Darryl W. Perry: Border Adjustment Tax is a tax on you

Darryl W. Perry at FPP.CC:

During the 2016 Presidential election cycle, Donald Trump repeatedly said that he was going to build a wall on the US border with Mexico and that Mexico is going to pay for it. Trump and company are now saying that American taxpayers will front the cost, but “Mexico in some form and there are many different forms… will reimburse us for the cost of the wall. That will happen.”

One of those “many different forms” that Trump says will be used to have Mexico “reimburse us for the cost of the wall” comes in the form of a so-called border adjustment tax. Reuters reports White House spokesman Sean Spicer “told reporters that Trump wanted a 20 percent tax on Mexican imports to pay for construction of the wall.”

Reuters adds the plan being considered by Congress, which represents a significant change from current U.S. policy, “would exempt export revenues from taxation but impose a 20 percent tax on imported goods.”

It should be pointed out that this border adjustment tax is simply a tariff by another name, and will increase the cost of items from Mexico by at least 20%. Mexican Foreign Minister Luis Videgaray told reporters, “If you tax exports from Mexico into the United States, you’re going to make things ranging from avocados to appliances to flat-screen tvs… more expensive.”

Like other taxes and fees, this additional cost will be passed on to consumers. In some ways, this border adjustment tax proposal is similar to the sugary beverage taxes that have recently been implemented in Philadelphia and Berkley. In Philadelphia, a tax of 1.5-cents-per-ounce has been levied on soda, iced teas, sports drinks, and other sugary drinks at the wholesale level. Reason reports, “the city is charging a tax on the transaction that takes place when a business, like a sandwich shop or grocery store, purchases soda (or the syrup used to make soda in a fountain) from a distributor.”

However, the distributors are passing the cost along to the retailers, who are passing it along to their customers. Andy Pincus owns and operates Carbonator Rental Services, a beverage syrup wholesaler, and says a 5-gallon box of syrup makes about 3,840 ounces of soda (192 20-ounce cups), and he charges between $60 to $90 depending on the brand of the soda. For each box of syrup, Pincus says he makes between $3 and 18 dollars profit, however he says the new tax is “$57.60 on a $60 item.” Adding, “It’s too big not to pass on.”

Newsworks reports, “In Berkeley, California, the only other city in America with a sweetened-drinks tax, a November 2015 study found consumers pay between 30 and 70 percent of the penny-per-ounce tax there, depending on the beverage.”

If Trump and Co. do implement a border adjustment tax, don’t be surprised when your Corona and avocados cost more. It will not be the Mexican government or even Mexican companies that pay this tax, it will be people like you and me each time we buy a product that comes from Mexico.

3 thoughts on “Darryl W. Perry: Border Adjustment Tax is a tax on you

  1. D. Frank Robinson

    Taxes (tariffs) cannot be shited, er, shifted forward from producers to consumers. The effect on consumers is lessened competition when producers go out of business. See Rothbard in Man, Economy and State with Power and Market for analysis.

    Otherwise, a good article.

  2. Jim

    High tariffs are usually put in place to protect noncompetitive domestic industry. When the tariff hits, the domestic industry raises its prices equal to the new imported price. So the tariff is passed on at that point. The only reason anyone would go out of business is if the higher price killed demand for the product, but that would happen over a longer period of time.

  3. From Der Sidelines

    Jim has it backwards.

    When a tariff hits an import, it usually spikes the import price to match a domestic comparable, creating a level price field. Then a domestic producer realizes that they can undercut the import, eat a temporary loss while increasing production to meet the increased demand, which then also creates domestic jobs.

    But that only works if the tariff causes at least an end-price match. If the import price is still lower than domestic, then it is ineffective.

    And before anyone freaks out, I got that from an uncle who was in the import-export business for 60 years, so he kinda knew what he was talking about in actual real-world experience, not abstracted should-be thinking.

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