Speculation regarding how President Trump would be received among the plutocrats in Davos, Switzerland, abounded ahead of his Tuesday speech at the World Economic Forum, but by the time Trump took to the podium to declare the U.S. economy “stronger than ever before,” he had already secured at least one significant international accomplishment: The United States and France agreed to a cease-fire in their negotiations over taxing American digital companies. The U.S. had threatened a 100% tariff on French imports in retaliation for France’s 3% digital services tax, which was put into place last fall.
European countries have contemplated implementing new taxes that target the revenue of U.S. tech companies for years. The last 18 months have seen a surge in debate owing to a renewed focus at 2018’s G-20 meeting in Argentina, where European Council Representative and Austria’s State Secretary for Finance Hubert 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.”
Revenue-hungry lawmakers in Europe have made a pastime out of attempting to tax the crown jewels of U.S. commerce, but an OECD consensus solution has proven elusive.
This is, in part, because the premise many European countries are operating under is flawed: European countries have contested for years that tech giants in America aren’t paying their “fair share” of taxes in Europe, a claim the Obama administration criticized as running contrary to achieving global tax certainty. The Trump administration had taken a more dulcet approach until recently, when France decided to circumvent the OECD discussions and institute its own tax. In turn, the Trump administration has threatened tariffs as high as 100% on the $2.4 billion worth of French imports U.S. customers enjoy.
France’s announcement was followed by other countries such as Italy, Austria, and the United Kingdom threatening to do the same. This piecemeal approach not only introduces untenable complexity into global tax systems, but it also fails to satisfy the main conflict preventing a deal: European countries have routinely failed to provide a supportive case for a new tax targeting digital tax companies. As was pointed out in a recent study, corporate revenues in Europe have stayed relatively constant over the last two decades, while corporate tax collections have outpaced the growth of European economies by 40%. What’s more, little evidence demonstrates that tech companies are beneficiaries of current tax systems — their effective tax rate is not meaningfully different from nondigital firms.
Now other countries will need to think twice about attempting to undermine international negotiations with their own tech taxes. This dilution of tensions this week is a huge win for America. Tech companies will be safe from France’s discriminatory tax for at least the rest of the year, while the industries that would have been impacted by a 100% tax on French imports can also breathe a sigh of relief.
Like the tariffs levied on hundreds of billions of dollars worth of Chinese goods, these levies would have been paid by U.S. consumers and businesses, not by foreign countries.
A tariff on French wine, for example, would not only hit distributors but also wholesalers, restaurants, retailers, and a complex transportation system that ultimately delivers wine to consumers. Businesses rely on the same distribution networks for their domestic wine as for imported wine, meaning if the cost for one input were to double, the entire system is in jeopardy. Wine is a highly specific industry and is in some ways reliant on geography (champagne can only come from, you guessed it, the Champagne region of France), so domestic wines cannot just “replace” a wine made too expensive to purchase through tariffs.
This cease-fire is good for U.S. taxpayers and businesses, but it is also good for the self-proclaimed Tariff Man. Regardless of how he is received at Davos, Trump is walking away with a significant concession from another world power at a time when many of the leaders present want to throw into question U.S. hegemony. Sending a strong message that the U.S. will defend its commercial interests from global tax discrimination positions Trump, and America, as a force to be reckoned with on the global stage.
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 the president of Forward Strategies, a strategic consulting firm.
