On Wednesday, European Commissioner Jean-Claude Juncker traveled to the White House to meet with President Trump. His trip comes following the G20 meeting of finance ministers in Argentina on Sunday, where EU counterparts pressured the United States to adopt their poorly conceived digital tax proposal the commission floated earlier this year.
The plan from the EU’s European Commission would erect a new tax regime targeted at American tech companies. Officials argue a new confiscatory tax system is necessary to confront the rise of the digital world, which has created an ecosystem of commerce that escapes taxation.
Never mind that these companies are all subject to the tax liabilities other corporations doing business in the EU face, and that the passage of last year’s tax law in the United States strengthened the safeguards against “stateless income.” In fact, while these rules will continue to be refined, the changes made to international tax law provide greater precision to combat base erosion in the growing multinational economy than ever before.
Nonetheless, officials in the EU continue to suggest a crisis is afoot if they cannot extract additional revenues from companies whose business is digital in nature. Their demands resurface at a time when trade policy and politics has colored the lens through which the relationship between the U.S. and the EU is viewed. This week’s visit from Juncker has been characterized as a peace voyage to pre-empt the Trump administration’s contemplation of auto tariffs, which would make the trade pressures between the two bodies that much more acute.
But while untold costs could be wrought by auto tariffs on both the American and EU economies, little notice has been given to the protectionist dangers posed by the EU’s proposal — even though the EU rocketed this shot across the bow long before the United States levied steel and aluminum tariffs on European countries.
And it’s not as though EU officials have been trying to keep their American offensive a secret. At the G20 last week, European Council Representative and Austria’s State Secretary for Finance Hurbert Fuchs made clear the goal in pursuing a new digital tax regime: “Taxation of the digital economy is mostly of course a taxation of American companies — because they are the key players in the world.”
As is usually the case with revenue-hungry lawmakers, the EU Commission has claimed its tax proposal is necessitated by some questionable concept of fairness — in this case, that innovative tech companies’ growth isn’t aligned closely enough with the amount governments can extort from them.
Even this claim is without basis. A study earlier this year from the European Centre for International Political Economy showed that EU members’ corporate tax collections have outpaced the growth of their economies by more than 40 percent. What’s more, corporate revenues have stayed relatively constant over the last two decades as a share of the EU’s economy, laying bare the EU arguments that coffers are running dry because of lost taxation on digital companies.
Even if the EU were justified in arguing American tech profits were escaping taxation, its proposal goes much farther than taxing net business income. Instead, the EU would levy a tax on a company’s gross receipts. This means that a company would still be liable to pay the tax, even in a year where it doesn’t turn a profit. The same would be true for a company that was profitable but whose net income was eaten up by, say, a capricious regulatory fine from an multinational bureaucratic body. This represents another chilling tax burden for an industry in which dynamism and risk-taking are required, and profits are usually delayed as a result.
What’s more, for all the gymnastics executed by EU officials claiming digital companies represent a drastically different commercial landscape, further study showed that there was little meaningful difference between the effective corporate tax rate of digital companies when measured against the traditional businesses on the Euro Stoxx 50.
Earlier this year, Treasury Secretary Steven Mnuchin testified to the Senate Finance Committee that Treasury was engaging with European officials to ensure American companies would not be “unfairly targeted” by EU tax administrators, but has not expressed much in the way of policy objectives since then. Even the Obama administration made clear its discomfort with the EU’s arbitrary tax enforcement proposals, and the Trump administration should not be hesitant to do the same.
No doubt there will be countless overtures that Trump must respect the “international order” when Juncker arrives to discuss trade. But while the media loves to breathlessly commentate on the president’s unpredictable nature, on one point he has been very consistent: For decades, Trump has made clear he believes the United States is unfairly made to play victim at the hands of this international order. It is unthinkable that, against that backdrop, this administration would allow the EU to progress with a plan that overtly targets American tech companies.
Potential levying of auto tariffs has received little support here at home, and is viewed even less favorably abroad. No doubt officials in the White House are contemplating how they can emerge from the meeting with a confident message that claims victory but keeps future lines of communication open. After fixing our own international tax rules and creating a more competitive business climate here, the president could do just that by stating once and for all that when it comes to the EU’s digital tax scheme, this administration stands firmly on the side of the innovative job creators that call the United States home.
Mattie Duppler (@MDuppler) is a contributor to the Washington Examiner‘s Beltway Confidential blog. She is the senior fellow for fiscal policy at the National Taxpayers Union. She’s also a visiting fellow at the Independent Women’s Forum and the president of Forward Strategies, a strategic consulting firm.
