Trump floats, then retracts, a border tax to make American consumers pay for the wall

Long-simmering tensions between Donald Trump and the government of Mexico kicked off over the past 24 hours in a back-and-forth that began with a fiery speech from Mexican President Enrique Peña Nieto and ended with the White House seeming to endorse a radical tax reform proposal.

Speaking in a nationally televised address Wednesday night, Peña Nieto promised that “Mexico’s 50 consulates in the United States will become true ramparts in defense of migrant rights.” He also repeated a vow that “Mexico will not pay for any wall.”

Thursday morning, he officially canceled his planned visit to the United States while Trump on Twitter appeared to suggest that the Mexican leader was disinvited anyway.

Paul Ryan, meanwhile, decided that he is happy to have Congress appropriate money to build the wall but agreed to continue with the pretext that this was merely an advance payment that Mexico would be reimbursing in the long run.

Things then took an unexpected turn Thursday afternoon when White House Press Secretary Sean Spicer told a press pool on Air Force One that we could pay for the wall by “using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico.”

After throwing the policy world into a tizzy for about an hour, Spicer clarified that his remarks were not a “policy proposal” but rather an “example” of options to pay for the wall.

Spicer’s comments are a potentially significant development in an ongoing debate over corporate tax reform. House Republicans have been cooking up a controversial plan to radically alter the way the US corporate income tax works by adding an element known as “border adjustment.”

What this means, in practice, is that companies would no longer count revenue earned by sales abroad as taxable, and in exchange they could no longer count expenses incurred by importing things as deductible.

Boeing, in other words, would incur no tax on revenue it earns by selling a plane to an Italian airline. Walmart, conversely, would be unable to deduct the cost of buying Chinese-made goods from its income. That would be a huge structural shift in the way the tax code works, and convert the corporate income tax into something more like a European-style Value Added Tax. This idea has been controversial in conservative circles (the Club for Growth blasted it, for example) and experts sharply disagree about its actual impact. On its face, the tax would greatly increase the price of many consumer goods. Textbook economics, however, says that currency values would adjust to offset this and the true cost would be borne by American citizens who own a lot of assets denominated in foreign currencies.

Donald Trump has previously voiced opposition to this border adjustment plan (one possible reason is the exchange rate effects would likely have a very negative impact on his personal wealth), and the most likely interpretation of Spicer’s words is to suggest new administration openness to the House GOP plan.

The immediate context for all this was a brief presidential jaunt up to Philadelphia, Pennsylvania, for Trump to address the House and Senate Republicans at their annual retreat. The retreat was largely a show of unity between Trump and the GOP leadership, and congressional Republicans may have sold Team Trump on the idea that their tax reform vision would create a plausible pretext to claim that “Mexico” is somehow paying for the wall.

In other Philadelphia news:

Spicer’s remarks on the border tax have generated a lot of confusion. Michael Shear, the New York Times reporter who wrote the official pool report, writes that when speaking, Spicer “did not give any details about that tax” or “how it would work” but “he did describe this as a decision that POTUS has made.”

Spicer’s full remarks are fairly ambiguous:

“When you look at the plan that’s taking shape now, using comprehensive tax reform as a means to tax imports from countries that we have a trade deficit from, like Mexico. If you tax that $50 billion at 20 percent of imports — which is, by the way, a practice that 160 other countries do — right now our country’s policy is to tax exports and let imports flow freely in, which is ridiculous. By doing it that we can do $10 billion a year and easily pay for the wall just through that mechanism alone. That’s really going to provide the funding.”

“This is something that we’ve been in close contact with both houses in moving forward and creating a plan.”

“It clearly provides the funding and does so in a way that the American taxpayer is wholly respected.”

“We are probably the only major country that doesn’t treat imports this way.”

“This gets us in line, frankly, with the policies that the other countries around the world treat our products.”

Many outlets, including Shear in the New York Times, are reporting this as a proposal for a 20 percent tax on Mexican imports. Some journalists (and some Republicans) appear to believe Spicer was describing a big net tax on imports across the board.

Those interpretations are broadly consistent with Spicer’s words and with previous remarks from Trump. But if in fact Spicer is referring to the House Republican plan, the revenue raised by border adjustment would be offset by other corporate tax reductions. In the House plan as written, in other words, the tax on imports goes to pay for a corporate income tax cut — not for the construction of a wall. One could, of course, tweak the plan to be slightly revenue-positive. Ironically, revenue-positive tax reform to finance infrastructure investment was a longstanding Obama administration proposal — though Obama had road and bridge repair in mind rather than wall-building.

While Spicer was confusing people, other actors outside the immediate Trump orbit were also causing confusion: