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Trump’s Trade Plan Means We Pay for the Wall

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While many are criticizing Trump’s travel ban put into effect this weekend, others are considering something more impactful to US interests: his tax reform bill. Last week Trump spun out several talking points surrounding his tax plan, which would “reduce our trade deficits, increase American exports and … generate revenue from Mexico that will pay for the wall,” Trump told Philadelphia lawmakers.

The ill-fated plan to cut taxes while increasing spending isn’t getting past Peter Schiff who recently criticized the President’s plan, which would ultimately hurt American businesses and consumers.

Peter makes some important points about why America can’t successfully win a trade war with Mexico. One of the reasons is because any attempt to fix trade imbalances will ultimately mean consumers pay higher prices. American voters won’t stand for it, even if Trump delivers on other promises like immigration reform.

To bolster domestic manufacturing, Trump will need to make consumer prices more competitive with imported products. It’s a problem that doesn’t work out practically. Peter explains:

“Either we’re going to pay more for Mexican products or we’re going to pay more for products that we import from other countries that are now cheaper than the Mexican products with the tariff, but are more expensive than what the Mexican products used to cost before the tariff. Even if we end up making something ourselves, we’re going to be selling it at a higher price point than when we imported it from Mexico. Americans are going to suffer. Americans are going to pay higher prices.”

In addition to Trump, the press also heard from House press secretary Sean Spicer last week. Spicer suggested the administration was considering putting a 20% tariff on all Mexican imports to finance the building of the border wall stating, “right now our country’s policy is to tax exports and let imports flow freely in, which is ridiculous.”

Spicer’s descriptions were confusing and lead some to speculate he was referring to a border adjustment tax (BAT) rather than a tariff, neither of which would avoid raising prices for businesses and consumers. While a tariff is simply a tax on imported goods, a BAT is actually a complicated restructuring of the tax codes.

The plan would tax both domestic and foreign made products, but exempt all American exports from the tax. Companies exporting, say, shoelaces to Mexico would be exempt from the tax, while any US shoemakers importing those same laces would have to pay the tax. Plus, they wouldn’t be able to deduct the cost of the import as a business expense. Businesses are then incentivized to produce and export rather than import. The problem is that those shoes going to American consumers are now more expensive.

Many Republicans support a BAT because they feel it would create more US jobs, increase wages, and spur the economy. However, they seem to be failing to acknowledge the rise in consumer costs overall and the impact on brick-and-mortar stores. Peter points out how technology would ultimately allow consumers to end the problem:

“The reality is if you impose a 20% tax on foreign products that you buy from an American retailer, why would you buy them from the American retailer? Just go online and buy [from the] company that’s selling it on the internet … and, of course, you also avoid the local sales tax. If [Trump] actually did this, it would destroy the brick-and-mortar stores. Nobody would buy anything from these stores. You would just order everything directly online because it would be so much cheaper.”

The shift to a BAT would be politically expedient for Trump given that it lets him “characterize a tax overhaul … as a protectionist measure,” according to an article in The Atlantic. Trump could pretend to keep his campaign promise to “make Mexico pay for it” while cutting corporate taxes.

Part of Trump’s vision for making “American Great Again” means returning it to a time of balanced trade and strong manufacturing. However, Trump’s new American Dream may be just that … a dream.

Highlights from the show:

“If we spend a lot of money on infrastructure, it will not stimulate the economy.”

“If the government keeps spending the money instead of paying for government with tax cuts, we do it with debt or inflation, whatever stimulus the tax cuts give, the inflation or extra debt taketh away.”

“The biggest loser is going to be Americans because we’re going to have to pay more for everything.”

“What it effectively does is impose a 20% tax on imports, which US companies will have to pass on just like a sales tax to their customers. They will have to increase the price … to recoup that tax and, in theory, this is how it’s going to work.”

“Of course, if we just had a VAT [Value Added Tax] or complete tariff, then that wouldn’t be a problem. If they just went out said, ‘We’re going to have a 20% tariff on all imported products, then you would pay that tariff if you bought it directly. But Trump doesn’t want to impose the tariff because then … it’s obvious that the Americans are paying it, so they want to bury it in this border adjusted income tax.”

“It takes a lot to basically resurrect entire industries that are no longer here. It’s not simply building a factory to make something, but’s the entire supply chain. There are all sorts of components, little pieces that have to go together, and all these industries have been dismantled over the generations. They’re just no longer here.”

“It’s a huge undertaking to try to bring them back, and it’s going to require a lot of capital investment and a lot of retraining, which in the short run is going to be a cost that we have to bear. It’s not going to immediately bear fruit. These are long-term investments.”

“Any tax cut is temporary because we’re going to have to raise taxes to repay this massive debt, so any tax cuts you get now are just a down payment on a larger tax hike in the future.”

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