A proposed digital global tax on large tech corporations will be an important agenda item at the next meeting of G-20 finance ministers and central bankers scheduled to take place on April 7th.
If an agreement is reached, member nations would place a new tax on large U.S. tech companies like Apple, Google and Amazon that would affect all online digital activities of these businesses, even those that take place where they do not have a physical presence.
However, the global digital tax would not have the effect lawmakers hope. Instead of paying the tax, these corporations can choose to avoid the brunt of these taxes by passing on the burden to consumers and small businesses. These added costs would create barriers to entry for startups who rely on the platforms big tech companies provide for business and force existing businesses to scale back significantly on online advertising.
OECD countries should recognize the harm they would be doing by agreeing to impose a global digital tax and choose to oppose an international regime of digital service taxation.
Levying digital taxes on big tech companies would lead to significantly higher costs for consumers. An economic impact study from Deloitte in 2019 analyzed a 3% digital service tax in France and concluded that only 5% of the tax’s overall cost would be paid by the large internet companies it targeted and 40% would be paid by other businesses, while the majority of the tax burden, 55%, would be paid by consumers.
This outcome is not unique to France. After the United Kingdom joined in on proposing a tax on digital revenues in 2020, Apple, Google, and Amazon responded by raising prices on advertisers and increasing fees on third-party producers in the country by 2%. Imposing a global tax for all G-20 member nations would mean American consumers encounter the same increased prices that these European countries faced as a result of the digital tax.
Taxes on tech companies also raise new barriers for tech startups that rely on these platforms to reach consumers. According to a survey from the Small Business & Entrepreneurship Council, 80% of startup companies consider the ability to reach consumers via online advertising a key factor in the decision to start their business. Tax hikes on digital services result in companies like Amazon and Google increasing service fees for businesses that use their platforms, which make advertising online more expensive and less feasible for new companies.
Amazon especially has been incredibly beneficial for startups looking to grow their businesses. The company’s 2020 impact report states that it provided $1 billion in credits to help new businesses accelerate their growth, along with a host of other benefits like technical support and training. A global tax would potentially decrease these benefits, thereby reducing innovation in the tech space.
While these increases affect startups more because they have less financial space to absorb extra costs, the increases also make advertising more difficult for established businesses. The Covid-19 pandemic has changed the advertising strategies of companies to focus more on digital ads. While the amount spent on all other major channels of advertisement fell significantly in 2020, digital advertising rose by 4% based on data from the World Economic Forum.
If a global tax is applied, fewer companies will be able to absorb the costs of advertising online. If digital advertising becomes less affordable for small businesses, fewer of them will be able to compete for consumers’ attention and dollars, creating economic and competitive difficulties. A global digital tax on large tech companies will only create more challenges for consumers. OECD nations considering agreeing to the proposal should recognize the harm they would be doing and reject an international regime of digital service taxation on tech companies. Failure to do so will only end up harming small businesses and consumers.