The European Commission is proposing a tax on the revenues of digital services. The tax is supposed to hit global tech giants, but the cost will be borne by small businesses and consumers.
Corporations have a natural tendency to maximize their profits. Via an occurrence which economists have dubbed ‘incidence’, taxes levied on these companies by governments will simply be passed on to consumers and business users. In other words, if 10% tax is levied, the consumer or small business will see a price increase of 10%. Apart from perhaps some administrative burdens, the corporation will barely be affected, leaving the governments the only winners and small companies, once again, losing out. This argument can be backed up by a recent OECD analysis , in which it states that companies – when faced with new tax burdens – will seek to optimize their bottom line.
In a 2012 case study, holding resemblance to the current situation, the above can be seen in practice . The Finnish government implemented a value-added tax on the sale of newspaper and magazine subscriptions in the country. The tax raised the rate from 0% to 9%, later increased to 10%. The study finds that the net effect of this increase was to pass the costs fully onto the consumer; that is, the newspaper incurred effectively no tax burden and the consumer paid the full tax bill. The characteristics of a newspaper - loyal customers and relatively stable prices make this case study an interesting one in the current discussion, as – much like many of the digital services covered - newspapers are not commodities or easily substitutable goods, putting them in a strong position to pass on costs to the reader.
Many SMEs depend on digital services to build their global customer base - something that is otherwise very hard to do. This puts SMEs in a very vulnerable spot, one where they are likely pressed to accept any costs that will be passed down on them.
Lastly, taxing revenue in principle is not a good idea. Sure, it is a relatively easy way to fatten the governments’ coffers, but it will inevitably hamper research and innovation and, by extension, productivity and competitiveness.
The question we really need to ask ourselves is whether it's worth harming SMEs to make a quick buck.