The three percent digital tax

France among other nations has been calling for a three percent digital tax, for instance as might apply to Facebook revenue connected to France but booked say to Ireland, which has a lower corporate tax rate.  (The exact meaning of “connected to France” is indeed murky here, if you are wondering, but proponents might have in mind a simple France-to-France transaction, such as selling an ad to a French buyer for a French product; there are more complicated grey areas.)

As is so often the case, the debate is focusing on how little tax some of the major tech companies pay directly to the French treasury, rather than on tax incidence.  In reality, the major tech companies may already be bearing a quite significant tax burden.

Let’s say you believe that Facebook has significant market power over the advertising market in France.  That is not exactly my view, but let’s run with it — a competitiveness assumption will hardly boost the case for taxing Facebook.

At this point your mind already may be thinking that the monopolist in the supply chain will bear some significant portion of a tax, just as land bears tax burdens in a Georgian land monopolist model.

Let’s now say that France boosts its VAT — how will that impact Facebook?  Well, the short-run effect is that directly taxed good and services will tend to cost more.  That in turn will create pressures for them to advertise less, because their potential market size and potential profits are smaller.  If they advertise less, they are spending less money on Facebook ads.  Facebook profits go down (remember, Facebook is selling those ads above marginal cost), and thus Facebook bears some of the burden of the tax.

Do the same analysis in terms of levels rather than changes, and you will see that Facebook bears some of the burden of the current French VAT.

So the French VAT brings money into the French treasury, and some of that money comes from Facebook in an indirect form, in addition to whatever direct tax liabilities Facebook may bear under the current French VAT structure.  Furthermore, the net tax burden on Facebook is higher, the more monopolistic is Facebook in the ad market.

I should note that there are other ways you can play around with the assumptions.

A good rule of thumb is that you should place less weight on tax discussions that do not focus obsessively on tax incidence.

Thanks to the Courtesy of :

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