Austria, France and Germany together with other EU-countries made a proposal earlier this month to introduce an “equalization tax” on foreign internet companies. The justification for this tech tax is that companies such as Google, Facebook and Airbnb are not paying their fair share of taxes, and especially not in France and Germany.
The tech tax is meant to “reflect some of what these companies should be paying in terms of corporate tax". The politicians are comparing the new web businesses with the kind of businesses that these substitute. Replacing an office with hired people renting out apartments through ads, catalogues, telemarketing etc. with a web page such as Airbnb is not only more cost efficient. If done properly you could reach many more customers at a lower cost. And the biggest winners are us, the consumers. According to the American economist William D. Nordhaus (2005) the consumers captures as much as 95 percent of the gains when creative destruction replaces old businesses with new and smarter.
The idea that a web platform business should pay a corporate tax that “reflects” what the former business model would have paid providing the service is not only absurd. Actually, it is a fierce effort to avoid healthy creative Schumpeterian destruction of old outdated business models.
At the same time, European politicians talk proudly about creating a single European digital market and embracing digitalization, they act in a way that more looks like they are the new Luddites. This is not the first effort. As owner of a web hosting company I have seen how bad design of new European VAT-regulation for sale of “electronic services” has made it too expensive to have Europeans consumers as customers. The compliance cost is higher than the price for the product. If we want a prosperous Europe with competitive corporations we have to increase productivity, not least with the help of digitalization. Efforts to limit renewal of business models will do the quite opposite.
One might ask finance ministers of France and Germany what they think about exporting finished goods. Providing services from another country via a web page could be compared with manufacturing of products in one country and exporting it to another - instead of selling raw materials and have the production where the consumers live. I see no difference in what our web company do compared to a manufacturing company.
Instead of trying to stop foreign competition - European politicians could try to learn how to create a better business climate for tech companies. Open more markets for competition and get rid of harmful regulations. Stop pledging for taxes that prevent smarter business models. They have the choice to really create a single European digital market and embracing digitalization or otherwise many entrepreneurs will start their businesses somewhere else.
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