A Digital Tax Is Still a Bad Idea

by Kai Weiss

The digital tax has become one of the most discussed ideas in tax policy in the past months. Last year, the European Union wanted to introduce such a tax, which would specifically target companies providing digital services. This attempt ultimately failed due to the opposition of multiple member states.

Nonetheless, the idea is far from off-the-table. The European Commission itself still plans to introduce one sooner or later – first it wants to abolish unanimity votes in the Council so to nullify the opposition to it (a bad idea, as I have written about extensively). Additionally, several member states have plans to implement a digital tax by themselves. This includes the UK, Spain, France, Italy and Austria.

The main argument these governments make is that digital companies do not pay their “fair share.” This is what the Commission has been arguing in its campaign for a digital tax, which kicked off in 2017. Because these companies evade to pay what they should, the argument goes, a three percent tax (or less in case of some of the national government approaches) should be introduced for these companies.

But as Matthias Bauer from the Brussels-based think tank ECIPE writes in his new study Corporate Tax Out of Control, reality shows a different picture. Even if we take for granted that one has to pay ones “fair share” to the government – a rather arbitrary claim since it is never explained what is actually meant with “fair” or at what level of payment ones tax bill becomes “fair,” it is simply untrue that digital companies pay less taxes than their counterparts in more traditional sectors.

Instead, as Bauer shows in the study, those “evil” digital companies which supposedly do not pay the same amount as their traditional peers in fact do pay, give or take, the same taxes. Indeed, the effective corporate tax rates (ECTR), to quote Bauer,

“of technology and software-driven companies exceed the average of traditional companies that are headquartered in Germany and Spain. At the same time, the average ECTRs of technology- and software-driven companies are comparable to the average ECTRs of traditional companies headquartered in France and only slightly lower than the average ECTRs of traditional companies headquartered in the US and Italy.”

This is even true for those that get most of the blame for supposedly not paying enough: “Big Tech” companies from the U.S. After all, it is not the small start-up in someone’s (European) garage the EU and national governments have in mind when it comes to the digital tax – though these new enterprises would be hit as well. It is also not the traditional brick-and-mortar company which has slowly moved some endeavors to the digital arena – though they would also be hit by a digital tax (proving that actually clearly stating what a digital company is and what not can be quite difficult).

Of course, those in favor of a digital tax are instead looking at companies like Google, Facebook, Twitter, or Amazon. But as Bauer shows, even these – or one might say, particularly these – companies already pay at least the same amount traditional companies do.

Not only do these companies from the U.S. pay their “fair share” – if anything, they may even pay more than that: “A great number of digital companies, including large US-based Internet companies (e.g. Amazon, Facebook, Google), actually show much higher effective corporate tax rates than a myriad of traditional, less- or non-digital companies headquartered in the EU.”

Between 2012 and 2017, Alphabet (which includes Google) has paid 26.8 percent corporate taxes, Facebook 27.7, Microsoft 28.2, and Amazon even 38.2. This is in contrast, for instance, to the 24.1 percent Germany’s biggest corporations included in the DAX30 have been paying in the same period.

Notably, this is not the case for some other big corporations which are more traditionally oriented, and – perhaps just accidentally, reside in Europe. Major European corporations often pay far less taxes than anyone else: this includes Renault in France or Volkswagen and the Deutsche Telekom in Germany, who are, as these national governments possibly realize, too important to tax too high.

It is therefore not surprising that many see in Europe’s attempts to introduce a digital tax a blatant attempt to target American companies. According to this story, the digital tax would be no more than a non-tariff trade barrier which could be seen as a retaliatory measure against Donald Trump’s actual tariff (and national security) warnings – or, even worse, a penalty for some companies’ success simply because they are not situated in Europe. As the Americans for Tax Reform’s Andreas Hellmann recently wrote, “the EU intentionally designed this tax in a way to almost exclusively target American companies as there is no comparable digital industry anywhere in the European Union.”

Regardless of whether the EU is intentionally trying to hurt Americans with this, digital taxes would surely not improve relations between the U.S. and Europe, and potentially cause further retaliatory measures by America. Those who would ultimately be hurt the most in the end would, of course, be normal European citizens, who would have to bear the costs. And as Bauer is showing in his study, it is impossible to assert that “Big Tech” isn’t paying enough taxes yet in Europe – they do so to an equal (and often higher) amount to European companies.

The idea of a digital tax is wrong-headed then. Such a tax is inherently distortive and discriminatory, representing a significant departure from the principles of sound tax policy, especially neutrality. Both the EU as well as national governments in cities from London to Vienna should reject them.

Kai Weiss is a Research Fellow at the Austrian Economics Center and a board member of the Hayek Institute.