept along with fundamental tax reform involving lower tax rates, full expensing of investments and allowing companies to be taxes only by the countries where they earn their money, could have some benefit.
“If you take an entire reformed system like that with border adjustability in it, you might be able to minimize some of the impacts on consumers,” said Sepp.
Trump critics allege that any such move to draw more money out of Mexico could trigger a trade war with one of our top trading partners. Sepp says that is unlikely unless Trump goes ever further and slaps new tariffs on Mexican goods.
“Those kinds of things always tend to invite some kind of retaliatory action. We need to be careful about how these kinds of policies are pursued. Sometimes a tariff might be justified if another country initiates a tariff against us. But for us to do that unilaterally from the start can complicate matters to a great degree,” said Sepp.
Trump’s first executive action on trade was the formal withdrawal of the U.S. from the Trans-Pacific Partnership, or TPP. Sepp says that decision is understandable.
“That treaty did have its flaws, a multi-lateral agreement involving something like a dozen nations, is going to be pretty complex by its very nature,” said Sepp.
But Sepp says existing and prospective trade partners would have a better idea of where Trump wants to lead on TPP if he listed reasons for the U.S. withdrawal.
“The problem is, by simply walking away from the Trans-Pacific Partnership and saying, ‘Well, we’ll try bilateral approaches,’ that creates a great deal of uncertainty about U.S. trade policy going forward,” said Sepp.
“To be more specific about the flaws in TPP would have been helpful in sending signals around the world that the U.S. is still committed to free trade, but these are the particular problems that we have with an agreement like TPP,” said Sepp.
While Sepp says border adjustability is the thorniest issue, he wants to see Congress get moving on substantive tax reform while the opportunity is available.
“I think the momentum is still there. What needs to happen going forward is the tax writing committees – House Ways & Means and Senate Finance – need to have hearings on these specific aspects of tax reform. Answer some of the questions are causing a lot of fear and speculation, and then start to build a legislative consensus around a particular bill,” said Sepp.
“Right now, we have a blueprint for tax reform. That is not legislation. We need to get to the legislative part as quickly as possible,” said Sepp.