Economic Implications of Building a Wall

April 21, 2017
Undocumented immigration and the state of border control have always been politically relevant topics. However, given U.S. President Trump’s campaign focus on border security, the issue has garnered special national attention this past election cycle. The population of undocumented immigrants has risen steadily over recent years, remaining the same from 2009 to 2014 at 11.1 million and accounting for roughly 3.5% of the total US population. [1]

On June 16, 2015, President Donald Trump announced his plan for what would become a divisive yet defining issue throughout the 2016 campaign: the implementation of a border “wall”. Now that the new president has settled in, the rhetorical has turned real, and many are wondering what a wall along our southern border will look like. Estimates of its cost range from President Trump’s proposed $8-$12 billion to New America Foundation’s comparatively higher $27-$40 billion estimate. [2] With such an endeavor, what are the implications for employment, trade, and tax policy? [3]

Construction of the Wall

<p><strong>Image: </strong>The various estimates for the cost of the wall are incredibly varied. <strong>Source: </strong><a href="https://www.bloomberg.com/news/articles/2017-02-01/here-s-a-glimpse-of-the-global-trade-carnage-from-a-u-s-border-tax">[Bloomberg Reporting]</a></p>

Image: The various estimates for the cost of the wall are incredibly varied. Source: [Bloomberg Reporting]

There is little consensus on precisely how much the wall would cost to build. However, there is one certainty: building the wall would create jobs. [4] Nearly all aspects of the construction — from physical building to servicing workers constructing the wall will undoubtedly require workers. However, despite providing a positive shock on the demand side, our president will soon encounter a critical problem on the supply side: the country’s ongoing construction labor shortage. [5] For the president, the shortage will, at best, affect labor costs; at worst, it may compromise the general feasibility of a prompt construction of the wall.

In order to have a sufficiently large workforce to make wall construction feasible, only two options seem plausible: face the increasingly high labor prices in the construction labor market - where demand for workers is steadily increasing – or look to undocumented immigrant workers. [6] The former option presents a question of timeliness and fiscal responsibility. However, the latter - while keeping labor costs down - presents a far more poignant issue that the wall’s proponents must address. The prospect of hiring Mexican workers to build a wall dividing the two countries is, according to Michael Camuñez - former assistant secretary of commerce under President Obama - akin to “asking an East Berliner to build the wall that cuts them off from the world.”

While many are concerned with the difficulties of a labor shortage, others are quick to point out the issue of how the wall will be financed. In his campaign announcement, President Trump stated that Mexico would pay for the wall. However, after President Enrique Peña Nieto categorically denied any chance of his country footing the bill, the prospect of Mexico directly funding the work grew dim. The task now became how to have Mexico indirectly pay for the wall.

Financing – the Border Adjustment Tax

On January 26, Sean Spicer, the White House Press Secretary, announced that the Trump administration was considering a 20% tariff that would be levied on Mexican imports. This announcement was met with harsh backlash and arguments that this policy would only nominally make Mexico pay for the structure. The real burden would be posed on American consumers. [7] The administration later backtracked on its claim and stated that the 20% tariff was just one idea that they were considering. Soon after, the U.S. House of Representatives Republican Conference released a more diplomatic proposal – a Border Adjustment Tax.

The new Congress is proposing a tax plan [8] that would lower corporate taxes from 35 to 20 percent. This tax would be applied by area of consumption as opposed to area of production. This being said, all imports would be subject to the tax, while exports would have the tax refunded, making them effectively tax-free. [9]

Border adjustment taxes do not hold the same negative connotations as tariffs do. Currently, the United States has tariffs that accounted for $1.4tn in 2015. [10] Though considered protectionist, Border Adjustment Taxes have the diplomatic benefit of applying across the board so as not to single out a specific country. 160 countries have such policies. Whereas a tariff levied on Mexico would certainly strain relations, the United States’ neighbor to the south can hardly object to the use of a policy they, too, enforce.[8]

Then the question remains, how much revenue would this plan bring in? If the United States had a trade balance, a numerically equal subsidy to exports and tax on imports would leave no impact on government revenues. [9] However, the United States is running a trade deficit. This being the case, the budget adjustment would bring in revenues.

<p><strong>Image:</strong> The net-impact as a percent of GDP of implementing a border adjustment. <strong>Source: </strong><a href="https://www.bloomberg.com/news/articles/2017-02-01/here-s-a-glimpse-of-the-global-trade-carnage-from-a-u-s-border-tax">[Bloomberg]</a></p>

Image: The net-impact as a percent of GDP of implementing a border adjustment. Source: [Bloomberg]

One of the countries that the United States has a trade deficit with is Mexico. In 2016, the size of this deficit was $63.2 billion. [11] If this level of deficit were to continue and if these net imports were taxed at 20%, this would generate $12.6 billion in additional tax dollars per year. Given that high estimates for the cost of the wall range between $15 and $25 billion, revenue from the border adjustment tax coming from Mexico would pay it in no more than two years – Mexico may effectively pay for the wall after all.

Political Implications of Policy Proposals

In addition to affecting undocumented immigration, the economic and financial impact of the border wall have political implications for the Trump administration [12]. A cornerstone of President Trump’s platform was that he would construct the wall without having to raise taxes on Americans. The previously cited initial proposal of a 20 percent border tax represents a major deviation from the President’s earlier claims that the wall could be built without incurring the cost on American taxpayers as the proposed plan to levy a border tax would effectively impose financial burdens on Americans of all socioeconomic strata. This stands in stark contrast to Trump’s previous claims economic situations would improve, especially for middle class Americans, and that Mexico would pay for the construction of the wall. [13]

Although details are still in-the-works, top GOP lawmakers have confirmed that a Border Adjustment Tax and not a border tax, or tariff, will likely appear in the final GOP tax plan. [14] However, the proposed tax plan has come under fire from retailers and small businesses, especially those that rely on imports. [15] In its current state, the Border Adjustment Tax replaces the US’s 35% corporate tax rate with a lower business tax rate of 20%. [16] However, the reduction in the overall tax rate will be compensated for the fact that imports will no longer be counted as a business expense and exports will no longer be counted as business revenues. Moreover, firms will be able immediately write off the value of a depreciated assets. Proponents claim that the dollar will increase in value in response to the new tax plan as to negate any disadvantage for importer or advantage for exporters. [17] However, opponents claim that such a valuation of the dollar is unrealistic as other countries might implement their own retaliatory policies and that too many factors influence currency values to claim that the dollar will increase by a predictable amount.

<p><strong>Image: </strong>The value of imports for different American Industries. <strong>Source </strong>[<a href="http://marketrealist.com/2017/01/how-do-border-adjustment-taxes-affect-apparel-companies/">Market Realist</a>]</p>

Image: The value of imports for different American Industries. Source [Market Realist]

Although the direct impact of the proposed GOP border tax solution is still unknown, it is clear that President Trump’s border initiative will have significant financial and economic implications. From impacting America’s standing in the World Trade Organization to providing a positive demand-side shock, one thing is for certain, the consequences of the border wall will stretch far beyond the Mexico-US border.

References

  [1] http://www.pewresearch.org/fact-tank/2016/11/03/5-facts-about-illegal-immigration-in-the-u-s/ 

  [2] https://www.bloomberg.com/graphics/2017-trump-mexico-wall/how-much-would-the-wall-cost/ 

  [3] https://www.technologyreview.com/s/602494/bad-math-props-up-trumps-border-wall/ 

  [4] https://www.bloomberg.com/graphics/2017-trump-mexico-wall/how-many-jobs-would-it-create/ 

  [5] http://fortune.com/2016/09/06/housing-construction-worker-shortage/ 

  [6] https://www.bloomberg.com/news/articles/2017-01-26/trump-wants-to-build-a-wall-finding-workers-won-t-be-easy

  [7] https://www.forbes.com/sites/timworstall/2017/01/27/memo-to-trump-20-mexican-import-tariff-means-americans-pay-for-the-wall/#75e597125a0820% tariff 

  [8] https://abetterway.speaker.gov/_assets/pdf/ABetterWay-Tax-PolicyPaper.pdf

  [9] https://www.washingtonpost.com/opinions/yes-trump-can-make-mexico-pay-for-the-border-wall-heres-how/2017/01/17/7edf7872-dcbf-11e6-ad42-f3375f271c9c_story.html?utm_term=.628bdb2f67e4 

  [10] http://wits.worldbank.org/CountrySnapshot/en/USA/textview 

  [11] http://www.economist.com/blogs/democracyinamerica/2017/01/taxes-and-tariffs 

  [12] https://www.cbp.gov/sites/default/files/assets/documents/2016-Oct/BP%20Southwest%20Border%20Sector%20Apps%20FY1960%20-%20FY2016.pdf 

  [13] http://www.foxbusiness.com/politics/2017/01/23/trump-doubles-down-on-promise-to-give-americans-tax-break.html 

  [14] http://www.cnbc.com/2017/03/21/border-tax-has-become-a-given-chief-gop-tax-writer-says.html 

  [15] http://www.cnbc.com/2017/03/21/border-tax-has-become-a-given-chief-gop-tax-writer-says.html 

  [16] https://www.washingtonpost.com/opinions/will-the-grand-republican-tax-plan-work/2017/03/03/4e3700e0-fdd6-11e6-99b4-9e613afeb09f_story.html?utm_term=.1685d401a3fb

  [17] http://fortune.com/2017/02/10/the-border-adjustment-tax-may-have-zero-effect-on-american-companies/

 

 

PENN WHARTON PPI
RESOURCE SPOTLIGHT: