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White House Said to Be Eyeing VAT, Carbon Tax

Posted on April 6, 2017 by Jonathan Curry

Despite denials from the White House, a Trump administration tax plan reportedly could end up featuring two tax proposals that are anathema to Republican orthodoxy: a VAT and a carbon tax.

Multiple sources in the Trump administration say they are exploring the idea of implementing a carbon tax and a VAT as a part of the White House tax reform plan, The Washington Post reported April 4. The proposals would amount to two potentially enormous revenue raisers that could help balance the ambitious tax cuts President Trump and Republican lawmakers are seeking.

According to the Post, the White House has not yet made a final decision on whether to adopt either of the tax proposals. However, CNBC reported that a White House statement later that day said the administration is open to hearing input on many ideas for tax reform, but “as of now, neither a carbon tax nor a VAT are under consideration.”

"I'm on the Finance Committee and I haven't heard that one," Sen. John Thune, R-S.D., told Tax Analysts when asked about the leaked White House proposals. "I think that they're trying to think outside the box, looking for ways of doing this that give them some other options and alternatives to the House blueprint."

Thune added that a carbon tax proposal would be "awfully hard" to muster support for, but noted that a VAT has similar characteristics to the House-proposed border-adjustable tax, and considered it something "we would have to look at."

In the House, Freedom Caucus Chair Rep. Mark Meadows, R-N.C., said that he didn’t have an opinion on the topic because he wasn’t familiar with it, but added that those taxes could have a problem getting support within his caucus. “Value added taxes are generally a non-starter for conservatives,” he told reporters.

House Ways and Means Committee Chair Kevin Brady, R-Texas, said on CNBC’s Closing Bellthat he thought it was healthy that the Trump administration was engaging with stakeholders and “thinking outside the box.”

Before the White House announcement, Brady said the House and Senate were resistant to those taxes, but added that conversations with the Trump administration indicated “they’re trying to find the right, most pro-growth tax code. They are looking at a number of options.”

Brady also said he didn’t think the border-adjustable tax in the House blueprint would get left behind. Trump has “repeatedly said he wants to equalize taxes between made-in-America products and foreign products coming in. We think the border-adjustability tax with modifications can achieve that.”

Similarities to Border-Adjustable Tax

Jeremy Cape of Squire Patton Boggs also noted that a full VAT isn’t a far cry from the border-adjustable tax proposal. “It’s not easy to see how a scenario with a VAT plays out, but it’s conceivable,” Cape said. “I don’t think it’s far away from where Brady and [House Speaker Paul D. Ryan, R-Wis.,] are,” Cape told Tax Analysts. “For WTO purposes, they have to sell border adjustability as a VAT anyway,” he said.

A VAT would play much the same role as the border-adjustable tax would in a tax reform plan by functioning as a revenue raiser, Cape said. He noted that the Trump administration and Republican lawmakers have signaled that they want significant tax reform, not just lower corporate tax rates, “So if you’re beginning to look at border adjustability and thinking it’s not going to fly, then if you want to do something that looks rather cool but can involve sorting out the [tax] system, you can see how a VAT might work.”

And unlike the untested border-adjustable tax, a VAT system is well established in many countries and generally works, which could be an advantage in the coming tax reform debate, Cape said. The current debate over the border-adjustability tax is largely focused on how currencies would adjust to the U.S. exempting exports from the tax while taxing imports, and whether specific industries would be favored while others suffer. “The VAT doesn’t give rise to those issues,” Cape said.

Donald Marron of the Urban-Brookings Tax Policy Center likewise didn’t think exploring the idea of a VAT should be a stretch for Republicans.  He said, “Republicans have been proposing things that look like a VAT for five or six years now, but they’re always structured in a way and named in such a way so that they aren’t value added taxes.” The border-adjustable tax, for example,  is “essentially a VAT plus a subsidy for labor,” he added.

Marron also pointed out that many Republicans have advocated a national sales tax, adding that while there are “important differences . . . there are some significant overlaps with a [consumption-based] VAT.”

Another advantage for the VAT is that it could help get Democrats to support a tax bill -- something Trump has said he would like to see happen. Though a VAT is often seen as a regressive tax, “you can manage that a bit” by “zero-rating basic food stuffs and things like that,” Cape said. As a proposal that isn’t fully supported by Republicans or Democrats, it could be designed in such a way as to accommodate the desires of both parties, he said.

But that support from Democrats could prove costly in getting Republicans to sign on. “The Republicans absolutely hate the idea of a VAT because they think, with some justification . . . the rates tend to go up. It’s quite an easy one to push up,” Cape said. Further, a VAT is a “hidden tax” in that it is built into the sales price, rather than added on top of it, he added.

 Carbon Tax

Like a VAT, a carbon tax could help pick up support from Democrats, though it’s no guarantee of bipartisan support.

Marron recalled that members of the Climate Leadership Council met with White House officials to discuss a “carbon dividends” plan that uses a carbon tax as a conservative solution to addressing climate change. He added that while council members appeared to receive a “respectable hearing” from the White House, it’s unclear what carbon tax proposal the White House may be considering.

According to Marron, market-oriented Democrats might like the idea as a practical way to address climate change, while environmentally oriented Democrats that are concerned about the Trump administration’s rollback of environmental regulations could see it as being an “effective feature” of a comprehensive tax plan. “The challenge, of course, is they’re going to look at all the other [tax reform] features as well,” he said.

Another reason Democrats might be reluctant to get on board with a carbon tax is that it could be perceived as regressive, said Marron, adding that "to get Democrats on board, they would need to see something offset that.”

Although a carbon tax is traditionally unpopular among Republican lawmakers, Marron said he thought it was inevitable policymakers would eventually turn to the carbon tax. “In the carbon tax community, we’ve talked for a long time about, once the VAT is dead, and once people give up on reducing interest deductibility and those kinds of things, that attention would turn to the carbon tax.

“I would not have expected it to be today, but I’m not surprised that it’s come up,” he added.

'A Tale of Two Cities'

Earlier that day, Trump indicated that two additional tax provisions were on his radar: the state and local tax deduction and tax-exempt municipal bonds.

During a CEO town hall event hosted by the White House, Trump acknowledged that different areas of the country have “unique problems” when it comes to taxes, drawing a contrast between high-tax New York and low-tax Indiana.

Among New York’s problems are “debt and deductibility,” Trump said. He cited Indiana’s “AAA-rated bond” and low levels of publicly held debt, as well as its low taxes, as reasons for why modifying existing tax provisions for tax-exempt municipal bonds and the state and local tax deduction “is not that big of a deal because they don’t have much to deduct.”

"The problem I have is that there are many places throughout the country that . . . consider that a gift to the state, and a gift to the people,” Trump said. “I call it a tale of two cities. You have different interests, but I am watching over everybody.”

Asha Glover, David van den Berg, and Dylan F. Moroses contributed to this article.

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