A looming presidential election typically means a slowdown in legislating and an uptick in campaigning as both parties vie for control of Congress and the White House.
Despite this, the administration and lawmakers have an opportunity to continue making progress on a key issue with rare bipartisan consensus, namely, efforts by foreign countries to impose discriminatory digital services taxes on American businesses.
Given the consensus on this issue, the Trump administration should use the rest of the year to make continued progress on the investigations that have been launched into the DSTs which have been adopted or proposed in Austria, Brazil, the Czech Republic, the European Union, India, Indonesia, Italy, Spain, Turkey, and the United Kingdom.
DSTs, which are imposed on the revenues of large digital companies, overwhelmingly target innovative American businesses. Their implementation threatens jobs and the U.S. tax base, and represents a cash grab by foreign governments seeking to cover their budget shortfalls or increase spending.
The proliferation of these taxes is an opportunity for Trump to continue fulfilling his promise of enacting an “America first” agenda that promotes a level playing field and ensures foreign countries do not take advantage of businesses and workers.
While there are parts of this agenda that do not enjoy broad support, such as efforts to impose a broad range of tariffs that raise costs on American consumers and manufacturers, the effort to defend against foreign DSTs has strong support.
For instance, Senate Finance Committee Chairman Chuck Grassley, a Republican, and Ranking Member Ron Wyden, a Democrat, as well as Democratic Ways and Means Chairman Richie Neal and Republican Ranking Member Kevin Brady, have all raised concerns about DSTs, noting that these unilateral taxes “adversely affect U.S. businesses and have negative economic and diplomatic effects.”
In addition, Republican Rep. Ron Estes and Democratic Rep. Dan Kildee have introduced a bipartisan resolution expressing congressional opposition to foreign efforts to impose DSTs on American businesses.
The strong bipartisan opposition to DSTs should not be surprising as these proposals threaten to upend existing tax norms, harming businesses and workers. Businesses are typically taxed on their income rather than their sales. This is done to ensure that taxes are paid on actual profit and allows for deducting ordinary, necessary expenses like wages, employee benefits, capital expenditures, and the cost of goods sold.
In contrast, DSTs are imposed on revenue — in this case, the revenue produced by search engines, social media services, and online marketplaces. While they are often imposed at a low rate (2% to 3% in many cases), they are imposed on a far broader base than income taxes.
In addition, these taxes lead to double taxation as they are imposed on companies regardless of how much income they earn and in addition to existing income taxes. While they are imposed on business revenues, DSTs will ultimately end up harming consumers and workers as the costs are passed down. This will result in fewer jobs and lower wages for businesses, especially third party suppliers and sellers that rely on tech companies for their livelihoods.
Although the current proposals are imposed only on large technology companies, DSTs could serve as a precedent to eventually impose new taxes on all businesses. Not only would this be harmful to taxpayers, but it would result in the expansion of government and fund vast, new spending programs.
DSTs represent a clear and urgent threat to the American tax base, to workers, and to businesses. Foreign countries will not wait for the upcoming presidential election to continue their efforts to impose discriminatory taxes. Given this, the end of the year offers an important opportunity to make progress on existing investigations into foreign DSTs.
Alex Hendrie is the director of tax policy at Americans for Tax Reform.
