The fact that the European Union is struggling to plug budget holes is hardly unique — many American states and localities are dealing with the same problems. What is unique, however, is the EU’s plan to raise a substantial amount of the money it needs to make the budget math worth through fining American tech companies.
The EU recently reached a deal to increase its budget by €15 billion in order to respond to the pandemic. AsPolitico reports, the “biggest chunk” of this €15 billion increase will come from competition fines on large tech companies, most of which are American.
That’s a problem for a few reasons. From a good governance perspective, there’s a clear conflict of interest at play here — if the EU is counting on revenue from competition fines to keep its budget in the black, then it has every reason to find that there is suddenly a great deal of anti-competitive behavior deserving fines. It’s an incentive structure comparable to the heavily-criticized practice of civil asset forfeiture.
These competition fines also come in a larger context of attempts by the EU to use American tech companies as cash cows. Several EU countries have already implemented a digital tax, including major European economies like France, Italy, Spain, and the United Kingdom. The European Union, meanwhile, is likely to move forward with its own digital tax proposal next year.
While these proposals are often couched in the language of fairness and equitable taxation, they can be more accurately understood as a poorly disguised effort to tax companies based in another country (namely, the United States). After all, analyses have found only a tiny difference between effective marginal tax rates paid by digital firms when compared to traditional firms, a difference which would be dwarfed by the additional burden of a digital tax. It seems that our friends across the pond have never truly gotten over their fondness for taxation without representation.
In this context, it’s only reasonable to be suspicious that the EU has discovered a sudden plague of anticompetitive behavior needing to be fined. In particular, one may find it unlikely that this behavior just happens to be perpetrated by the very American tech companies the EU has been held up in assessing digital taxes on (the fact that the revenue raised from fining these tech companies happens to fill budget holes is also rather convenient).
After all, the EU has been largely held up in its digital tax efforts by threatened retaliation from the United States in the past. Well-deserved threats of retaliation from the United States delayed implementation of France’s digital tax, and has held up attempts at Europe-wide digital tax framework. The bloc may well see competition fines as a stopgap means of indirectly “taxing” American digital firms until it can get a digital tax in place.
The United States’s only possible response to this naked form of protectionism is unfortunately retaliation. If European countries, and the EU writ large, cannot be dissuaded from attempting to impose underhanded taxes on American businesses, then it is incumbent upon the Trade Representative to encourage them to keep their taxes within their own borders.