Plan to tax imports from Mexico sows confusion as border tensions soar

PHILADELPHIA — President Donald Trump's decision to build a wall along the length of the United States' southern border with Mexico erupted into a diplomatic standoff on Thursday, leading to the cancellation of a White House visit by Mexico's president and rising tensions over who would pay for the wall.

Trump appeared to embrace a proposal by House Republicans that would impose a 20 percent tax on all imported goods. The White House press secretary, Sean Spicer, told reporters that the proceeds would be used to pay for the border wall, estimated to cost as much as $20 billion.

But an uproar prompted Spicer to temper his earlier remarks, saying the plan was simply "one idea" that might work to finance the wall. Spicer said it was not the job of the White House to "roll something out" on tax policy, while Trump's chief of staff, Reince Priebus, said the administration was considering "a buffet of options."

If Trump does eventually announce his support for the tax plan, it could have a broad effect on the U.S. economy, and its consumers and workers, by sharply increasing the prices of imported goods or reducing profits for the companies that produce them. Other nations could retaliate, prompting a trade war that could hit consumers around the globe.

Retail businesses could see their tax bills surge, said David French of the National Retail Federation, who predicted that those costs would be passed on to consumers. He called the idea "very counter to the way consumers are feeling at the moment."

If nothing else, the rapid-fire developments showed Trump the complications involved in international diplomacy and a top-to-bottom overhaul of the tax code. The events unfolded after Trump signed an executive order on Wednesday to strengthen the nation's deportation force and start construction on a new wall along the border.

Adding to Mexico's perception of an insult was the timing of the order: It came on the first day of talks between top Mexican officials and their counterparts in Washington, and just days before a scheduled meeting between Trump and the Mexican president, Enrique Peña Nieto.

The sense of chaos and confusion about the tax issue added to the fallout from Trump's conflict with Peña Nieto, his first direct clash with a world leader since becoming president a week ago. The Mexican peso bounced sharply with each new development.

The two had been heading toward a clash for months, and Trump's immigration and border-wall decisions Wednesday appeared to shatter the remaining goodwill between them.

"I regret and condemn the United States' decision to continue with the construction of a wall that, for years now, far from uniting us, divides us," Peña Nieto said in a video message on Twitter on Wednesday night.

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Trump responded on Twitter, "If Mexico is unwilling to pay for the badly needed wall, then it would be better to cancel the upcoming meeting."

Within hours, that is just what happened. Blasting Trump for sowing division between the two countries, Peña Nieto angrily backed out of the White House meeting, which had been scheduled for next week.

In remarks at congressional Republicans' retreat in Philadelphia, Trump portrayed the decision to cancel the meeting as his own and issued a stern warning to Peña Nieto about the consequences of refusing to cooperate with him on financing the wall.

"Unless Mexico is going to treat the United States fairly, with respect, such a meeting would be fruitless, and I want to go a different route," Trump said. "We have no choice."

In the same remarks, Trump alluded to the idea of a border tax, saying, "We're working on a tax reform bill that will reduce our trade deficits, increase American exports, and will generate revenue from Mexico that will pay for the wall if we decide to go that route."

After the speech, in a brief, impromptu news conference as Trump flew back to Washington, Spicer told reporters that the president now favored the plan to impose a 20 percent border tax as part of a sweeping overhaul of corporate taxation. Only last week, Trump had dismissed the tax as too complicated, favoring his own plan to impose a 35 percent tariff on manufactured goods made by U.S. corporations in overseas factories.

Spicer said that the plan for the tax was "taking shape" and that it was "really going to provide the funding" for the wall.

Spicer said that was a direct reference to the centerpiece of House Republicans' proposal to overhaul the tax code. They have been pushing the idea for months, but with little evidence, until Thursday, that Trump was interested in it.

But by the time Spicer returned to the White House two hours later, he had already recanted. In another hastily arranged conversation with reporters, he called the proposal "one idea" that might work and said it was not the job of the White House to "roll something out" on tax policy.

"We've been asked over and over again: 'How could you possibly do this? There's no way that Mexico will pay for it,'" Spicer said. "Here's one way. Boom. Done. We could go in another direction. We could talk about tariffs. We could talk about other custom user fees. There are a hundred other things."
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White House officials and House Republicans have been hashing out their respective tax proposals as they press forward with Trump's agenda to revive U.S. manufacturing and increase exports.

The House proposal would replace the current system of corporate taxation with one that more closely resembles the approach taken by many other developed nations. The government would impose a 20 percent tax on corporate income earned in the United States, which would have the effect of taxing imports while exempting exports.

The approach, known as border adjustment, creates the appearance of taxing trade deficits. The goods that the U.S. imported from Mexico in 2015 were worth about $60 billion more than the goods it exported to Mexico, so federal revenue in the short term would increase by roughly $12 billion.

But the House plan would offset that revenue by reducing the 35 percent corporate income tax rate, and would thus generate no new federal revenue overall. It was unclear how that fit with Spicer's repeated contention Thursday afternoon that revenue from the tax adjustment would help finance construction of the border wall.

By siphoning off that revenue, Trump would make it impossible to reduce the tax rate as far as Republicans wish. He is pressing for a 15 percent corporate tax rate.

Moreover, the tax would not be paid by Mexico. It would be paid by companies selling Mexican goods in the United States. Some might raise prices, imposing the cost on consumers, while others might be forced by competitive pressures to absorb the tax, reducing their profits. Many economists also doubt that the change would end up penalizing imports or encouraging exports. They predict that the value of the dollar would rise, offsetting those effects.

Nonetheless, many businesses in industries such as retail and energy, which rely heavily on imports, were in a panic.

Rep. Kevin Brady, R-Texas, who wrote the plan, told Fox News on Thursday afternoon that he was pleased that Trump appeared to be on board with it after his appearance in Philadelphia.

"What I heard today from this president was that in tax reform, that they would level the playing field for imports around the world and level it with the U.S. products here in America at the exact same rate," Brady said.