The White House on Tuesday disavowed two controversial options for their planned overhaul of the tax code, after two Trump administration officials earlier in the day said the president's team was exploring a value-added tax to raise government revenue.
"As we have said many times, the President's team is hearing input from experts on all sides of the tax reform debate as we formulate what will ultimately be the President's plan to enact the first significant tax reform since 1986. As of now, neither a carbon tax nor a VAT are under consideration," deputy press secretary Lindsay Walters said in a statement.
The rapid reversal illustrates a Trump administration still in the initial stages of a plan to rework the tax code, particularly as it looks to build support while also sticking close to conservative ideas. Administration officials have long been aware of how politically divisive these ideas are, but they had searched for ways find new revenue sources to offset the steep cuts in individual and corporate tax rates that President Trump promised during last year’s campaign.
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 talk right now about a value added tax or a carbon tax would blow up the whole movement,” said Stephen Moore, who was a top economic adviser to Trump during the 2016 campaign. “It would bring it to a screeching halt.”
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.
Many Republicans oppose the creation of a carbon tax, but several major oil companies have backed the idea. And there is other pockets of support from prominent Republicans. Former Secretary of State James Baker, former Secretary of State George Shultz, and former Treasury Secretary Henry Paulson recently met with White House National Economic Council Director Gary Cohn to push the idea of a carbon tax.
A key part of the plan proposed by Baker and his colleagues was to refund the revenues raised by a carbon tax by issuing dividend checks to American households.
In 2013, the nonpartisan Congressional Budget Office projected that a modest tax of $20 per ton of carbon dioxide emissions would raise roughly $1.2 trillion over a decade -- roughly the same amount that would be raised by the border adjustment.