Maybe something, maybe nothing.
There is a lot of confusion about how the Trump Administration will make Mexico “pay for the wall”. It is unclear to me that the individuals within the Administration, including the President, have any more clarity than we do.
Here are my main observations:
- If corporate tax reform takes the form of the House’s blueprint for Destination Based Cash Flow Tax (DBCFT) with border adjustment, and is the basis for the view that Mexico will pay for the wall, then it is not “Mexico” that pays, but — depending on what happens to the dollar, and the extent of exchange rate pass through — US consumers, producers in all countries we trade with, and shareholders in US firms will pay.
- If the idea is to place an explicit tariff on Mexican goods imported into the US, separate from whatever happens in the arena of corporate tax reform, then it’s possible that Mexican producers will pay, although it’s possible that US consumers will also pay in part.
- If the idea is to place a tax on remittances from the US to Mexico (an idea mooted during the campaign), then indeed Mexicans may pay, but Mexican Americans who wish to remit funds to Mexico might also pay. To the extent the Trump Administration views such individuals as not real Americans, but “Mexicans”, then Mexico in aggregate would pay. (I have no idea what level of tax would be required, but here are some thoughts on the implications for financial openness.)
An Elaboration on the DBCFT Impact
The DBCFT acts like a Value Added Tax (VAT), except that wage expenditures are also exempted from taxation, as pointed out by Krugman. The most simple public finance approach to evaluating the DBCFT relative to a no-tax situation is to assume the non-deductibility of imports results in an increase in demand for exports (due to the fact that exports are not taxed) that in turn increases the demand for dollars, so that in the end import prices and export prices are unchanged (see here). Hence, the DBCFT is neutral with respect to imports and exports. Shareholders bear the burden of the tax. In principle, ignoring aspects of tax shifting, etc., if total revenues are the same, then the burden falls in the same way on shareholders as in the currently existing tax system.
This public finance interpretation seems at variance with the commonplace view that the new tax system is in effect a tariff on imports. It may very well act like a tariff, if the dollar does not adjust. If it adjusts halfway (as in this example), then import prices will rise. Then the burden falls at least in part on US consumers.
Of course, if corporate tax revenues are less than under the current tax system, then in a way, it’s not possible for the new tax system to “pay” for the wall, estimated around $12-$15 billion by Senate Majority Leader Mitch McConnell.
I think in the short term, it is likely that the proposed tax reform will yield more revenue (particularly because right now the US runs a trade deficit with the rest of the world). However, there is no guarantee, running over a longer horizon.
In any case, it’s not very clear that “the Mexicans” are going to be paying for the wall through this route…
By the way, as Joel Trachtman notes, the DBFCT is unlikely to be WTO compliant.