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The New Trump Tax

Trumps notion of a 20% border tax on Mexican goods will not ensure Mexicans pay for the wall. At least not entirely. Both Mexicans and Americans will pay for the wall. This result follows from the literature on tax incidence. That is, irrespective of who the tax is levied on via statute who actually pays depends on the elasticities of the supply and demand curves. That is the slopes of the supply and the demand curves will dictate who pays what portion of tax. If the elasticities are equal then the tax burden will fall equally on Mexicans and Americans. If the demand is more inelastic then Americans will pay a larger share of the taxes.

Further, as I have been pointing out, such taxes are a dubious method of protecting or promoting American jobs or job growth. For example, if we import car parts from Mexico, and then use those parts in a factory in say Georgia and produce cars that are exported back to countries like Mexico and others and also for domestic consumption; then limiting this arrangement via a tax may very well reduce jobs on both sides of border. And with those people unemployed on both sides of the border it could lead to a secondary round of job losses as those people reduce their consumption spending.

Trump seems to have a very poor grasp of even rudimentary economic concepts. The idea of opportunity cost seems to elude him completely. Never mind actually doing something like looking at historical examples of protectionism such as the Smoot-Hawley legislation which had a definite role in turning a recession into a depression. And considering that the current expansion is old and has never been particularly robust, enacting a policy that is going to reduce trade, both international and domestic, does not make any sense at all.

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About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research.

Comments

  1. Stormy Dragon says:

    *gets popcorn for the Republicans suddenly turning pro-tax increases and the Democrats suddenly turning anti-tax increases*

    Like or Dislike: Thumb up 5 Thumb down 0

  2. Pete S says:

    This is not a serious attempt by Trump to make Mexico pay for the wall. It is a first attempt by Trump to convince Americans who do not understand economics, that he is making Mexico pay for the wall, while those same Americans pick up much or most of the cost of the tariffs. There is presumably a large overlap between people who believe him, and people who support him. I wish I was not related to so many of them.

    Like or Dislike: Thumb up 10 Thumb down 0

  3. gVOR08 says:

    What @Pete S: said. Trump will build some pretense of a wall, probably some add-ons to the existing fences, etc. He’ll proclaim it a yuuge wall. He and the GOPs in congress will come up with some accounting fudge to claim Mexico paid. He’ll be able to announce that net immigration is near zero, i.e. what it is now. The CEC will echo whatever he says endlessly. And the rubes will never figure it out.

    And it’ll be a miracle if the supposedly liberal MSM says any different.

    Like or Dislike: Thumb up 3 Thumb down 0

  4. Just 'nutha ig'rant cracker says:

    “Trump seems to have a very poor grasp of even rudimentary economic concepts on nearly any topic one could name.”

    FTFY

    Like or Dislike: Thumb up 3 Thumb down 0

  5. Hal_10000 says:

    To be fair to Trump, this appears to be a misstatement of his idea of a border adjustment tax, which is the subject of intense debate right now.

    Like or Dislike: Thumb up 0 Thumb down 0

  6. gVOR08 says:

    @Hal_10000: To be fair, a border adjustment tax is hardly Trump’s idea. But it could provide an accounting fudge for him to claim Mexico is paying for his “wall”.

    Like or Dislike: Thumb up 1 Thumb down 0

  7. Mikey says:

    @Stormy Dragon: You should put the popcorn away, the apples and oranges you’re trying to equate are healthier for you.

    Like or Dislike: Thumb up 1 Thumb down 0

  8. Hal_10000 says:

    @gVOR08:

    Oh, agreed. We’re going to pay for the wall one way or another. I think Spicer simply messed up a talking point. Good thing he’s not in a job that requires him to communicate effectively with the press.

    Like or Dislike: Thumb up 1 Thumb down 0

  9. Ben Wolf says:

    Who pays for the wall is irrelevant. It will be built using dollars on deposit in the U.S. banking system and dollars don’t get used up. The only relevant questions are macroeconomic; what will happen to the price level and what will happen to the dollar?

    A 20% tax would mean significant increases in prices of goods imported from Mexico, albeit likely a one-off rise gradually eroded via import substitution. The dollar will also face downward-pressure relative to the peso, barring some sort of large-scale fiscal stimulus by the Mexican government. The Federal Reserve, being run by inflation-phobes, will respond with counterproductive rate increases and exacerbate the inflationary pressures.

    Invest accordingly.

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