One would think that an attempt by foreign countries to aggressively target American-based businesses for special taxes would sound the alarm for any president seeking to help our economy recover from the COVID-19 crisis. Unfortunately, President Biden’s response to aggressive actions by foreign countries to impose new “digital taxes” on innovative American companies has been so unthreatening that there is little chance our European counterparts will take it seriously.
European countries have for years salivated at the thought of getting a bigger share of the tax revenues from largely American-based tech companies. For them, it’s an opportunity to increase tax revenue without having to face the blowback from raising taxes on domestic industries.
Thus far, the only thing that has restrained revenue-hungry countries from descending on American multinationals is the threat of retaliation. While so many of the imposed and threatened tariffs of the Trump administrationwere ill-advised, the former president was right in taking a strong stanceagainst proposed European and international digital tax schemes.
That’s because at the time, the threat of retaliation appeared to have the desired effect. In early 2020, France, part of the European digital tax vanguard, temporarily backed down on threats to impose a digital tax due to fears of U.S. reprisals. But France eventually revived its push for a digital tax back in December, perhaps hoping the Biden administration would prove less resistant.
Thus far, it appears that France and other digital tax hopefuls will get their wish. Trade Representative Katherine Tai announced recently that the U.S. would hold off on instituting retaliatory measures against countries that imposed digital taxes for six months pending an international agreement. This exercise in can-kicking is unlikely to encourage the kind of multilateral deal that has evaded negotiators for months.
It’s doubtful any foreign nations will be scared off by such a half-hearted reprimand. Digital tax proposals are advancing already with France initiating collections earlier this year, and yet they still haven’t faced any kind of full-throated response from the U.S. In other words, countries hoping to get away with digital taxes targeted at American-based businesses will doubtless smell blood in the water.
It’s not surprising that this administration is taking a somewhat softer stance on this issue. The Biden administration has also weakened its hand in negotiations by pushing for an international agreement on global minimum corporate taxes. American businesses could be facing worst-case scenarios where Biden hangs them out to dry on digital taxes in return for an also-harmful agreement on minimum taxes.
Certainly, the end goal of retaliation should not be to subject American businesses and consumers to further trade barriers. Americans have already suffered greatly from tariffs imposed by President Trump, with the impact of Trump’s import taxes well exceeding the tax burden of the Affordable Care Act. The fact that the economic impact on Americans of justified retaliation to aggressive trade actions would only be compounded by prior ill-advised trade actions serves to accentuate why tariffs should always be a last resort.
But when foreign nations are aggressively attempting to tax American businesses and industries and diplomatic efforts have proved fruitless, a vague threat of future retaliation is insufficient. After all, foreign nations without substantial digital industries of their own have every incentive to try to tax the American one for every ounce of revenue they can get.
Moreover, states like Maryland have further undermined the U.S. government’s negotiating position by imposing digital taxes of their ownon largely out-of-state businesses. It’s difficult for the federal government to convincingly argue that other countries can’t take a slice of tax revenue from businesses headquartered in other countries when its own states are doing something similar.
While trade barriers are never something to root for, it’s reasonable to expect that an American president would be more aggressive in defending American companies from foreign tax efforts. If there’s any situation in which tariff retaliation is justified, it’s in response to efforts by foreign countries to target American-dominated industries for special tax bills.
