As President Trump prepares to depart for an international tour this week, his long list of accomplishments includes reform of America’s system of international business taxes that has made American companies more competitive around the world. Unfortunately, proposals from outside the U.S., specifically the European Union, are threatening the successes that can be realized from the Republican tax reform that became law in December 2017. The Trump administration would do well to use its pulpit to make sure these EU-style proposals never see the light of day.
The move from a system of global taxation to a territorial system that tax reform implemented makes America more competitive internationally. Businesses are now more easily able to move finances and investments across borders, which results in a strong economy both at home and abroad. The former system forced many U.S. companies to run their businesses and invest their capital elsewhere; for quite some time, European countries were only too happy to provide a home.
Now, some might hope that a more competitive U.S. code would compel its global partners to rethink their tax and regulatory regimes to retain an industrious edge.
Bureaucrats, more interested in consolidating power than liberalizing their economies, are taking the opposite approach in the European Union. Last month, the European Union’s European Commission released a proposal outlining a disruptive new tax regime to be applied to businesses engaged in digital services. The initiative is intentionally vague in its suggested application, but overt in its intentions: to extort successful American businesses who conduct business in EU member countries.
The European Commission claims that the increasingly digital nature of commerce has sparked tax collection challenges that their proposal endeavors to solve. Not mentioned is the lack of evidence that digital companies are prone to tax avoidance or that the EU has suffered from decreases in corporate revenue as a result of “digitization.” In fact, the Tax Foundation points out that according to a recent study by the European Centre for International Political Economy, corporate revenues have far outpaced the growth of the EU economy over the past few decades.
Nor has evidence been offered that tax avoidance by corporations (in particular companies who deal in digital) creates the problems the commission claims. As a share of the economy, corporate tax revenues have stayed steady over the same time period, despite reductions in the corporate tax rate.
It may be tempting to think that this is just the latest act in Europe’s ongoing romantic play with collectivism. But it could be prologue for invidious action anywhere else in the world, as commerce evolves in the digital age but governments do not.
If the EU is successful in exploiting innovation in the information age to levy new taxes, other countries will follow. Though it was an American president who once observed that a government’s instinct is to tax anything that moves, it is universally true that politicians cannot contain themselves around successful businesses. A government’s power to tax ends at its borders, but international companies are clearly making for juicy targets.
The European Commission proposal would erode the basis for sound tax policy by fabricating a regime in which compliance costs alone would cost hundreds of millions of dollars. This is without contemplating the cost to the companies upon which the new taxes would be levied, and the millions of people they employ in the United States and abroad.
The European attempt to unmoor tax policy from conventional understanding of physical presence and commercial activity is a bold-faced attempt to create a system that entraps American businesses abroad. If they get away with it, politicians worldwide will be similarly unrestrained; after all, reducing barriers to compete with America’s next competitive tax system is a lot of work. Ensnaring private businesses in tax regimes too complex to navigate is much easier.
As updates to the U.S. tax code continue to be implemented and American businesses consider how they can begin investing here at home, anxiety in Europe and elsewhere will rise. Our global partners have never had to contemplate what it means to do business with a United States tax system that is truly competitive; they should think seriously about how they plan to contend.
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.
