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US president Donald Trump suggested on Thursday that he would consider using a 20% tax on imports from Mexico in order to generate funds to build a wall. To Trump’s supporters, this plan may sound great: Mexico’s exports will be taxed! They’ll pay for the wall in the end! And it’s true that this really would disadvantage Mexico relative to the US, which could be good for some American manufacturing jobs.
But there is a big drawback—which may explain why his staff is now backpedaling. This tax would mostly be paid by US consumers, in the form of higher prices. How do I know? Basic economics.
Here’s a simpler example. Imagine the government imposes a $1 tax on each gallon of gasoline. And let’s say the way they implement that tax is by requiring oil companies to pay them a bunch of money at the end of the year—specifically, $1 for each gallon of gas they sold. Sounds like a tax on the oil companies, right?
Not so fast. When the price of oil rises, gas companies make up for a lot of their losses by charging consumers more. They do the same with a tax increase. Even though the payment seems like it comes from the gas company, it really comes mostly out of consumers’ pockets.
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