White House explores two new tax ideas — a value-added tax and carbon tax — as leading proposal to raise revenue falters

Source: By Damian Paletta and Max Ehrenfreund, Washington Post • Posted: Wednesday, April 5, 2017

President Trump looks at a chart illustrating the regulatory process to build a highway during a town hall with business leaders at the White House. (Evan Vucci/AP)





White House officials have said they will be much more involved in proposing and negotiating elements of their tax overhaul plan than they were during their initial failed effort to repeal the Affordable Care Act.

But both of the taxes discussed Thursday would face significant opposition — including from Trump’s fellow Republicans. The value-added tax, which is popular in many other countries, would serve as a kind of national sales tax, one that consumers would pay when they make purchases and that businesses would pay for supplies, services and raw materials. But many economists view a VAT as a tax that disproportionately hurts lower-income workers, who typically benefit from a progressive income-tax system.

A carbon tax would target the emissions of carbon dioxide and other greenhouses gases in the burning of gasoline, coal and other fossil fuels. Many Democrats support the creation of a carbon tax as a way to address climate change, but they couldn’t even reach an agreement on the issue when they had control of Congress and the White House during the early years of the Obama administration. In the years since, many congressional Republicans have continually accused Democrats of seeking a carbon tax and promising such a fee would devastate the economy.


The White House sees its effort to overhaul the tax code as one of its top domestic and economic priorities.

The search for different options reflects a recognition of the political challenges facing a proposal known as a border-adjustment tax that the White House and some Republicans had begun to rally around. The proposal, effectively a tax on imports, would not only raise close to $1 trillion in needed revenue but also serve to fulfill Trump’s pledge to protect American companies from unfair export competition.
White House officials are split on whether to endorse the creation of this specific tax. Treasury Secretary Steven Mnuchin said last month that the Trump administration was exploring a number of different ideas, including tailoring border adjustment tax so that it was applied differently to different industries or products.
Many GOP politicians have opposed value-added taxes. President Reagan warned that a value-added tax could become way for the government to raise revenue without the public being aware of it. “It’s hidden in the price of a product. And that tax can quietly be increased, and all the people know is that the price went up,” Reagan said.
All the same, value-added taxes enjoy broad support from economists, who argue that they are an efficient way of raising revenue without discouraging work or investment – a frequent criticism of the current system, which taxes income and capital gains. Conservative policymakers and politicians have proposed value-added taxes over the years, though often without using that term to describe them.
For instance, economists described the plan that Sen. Ted Cruz (R-Tex.) proposed as a presidential candidate in 2015 as a value-added tax, though Cruz insisted his plan was not one. His primary opponent Sen. Marco Rubio (R-Fla.) attacked Cruz’s plan relentlessly, appealing to Reagan’s opposition.
A value-added tax of just 5 percent would yield $2.7 trillion in revenue over a decade, according to a projection by the Congressional Budget Office. The figure would vary widely, though, depending the rate and what goods and services were subject to the tax.
Many countries impose substantially higher value-added taxes – the average rate across rich countries is about 19 percent – but exempt broad categories of essential purchases such as food, health care and education. These exemptions would lessen the burden on poor households, but the federal government would collect less revenue.
Some Democrats might also support a value-added tax, depending on the other provisions of the overall reform.