Mexican President Enrique Peña Nieto told an assembly of top diplomats last week that “Mexico of course will not pay” for Donald Trump’s wall. His predecessor, former president Vicente Fox, put it more bluntly in a tweet storm last week, declaring: “TRUMP, when will you understand that I am not paying for that [f—-n] wall.”
They are both wrong. Trump absolutely can make Mexico pay. And the answer lies in a provision of the corporate tax-reform plan House Republicans are planning to take up after Trump’s inauguration — the so-called “border adjustment.”
Trump criticized the border adjustment this weekend, telling the Wall Street Journal “Anytime I hear border adjustment, I don’t love it.” Here is why he should: It would force Mexico to give us every penny we need to pay for the wall, and then some.
The House Republicans’ plan would lower the corporate tax from 35 percent to 20 percent and apply the tax based on the location of consumption rather than the location of production. It would do this through a “border adjustment” that exempts exports while taxing imports. Under the plan, all imports coming into the United States would be subject to the 20 percent tax, but exports would have the tax refunded — making them tax-free.
Supporters see it as a way for Trump to follow through on his campaign pledge to tax imports and support exports without resorting to tariffs that would provoke a massive global trade fight. Right now, more than 160 countries around the world have a “border adjusted” value-added tax (VAT). So unlike tariffs, a border adjustment should be able to pass muster with the World Trade Organization.
Here is where the wall comes in: As economist Martin Feldstein explains, the border adjustment would raise hundreds of billions in tax revenue — not from U.S. consumers or corporations, but from our foreign trading partners. Under the border adjustment, the United States would refund the tax on exports and charge it on imports — so the net revenue would be negative if we had a trade surplus, and positive if we had a trade deficit. Because the United States has a trade deficit, Feldstein calculates the border adjustment would bring in about $120 billion a year, or $1 trillion over a decade.
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