Pufendorf Institute: BLOGG POST
Across most EU Member States, debates on the upcoming year’s budgets are in full swing. In these times of austerity and fiscal constraint, proposals to raise taxes does not come as a surprise. France’s case is particularly noteworthy, as it proposes a significant increase in tax revenue, aiming to generate an additional €60 billion next year. This revenue target means income taxes must exceed current levels. For individual income tax, the French government has introduced a “differential contribution of high incomes,” impacting households already subject to the exceptional contribution on high income (with net income over €250,000 per individual or €500,000 per couple). Those whose average tax rate is below 20% will now need to meet this threshold. Though only 24,300 tax households will be affected, this measure is expected to contribute substantially to the €60 billion target, alongside higher taxes on capital and the cessation of tax exemptions on life insurance payments for inheritance beneficiaries.
Additionally, the 2025 budget proposal suggests doubling the Digital Service Tax (DST) from 3% to 6%. France is not alone in reconsidering DST frameworks; Italy, for example, proposed strengthening its DST in its draft 2025 budget by removing thresholds related to global revenue and domestic sales. Beyond the EU, Australia has also raised similar issues, with a parliamentary committee recommending taxation on large social media platforms to support the country’s news publishers. However, protectionist measures may prompt defensive trade barriers from other countries. In her Tax Notes International article “Looking Past Pillar 1 Through a DST World” dated November 18, Prof Mindy Herzfeld exposes the large retaliation risks from the US side, mentioning section 891 of the IRC,stating that ” if the president finds that, under the laws of any foreign country, citizens or corporations of the United States are being subjected to discriminatory or extraterritorial taxes, the president will proclaim that the rates of tax imposed ( …) for the tax year during which the proclamation is made and for each tax year thereafter, be doubled for each citizen and corporation of that foreign country. ” There is little doubt that the new Trump Administration will hesitate to use this tool.
These targeted initiatives to curb tax base erosion and address national budget shortfalls underscore the need for a global forum, such as the OECD or UN, according to these organizations. The unfit current international tax system to the current economy is a recurring topic in international economic discussions. Rebecca M. Kaysar’s recent article, explores the need to reassess the trade liberalization foundations on which existing laws stand. She references Ruth Mason’s influential article, The Transformation of International Tax (2020), which posits that we are experiencing a shift toward “coordinated unilateralism” driven by the OECD. This new approach in international economic governance reallocates resources to reverse fiscal austerity and address inequality.
As the geopolitical landscape becomes increasingly fragmented, a new global tax agreement seems to be difficult to reach but also necessary to avoid more fragmentation. Short-term unilateral responses like digital service taxes, designed to address tax issues from the digital economy, have instead become entrenched rather than leading to a comprehensive global tax framework like the OECD’s Pillar One proposal. A recent article, Five Years of Digital Services Taxes in Europe: What Have We Learned? (Intertax, Vol. 52, Issue 10), reveals that a significant portion of the tax burden has shifted to SMEs and consumers, with minimal impact on digital giants. For instance, “the overall impact of a 3% revenue tax correlates negatively with corporate profitability. For a company with a low profit margin of 5%, the tax is equivalent to a corporate income tax of 60%, whereas for a company with a high profit margin of 50%, it amounts to only 6%” (ibid, p. 646, M. Bauer).
The “new international economic governance” advocating for a global solution raises questions across disciplines. One key inquiry is how current laws might be adapted to meet today’s costs of welfare financing. Corporate income tax rules currently allocate taxable profits according to bilateral tax treaties embedded in domestic law. Parliaments ratify these treaties, historically under OECD and UN guidance, to prevent double taxation and combat double non-taxation. But what alternatives exist if this system is no longer viable? Are the OECD and UN’s Pillar One and Pillar Two proposals legitimate, and can international tax “technocrats” without direct ties to domestic tax authority truly enact global change?
Ana Paula Dourado, in an editorial for Intertax (Vol. 52, Issue 3, 2024), underscores the importance of legitimacy, noting that legitimate taxation relies on laws that reflect a social contract between citizens and government. Social scientists discuss the input, output, and throughput legitimacy of rules, acknowledging, as legal positivist H.L.A. Hart did, both formally adopted and informally applied rules. Legal scholarship, often focused on the formal validity of rules, recognizes that the OECD’s recommendations to equitably distribute tax responsibilities play a role. Yet criticisms about the OECD’s lack of democratic representation are unlikely to succeed in court (if an international tax law court existed). While this does not exempt the OECD’s proposed regulations from critique, the tools of traditional legal analysis may be insufficient here.
Thus, for scholars examining the shifts brought by a digitalized economy, it is essential to look beyond legal frameworks and consider insights from other fields on the broader issues of eroding tax bases and the pressures on welfare funding before justifying or criticizing such globally impactful reforms.
Cécile Brokelind
Pufendorf Institute
Theme DIGITAX
