Explaining the Tax on President Donald Trump’s US/Mexico Wall

With cupcakes.

 

 

Last Thursday, before President Trump pushed out his executive order on immigration and refugees (ie Muslim Ban), tweets like these sent political Twitter into a frenzy.

 

 

This of course would be going directly against then GOP presidential nominee Donald Trump’s promise that Mexico would pay for his US/Mexico wall.

 

 

So what changed? Is President Donald Trump really creating an import tax that will go towards the wall? Will prices for tequila go up? IS THE US STARTING A TRADE WAR WITH MEXICO?!? 

 

So there’s a lot to unpack here. Let’s explain. With cupcakes.

 

 

How the “Border Tax” Works Right Now 

 

Say if you’re a company that makes cupcakes. After years of selling cupcakes nationwide, you decide to sell them across the border to Mexico as packaged exports. Currently how tax law works, the profits that your company makes from your export cupcake sales in Mexico is what gets taxed. What some in the Congressional GOP (along with the Trump Administration) wants to do is change that.

 

 

The GOP’s Proposed Border Adjustment Tax

 

As part of the proposed GOP’s new tax plan, they no longer want to tax exporters to Mexico making a profit and want to put that tax on companies importing goods/materials from Mexico. Going back to our cupcake example, under the GOP’s tax plan, if you decided that you wanted to expand your cupcake brand and started to import cupcakes from Mexico, the new tax plan would require the profits from the imported cupcakes to be taxed at 20%. The money from these taxes would be spent wherever, in President Trump’s interpretation, that would be a wall on the US/Mexico border.

 

 

Some Additional Points:

 

  • Many have called this a “tariff on Mexico”, however that isn’t the case here. The GOP’s idea here is to broaden the tax base and incentivize US companies to export more, import less. However, what it won’t do is undermine US/Mexican trade rules, which would result in a trade war with Mexico, which many had originally feared under a Trump administration. In other words, the tax the GOP is proposing is on companies, not consumers.

 

  • Yet that doesn’t mean consumers would come out of this completely unscathed. Supporters of the border adjustment tax can’t guarantee that businesses won’t pass that tax onto consumers in the form of higher prices! Particularly higher priced items like liquor (ie tequila and Mexican beer) and popular produce (ie avocados), will most likely become costlier! Those who support the measure claim that it would just shift the tax burden around, from exporters to importers, along with balancing the costs out by being part of a larger comprehensive tax package. But to reiterate, supporters of the border adjustment tax can’t promise Mexican products won’t become more expensive!

 

  • Also just so everyone understands, the US imports a ridiculous amount of fresh produce from Mexico each year. Based on the US Department of Agriculture estimates, around 70% of vegetables and 40% of fruits is imported from Mexico each year! That means other food industries, like restaurants, would be impacted by the border adjustment tax.

 

  • It’s important to note that after the story of President Trump wanting to tax 20% on imports started going around, many in the GOP started to reject the idea, even though originally they had been in support of it.

 

 

 

So while not a tariff (which is good), it looks like we’ll still be paying for President Trump’s dumb border wall one way or another (which is bad). But the greatest tragedy in all of this, the price of guacamole will probably go up, and that affects us all! 

 

 

(Photo Credit: Pixabay.com, Google Images)

 

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