Will the House GOP Border Tax Survive?
Businesses know the consumer will end up paying big time.
The Republicans in the House have suggested to overhaul the tax code with a “border-adjustment” proposal, but it has caused a massive split with companies before anyone has even drafted legislation.
I brought up this proposal when President Donald Trump explained that he would make Mexico pay for a border wall by placing a 20% tax on imports because it mirrors the House GOP’s plan. I also mentioned how these plans will screw the consumer and businesses have started speaking out against it:
Some retailers and other big importers doubt the dollar would rise that much. They warn of tax bills that would exceed profits, forcing them to pass costs to consumers. Some are in the early stages of working on an alternative plan they can present to lawmakers, says a person familiar with those plans.
Cody Lusk, president of the American International Automobile Dealers Association, says his members are shocked that a Republican Congress is proposing a 20% tax on imports.
“We view this as a very, very serious potential blow to the auto sector and the economy,” says Mr. Lusk, whose members sell Toyotas, Hondas and other cars from foreign-headquartered companies.
He likes aspects of the House plan, “but when we look at the whole, I don’t think the juice is worth the squeeze.”
Because it’s a tariff!!
Even Steve Forbes blasted the idea of the border adjustment:
“The Republicans are proposing this crazy tax. They’re going to punish American consumers over $100 billion a year” over 10 years by making goods coming into the U.S. more expensive, Forbes told CNBC’s “Squawk Box” on Wednesday. “And these are Republicans doing it.”
The people who would be hurt most by the border tax would be middle-class workers who elected Donald Trump as president, Forbes said. “Economically it’s wrong. Politically it’s wrong.”
I have no idea why people complicate economics when it’s all very simple. The businesses need to make a profit in order to keep running and providing goods to consumers. If the business has to pay more in taxes then it has to raise prices in order to make a profit.
Therefore, it hurts the consumer. Not freaking complicated.
Of course, those who support the tariff (IT IS A TARIFF) say that those burdens “would be offset by an increase in the dollar’s value due to the policy, thus negating the need for the importers to hike prices for consumers.” Forbes once again brings them down to Earth:
“So now these Washington politicians are becoming currency swap traders and experts. It’s preposterous,” said Forbes. “[Also] people forget in Washington we have these elaborate global supply chains. You’re going to disrupt all of that and you don’t know what the consequences are.”
The Wall Street Journal report I cited in my article also noted that the “sharp shift in the dollar could unsettle markets, hurt investors with holdings overseas, and change the Federal Reserve’s calculations about interest-rate decisions.”
Sorry, as a consumer I do not want to take that risk. Plus, who knows how countries would react:
Tax experts are puzzling over how to describe who wins and loses from border adjustment. One thing is clear, economists say: If the dollar goes up 25%, U.S. holders of foreign assets—including pension funds and endowments—would suffer a one-time loss in wealth of more than $2 trillion.
There is also global uncertainty: Other countries may retaliate, either by border-adjusting their corporate taxes or by challenging the U.S. plan at the World Trade Organization as too tilted toward American producers.
The Financial Times also reels in the GOP from fantasyland. If the dollar does adjust, it will not happen overnight. The adjustment could takes years, “historically been about a five-year lag between a current account shock and a full adjustment in the real effect exchange rate.” The article continued:
Prices tend to be sticky, particularly when 93 per cent of US imports and more than 40 per cent of global trade is invoiced in US dollars. These prices would have to be renegotiated over time. Furthermore, the Federal Reserve and the People’s Bank of China would do their best to lean against such a currency move.
This means the costs will burden the consumer.
Stephen Moore, a Heritage Foundation economist who advised Trump, told an event on Tuesday he doubts this bill will go anywhere:
“I think it’s a distraction,” Stephen Moore said Tuesday at an event hosted by Bloomberg BNA.
Moore, who was involved in writing Trump’s campaign tax plan but does not have job in the administration, said he supports the the House Republicans’ “border-adjustment” proposal because he thinks it “takes tariffs off the table.” The proposal is part of the House GOP tax-reform blueprint.
But he noted that other Republican thought leaders don’t support the concept, and said it’s a “pretty prickly issue.”
Takes tariffs off the table? It is a tariff! It’s a tax on imports. Anyway, hopefully Moore is correct.
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Comments
A tariff by definition transfers the cost of government from Taxpayer to the Consumer. So, only consumers of Mexican made products will see a cost.
Also, remember that this is self limiting. If Mexico buys as much as it sells to the USA there will be no tariff. If companies buy as much as they sell there will be no taxes.
ONLY companies that sell more in the USA than they buy will pay a tariff.
Understand – most countries in the World charge a tariff under the guise of an ‘inspection fee’.
Yep, if those companies are truly concerned then they can go lobby Mexico to re-negotiate a trade deal that’s fair to the American worker AND pay for the wall. Otherwise, no free access to our market for you!
This tariff is actually encouraging Mexicans to buy American. If they buy enough, no tariffs will ever be due.
“So, only consumers of Mexican made products will see a cost.”
Not only.
Consumers of products which compete with Mexican made products will also see a price increase — even if they were already personally committed to only buying American-made products.
Also consumers of products which are made with parts that are made in Mexico — or with American-made parts that compete with parts made in Mexico.
And that’s before you get to the downstream effects of introducing a drag on the economy.
A tax on remittances would be much better.
But I assume all of this talk is just posturing to get a better bargaining position with Mexico for a NAFTA renegotiation.
But Trillions of $$$ are at stake. So, look for the Chamber of Commerce and their lackeys to object strenuously.
Well, that’s just tough.
As Sonny said to Tom Hagen: ‘Business will just have to suffer’.
don’t tax imports to pay for the wall…
tax all remittance payments to any country south of us.
not only will we collect large $$s, but it will lessen the incentive to come here illegally.
#DrainTheSwamp
Bologna. If all things are equal and the Made In Mexico Dodge Ram costs 20% more than the Made In America Ford F-150 I’ll simply buy the F-150. If enough people do this Dodge will either lower the price of their Ram or move production to America. Problem solved either way.
Name me one thing that is only made in Mexico that I can’t buy an equivalent made in the USA.
‘Name me one thing that is only made in Mexico that I can’t buy an equivalent made in the USA.’
Mexican avocados. And don’t you dare tell me Californian avocados are equivalent.
As a Texan, I am sick of all the emigration to my great state from those damn lefties out west, and I insist we put a wall up to keep them in their socialist utopia. And if you are going to tell me that paying 20% more for guacamole that comes from right next door is somehow a good thing, then you fail to understand the really important issues at hand.
Hashtag Calexit, Hashtag Texit.
Dear Coolway:
I do’t get your point. Totally in favor of California secession – and indeed of secession of any state that wishes.
Also totally in favor of whatever will keep foreigners from coming here and in favor of whatever will keep American jobs here.
Also, we had tariffs for most of 19th century and we kept growing. Understand no one likes a tax, but if it makes America stronger overall, am totally in favor of it.
CTF
Mexico doesn’t have a God-given right to free trade with the USA. They’re not US allies or even particularly cooperative. Its one of the most corrupt countries in the world so you have no idea where the profits are going. Although, we know some profits go to Carlos Slim, the billionaire largest shareholder of the New York Times, which is at this point one of the most anti-American news organizations in the country.
Still, I wouldn’t count on all of that money being there, since consumers will find alternative products & services rather than paying the 20% tax. But that’s a good thing, let’s let other countries who are allies and who are cooperative and not riddled with a corruption have a chance.
Mexico does not trade with America. Mexicans trade with Americans, and yes, both Mexicans and Americans (and everyone else) do in fact have a God-given right to trade freely with each other — exactly the same right that you have to trade with your local supermarket, or with the your local plumber or church, at mutually agreeable terms. The fact that someone drew a border between two people doesn’t magically cancel this right.
And every time two people trade at mutually agreeable terms, by definition each of them benefits, so their total welfare increases. What effect it indirectly has on anyone else is none of anybody’s business, and nobody has the right to interfere with these two people’s trade just because one or both would otherwise have traded with that person on worse terms. Do you imagine that your corner store has a legitimate grievance when you pass it by to shop at the supermarket, or that the supermarket has a legitimate grievance when you chose to shot at Costco? If not, then what gives some midwesterner a legitimate grievance when I chose to buy from someone in Hong Kong instead of from him? To give legitimacy to such a grievance is to say that the would-be interferer owns his erstwhile customers, that they are his slaves.
Oh stop all this international high falutin’ economics stuff. All I want to know is can I get someone to maintain my yard or wash my car really cheap so I can take the savings from that and use if for taxes to pay for welfare for American born workers because they can’t find a job?
An import tariff, linked to the balance of trade with a particular foreign nation, is not necessarily a bad thing for consumers. While it may raise the costs of particular items, for consumers of those particular items, as well as a slight increase on other consumers, two advantages will usually occur. The first is that manufacturers will produce those imported items in the host country, rather than abroad. This will increase jobs, which will increase consumer buying power as well as keep a country’s currency within its own borders. The second thing is that it encourages other nations to attempt to adjust their balance of trade to make it more neutral, as these import tariffs will raise the cost of goods flowing from the nation imposing those tariffs as well.
In the case of a tariff being used to pay for the construction of a wall, even if consumers in the US reduce their purchases of products from Mexico, this simply acts as an incentive for the Mexican government to pony up the money for the wall, or deal with serious economic problem until they can establish another customer base. If they can establish another one, that is.
It seems that both the Democratic and Republican establishments are betrothed to special and peculiar interests with varying degrees of overlap and convergence.
Labor and environmental arbitrage are necessary to increase profits and simulate a green, clean revolution. It is similar to the methods and motives underlying immigration reform including the refugee crises. It is an existential cause necessary to sustain the welfare industry and accompanying enterprises including those that cause arbitrary asset inflation, which require reciprocating credit and demographic replacement. These conditions preclude the function of a capitalist market and economy.
Mary, thanks for a good, economically rational piece.
It is depressing to note the tone of the comments on this thread.
Americans (and everyone) have a natural right in their property and how they chose to use it. It’s just depressing to see how many here totally either ignore that or condone its abuse.
It’s also depressing to see how many here simply don’t comprehend the first thing about market economics. Little wonder we’re in the shape we are in.
Oh, well. I can take some comfort in the fact of your own awakening and conversion from Collectivism.
In response to Rags:
If in the actual world, application of a theory veers from the trajectory it’s hypothesized to have, then you can either ignore the evidence, hew to the theory and suffer the divergence, or you can wake up, and decide if the actual trajectory is preferable or not to the one theoretically expected.
The fact is, our current trading practices have gutted middle America. No question. We can either acknowledge that and try to determine the cause and adjust, or just let America die.
I’m in favor of keeping America alive.
Or, just letting us all secede and have our freedom back to exercise our natural rights.
Either one. But not in favor of continuing this slow suicide.
“The fact is, our current trading practices have gutted middle America. No question.”
No. It is NOT “a fact”. It is, in fact, a rather stupid lie that simply has a lot of coinage at the moment.
Trading hasn’t “gutted” Switzerland. It hasn’t “gutted” anyplace where it has been allowed to flourish. Exactly the opposite. BREXIT is LARGELY about freeing up trade, so Brittan can again be the powerhouse it was BECAUSE of trade.
The models are scattered everywhere, both in time and space. Holland was a terribly poor nation, partly because of its lack of resources…UNTIL it became a trading nation. Hong Kong, Singapore, etc. are other examples.
There are reasons why the American middle-class has suffered a down-turn, but they are not due to “trade”. Quite the opposite. If you want to see a model for trade restrictions, look to the Great Depression.
I didn’t say “trade,” I said “trading practices.”
Very different.
If your “trading practice” consists of giving your product away for free, as an example, then you’re going to go bankrupt.
Does your classical economics education tell you what happens with free trade between two countries when workers in country A have a minimum wage, social security, public schools, medicare, workplace inspections, intellectual property laws, public accounting, a functioning court system, etc while workers in country B have none of those things?
The future of that kind of free trade is 50% unemployment in America and the UK and full employment in China, N. Korea, Vietnam, etc.
That’s simply nonsense.
A lot of what you mention…a functioning court system, a rational accounting system, and intellectual property…are THERE because they ADD wealth to the nation.
“Does your classical economics education tell you what happens with free trade between two countries when…”
Why, yes. Yes it DOES. So does history.
What both sound economics and history show is that BOTH nations are made more wealthy, BOTH populations enjoy a HIGHER standard of living, and they tend to become more like each other as the backward nation begins to emulate the more modern nations it sees around it.
Again, think of Hong Kong, which, of course had a very British set of laws, regulations, courts, etc. as a Crown Colony. It was virtually devoid of resources, except for one: people. As Adam Smith’s great insight taught any of us with the wit to learn, the wealth of nations was in its people, left free to act in their own self-interest. Not in natural resources; Spain had mountains of gold, but slipped behind England and Holland.
Yes, I sat in the same economics classes and in a higher ranked school. (Unless you went to the same school!) But did you pay enough attention in the global strategy classes?
You cite Hong Kong and Singapore, as if they were examples we could emulate. But both are city states with small, dense populations under the tight control of an authoritarian regime. They’re also indirectly products of the cold war, when it was US policy to go around giving countries access to western technology and western markets to keep them from going Red. Japan and Korea are also economic powerhouses today because we needed them to be.
China is a different story – it’s not going to be a bulwark between us and a more dangerous regime, it is the more dangerous regime. China had no future until we gave it access to western technology and western markets. Now that they’re modernizing, they have every intention of asserting their economic and military control over the most populous continents in the world. And if they’re successful, take the darkest future you can imagine and you’re probably halfway there.
And if you don’t think the US should trade with Cuba or N. Korea or Iran than I’d love to hear your case for why we should trade with China or Russia, countries which are far more dangerous to us and our allies.
Now for Mexico and similar countries like Costa Rica, Vietnam, etc who aren’t geopolitical rivals, we go back to economics. Like China, they have large poor populations that are ready and willing to work for $10-20/day in factory that, for all practical purposes, is an American factory that’s just been transplanted to another country. Or in India, call centers and software development shops that are clones of ones of America.
So they obviously displace lower skilled, lower income US workers, but then American companies can go to those countries and sell their own products, right? Well, not so fast.
Countries like Mexico have no intellectual property law enforcement, so there goes the software, media, and any physical product which can be cloned, including clothes, books, pharmaceuticals. Banking is always highly regulated, construction too. Opening retail stores is possible, assuming you can grease the right palms and you don’t care about the FCPA. Healthcare is government owned, so no free market there. Hmm, almost like free trade is a sham… And yet without it, those corrupt regimes and officials would in whatever their equivalent of the Bastille is.
Businesses know the consumer will end up paying big time.
It all depends on how big.
Obviously. To claim otherwise is to imply that any costs hurt consumers. Which may be true in the abstract, but we don’t really expect things to be free just because that would benefit consumers.
Economics without numbers is just noise. I wouldn’t clutch my pearls and collapse onto the swooning couch until I saw some real numbers. The Empire isn’t going to fall just because I have to pay $.25 more for a telephone extension cable, or 2% more for a replacement car body panel or a cheapo Strat.
Bring the payroll tax cut back and most of us can easily afford the wash between dollar and import tax.
The country lived without an income tax for more or less over 100 years. The govt had tariffs.
So, as I recall, the country grew by leaps and bounds in the 19th century.
We could probably get rid of a million things government does, and go back to paying for it without an income tax.
I mean, seriously, hundreds of thousands of dollars to a muzzie “charity” for female violence victims, when if they’d just leave the religion, they’d probably not suffer violence. I saw that today and just about flipped my lid.
The country had a tax on all alcoholic beverages, which (as predicted) went away with Prohibition, so the Infernal Revenue was necessary.
Has free trade ever been practiced in the real world? I’ve heard much of its supposed benefits, similar to the claims made by socialists.
Is free trade, like socialism, a chimera?
Yes. So has UNFREE NOT trade.
Open a book…
This is a tariff, nothing more, and it’s illegitimate. To compare it to a border adjustment tax such as is common in countries with a GST is dishonest. all those countries are doing is applying exactly the same sales tax to imported goods that they do to domestic ones, and refunding the sales tax that was paid on goods that aren’t going to be bought by locals, and therefore should never have been taxed in the first place. That makes perfect sense. This does not.