The Trump administration is right to threaten France with new tariffs over the new “technology tax” which passed through the French legislature on Thursday.
I’m a free trader, but the moral cause for action here is clear. France’s digital services tax is specifically designed to affect American technology firms such as Facebook, Google, and YouTube, and to provide comparative advantage to French firms. Although its rate would be only 3%, the tax would fall predominantly on American firms rather than French companies. And seeing as U.S. technology companies are the evolving crown jewels of our economy, we must protect from being bullied in foreign markets.
The French government’s excuses for this measure are weak.
France claims the tax is just because it would raise revenue from digital firms that avoid paying the same average rate of tax as other companies. But this assessment is based on flawed data extrapolation by the European Commission. As Daniel Bunn of the Tax Foundation points out, “The difference between what the studies show and what the Commission claims is in the metric. Dr. Spengel and his coauthors analyzed the tax rate that applies to the marginal investment by a digital firm. This is different from an average tax rate. The marginal tax rate applies to the next dollar of income earned, while the average rate is the amount of tax divided by total income.”
Bunn also notes that French technology firms receive very generous government subsidies. Oh, and French-domiciled firms that fall under the digital tax’s remit can also offset its costs against their corporate tax obligations!
In short, this is standard-fare French protectionism. It is designed to penalize American companies that provide a valued service to French consumers, and the United States has every right to respond in kind.