Philip Hammond, the British Chancellor of the Exchequer, made headlines by promising to levy a new tax on large tech companies’ revenues to compensate for their low rate of taxation on their profits. As documented by several news outlets, the mechanism could be implemented as early as in 2020.
It might come as a surprise that it’s the UK and not, say, France, that is now racing ahead to tax large tech companies. But because Philip Hammond’s proposal has made quite a stir, it’s worth remembering a few key facts with respect to the political economy of corporate taxation in the digital age.
First of all, the boldest moves on the digital tax front are sometime made by the most pro-business politicians. The simple reason is that as they reduce taxes on wealthy individuals and corporations in general, conservative policymakers often leave their supporters behind. Contrary to what many assume, most voters, including conservative ones, like fairness and social justice. Above all, they really don’t like that the middle class pays all the taxes. And so for a Tory minister it eventually becomes convenient to verbally tackle US tech giants to compensate for their actual efforts at lowering taxes on the wealthy and large corporations. Years ago, it was David Cameron. Now Philip Hammond is filling his shoes.
Second, there’s the problem of how the US will react. Under Obama, the US response to such proposals was always a friendly but firm “no”. Obama rightly saw Silicon Valley as a powerful ally. They had contributed a lot to his 2012 campaign. They were also helping him transform the federal government and improve the delivery of public services. So Obama didn’t want his friends in the tech world to be struck too hard by European tax authorities. And because Europeans were on friendly terms with the Obama administration, it was always possible to sort it out. Radical European proposals were ultimately stalled in exchange for more constructive discussions within the OECD and the G20.
Today, the context is very different. Trump is president, and even though he doesn’t like the tech industry very much, by principle his administration stands against the idea of US companies being struck by unilateral tax measures on a European market that is so critical for their profits and losses. If the UK goes forward with Hammond’s idea, it’s likely that the Trump administration will retaliate in less friendly terms than what Europeans were accustomed to under Obama.
Then there’s one final catch. It sounds simple enough to slap new taxes on “search engines” (that is, Google) and “social media platforms” (that is, Facebook). But taxation remains a field governed by the rule of law (and fortunately so). Taxpayers are not designated by name. They pay taxes only if they fit certain criteria and when certain amounts cross certain thresholds. Thus it’s highly probable that a tax designed to weigh on Google and Facebook will end up being paid not only (and not even principally) by US tech companies, but rather by European tech companies as well as other legacy companies that happen to be doing more and more business online.
Add to that the fact that Hammond’s tax would be highly distortive by weighing on revenues rather than profits (why apply the same rate to Google’s and Amazon’s revenues when the latter’s margin is thin while the former’s is fat?) and you get a better sense of why this tax will probably never see the light of day. As a Tory government in the middle of a difficult Brexit negotiation, you simply can’t afford to quarrel with the US government and risk unintended consequences for your own tax base thanks to a theatrical and ill-designed attempt at sounding more populist.