On France’s digital tax

The arguments against the digital tax

Govindarajan and al. put forth the main arguments against the digital tax:

• In the absence of a clear definition of a “large” and “digital” company, EU proposals are tantamount to selective targeting of American companies;
• Some academics and think tanks question whether the tax collections of EU governments have declined over time and whether there exists a need for alternative sources of corporate taxes;
• Critics argue that there is no consistent evidence that internet firms pay taxes at lower rates than other firms;
• The selective imposition of taxes could violate bilateral taxation treaties, and could threaten an all-out trade war, reducing international trade and commerce; and
• Should all digital corporations pay the same 3% tax, irrespective of their business model or profits?

The Problem with France’s Plan to Tax Digital Companies
By: Vijay Govindarajan, Anup Srivastava, Hussein Warsame, Luminita Enache – Dartmouth University, University of Calgary

A different perspective on the importance of a digital tax

Recently, the French Senate approved a law that imposes a 3% tax on revenue generated from digital services by companies above a certain size. While there is a lot of political debate about economic consequences of this action, it is actually interesting to reverse the question: We consider the long-term implications of an economy with no such digital tax. More generally, we can think of digital services as a special case of products with low or zero cost of transportation. With basic economic models we show that a market with no transportation costs is prone to monopolization as minuscule, random differences in quality are rewarded disproportionately.