Wei Cui's The Digital Services Tax: A Conceptual Defense, which we discussed earlier this week in the final session of this semester's NYU Tax Policy Colloquium, deserves props for lucidly and significantly advancing the debate on digital services taxes (along with an associated debate on corporate income taxes). My prior blog post emphasized the efficiency issues discussed in the paper, but Cui also more briefly discusses equity issues, and this post will address them.
"Equity" here means inter-nation equity, a concept which is distressingly difficult either to use or, when global coordination / who-should-get-the-revenue issues arise, to avoid. The core challenges in using it relate to (1) the fact that nations are collective entities, composed of individuals but not themselves sensate, and (2) the difficulty of determining consistently how people in one country should weight the interests of people in other countries.
As to (1): Any approach to tax or other policy that is based on the welfare of individuals can readily be deployed to evaluate distributional issues as between the members of all those whom one classifies as members of the relevant group - for example, the rich and the poor within a given society. But a nation is a legal or sociological entity, which can't itself experience welfare, any more than a corporation can. So it is hard to get one's hands around the concept of, say, America's versus France's welfare. To be sure, one has American and French individuals - although the membership list for each group may be both contested and fluid. But we can be sure, for example, that some American individuals are better-off than some French individuals, and vice versa.
One needn't employ a fully welfare-based standard in order to face problems of this kind. In standard distributional analysis of a group of people, I can understand the claim that, if X has gotten very rich due to her effort in applying her talents, she deserves to keep everything based on entitlement, not just incentive effects. I disagree with this line of argument, but I understand it.
Now suppose we say that investment from Americans into France will be taxed in a certain way, leaving only the question of which country will get the revenues. To say that France "deserves" the revenues, perhaps on some sort of benefit theory, and notwithstanding the possibility that France would choose not to tax the activity at all if the alternative were that no one (rather than the U.S.) would get the revenues, is hard to make coherent enough even to be refuted in a specific way. I sometimes feel that one might as well be discussing with the Walrus and the Carpenter "why the sea is boiling hot, and whether pigs have wings."
But then again, suppose we hear that Finland or Taiwan wants to claim the revenue from Americans investing in France. Or suppose I want to claim the revenues personally. (As Al Franken used to say, decades before his disgrace, "Why not me?") From an efficiency standpoint that focuses just on taxpayers' incentives, it makes no difference who gets the revenue. So where do we go to conclude that, perhaps, if anyone is to claim revenue from these cross-border investments, it should probably go (absent further complicating facts) either to the U.S. or France.
Obviously, there might be rationales here of political economy, making global coordination more feasible, requiring national and other actors to treat each other "reasonably," having rules of the road like driving on either the left or the right, etcetera. But the language of inter-nation equity naturally creeps in here, whether or not one ultimately thinks it is about equity.
This brings us to (2) the difficulty of determining consistently how people in one country should weight the interests of people in other countries. I've written about this before, but, in a nutshell, global beneficence - valuing everyone's interests equally - is hard to beat as a moral standard. But we accept that countries may greatly prioritize the interests of their own community members (a concept which of course is in itself highly fraught). This is at least analogous to the fact that individuals who might consider themselves utilitarians may nonetheless not beat them themselves up to much over using their own material resources chiefly on behalf of themselves and other members of their households or families, rather than asking themselves who in the entire world is most in need.
From this standpoint, at a first approximation tax revenues that go to another country, rather than to one's own country, have zero value to oneself. So why not be Finland or Taiwan with respect to U.S. to France cross-border investment? But again one may reach for the idea that all may gain if all behave reasonably and cooperatively. And this in turn takes us to the case for generally behaving cooperatively in prisoner's dilemmas (at least, if one thinks others are sufficiently doing so) even insofar as one doesn't expect this to pay off directly for oneself via multi-stage strategic play.
I'm known in some circles for arguing that the U.S. (and other countries) should make international tax policy choices as if foreign taxes were just a cost like any other. My argument was partly just about logical consistency - those who claimed otherwise could not, or at least had not been able to, explain coherently why a global welfare standard should apply here in particular but not elsewhere. But it was more fundamentally about disagreeing that, in recent and present circumstances, any one country's offering foreign tax credits (while other countries were shifting their international tax systems in a more territorial direction) made sense either unilaterally, or strategically, or as conditional-Kantian cooperation (in John Roemer's sense). I probably would not have regarded this line of argument as indicating, say in 1976 if I were flown back there with my present state of beliefs, that the U.S. should go first in reducing foreign tax creditability.
With all that as background, let's turn now to the inter-nation equity issues in Wei Cui's paper, Suppose we posit the following. There are a bunch of people out there who have become billionaires by launching successful start-up companies that exploded via the creation of digital platforms that are being used globally. As it happens, many or perhaps even most of these people are Americans - e.g., the Facebook, Google, Amazon, Apple, et al founders. Suppose further that they are generating rents, which in turn can be divided, if one likes, into the location-specific rents (involving zero marginal cost and non-rival use) that are available to be earned in each particular country.
Now suppose that one is thinking about entity-level corporate income taxation, and that one starts out by regarding it as purely a proxy for income taxation of individuals - which could be wholly avoided or at least deferred, by one's operating through corporations, unless the income was contemporaneously taxed at the entity level (or otherwise adjusted for at the individual level). This clearly is AN important reason for corporate income taxation, treating the rest of the fiscal system as fixed, although not necessarily the only purpose that it could be designed to serve.
From this perspective, the mega-profits earned by those mega-companies - or to be earned in an accounting sense, but already reflected in stock price valuations - belong to the individuals who own the companies. Insofar as these people are U.S. residents (Zuckerberg, Page, Bezos, et al), the U.S. has reason to, and should want to, tax them on the location-specific rents that they are earning around the world. Or more precisely, it has reason to count those rents' effect on these individuals' annual economic income and net worth. In addition, to the extent not already following automatically from the above, it has reason to tax U.S. individuals' foreign source income on the same terms as their domestic source income, so that such individuals can't avoid source-based U.S. income taxation by investing abroad. (The reason this doesn't follow so automatically for entity-level corporate income taxation of resident companies relates to the differences between corporate and individual residence as operating concepts.)
From a U.S. standpoint, therefore, if one were to assume that only one country should be able to tax the location-specific rents that U.S. individuals earn abroad (whether through corporations or not), it would be us. This is even leaving aside the "Finland or Taiwan" reasonableness point from above that we'd also want to be the one taxing all the other rents that arise anywhere in the world.
On the other hand, suppose people from other countries are earning location-specific rents from investing in the United States. Even under the reasonableness constraint, we'd want to tax those, too. And by the same token, all the other countries out there in which U.S. individuals, often through U.S. corporations, are earning location-specific rents may quite reasonably want to be the ones to tax at least the rents earned in their own jurisdictions. Not to mention that they have also observed our not especially taxing those rents, given the porousness of U.S. (and other countries') corporate income taxation as applied to multinationals.
Cui's paper on digital services taxes argues that it is at least prima facie reasonable and fair, subject to further development of the relevant inter-nation equity issues, for a given country to want to tax a piece of the location-specific rents that multinationals deploying highly profitable digital platforms are earning with regard to activity that takes place inside such country and/or involves individuals who are among its residents.
I agree with this proposition. At a minimum, we're not in the realm of Finland, Taiwan, or me trying to grab the rents from, say, U.S.-into-UK activity, and we've all generally agreed that self-interested behavior is permissible within those broad bounds. How to handle the coordination issues that may arise, and how well they are likely to be handled, is of course another, and far more difficult, question.
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