The Canadian Government Cancels Its Digital Services Tax, Giving Trump a "Win" that Will Almost-Certainly Create More Headaches for Us in the Future
If you give a mouse a cookie, he’s gonna want a glass of milk
Just two days after Donald Trump threw a temper tantrum over Canada’s Digital Services Tax (DST), which was to come into force today, the Canadian government has cancelled it.
I am not surprised by this cancellation because there are still a lot of people who (astonishingly) think appeasing Trump will lead to a trade deal which will not be violated by Agent Orange within a few months.
Never mind the substantial evidence to the contrary — if we keep wishing upon a star that deep down, Trump is just a great business man and negotiator who plays 7D chess, then eventually we will satisfy him and cats and dogs will live in harmony.
The rationality of these people is so bounded it makes me want to cry.
To be clear, I am not against taxing big tech companies when it makes sense economically.
For example, whether big tech or otherwise, foreign companies who operate in Canada should pay the same taxes their Canadian competitors must pay. This argument is not just one out of “fairness”, but one that appeals to basic competition economics: differential tax treatment based on a competitor’s geographic location creates an artificial competitive advantage, and that is a bad thing.
But then there are the following criticisms of the DST:
Critics of the tax took issue with Canada’s refusal to wait for a global deal. They also opposed the retroactive application of the tax, which means companies will have to pay several years’ worth of taxes at once.
U.S. businesses and politicians argued the tax targets U.S. companies. The tax applied to all large tech companies no matter where they were based, but because so many of those companies are American, U.S. firms would have paid the bulk of the money.
In a letter earlier this month, 21 members of Congress said U.S. companies will pay 90 per cent of the revenue Canada will collect from the tax, and that first payment will cost U.S. companies US$2 billion.
While I would also prefer a global deal, in my experience people only argue for “unanimity” when they do not want something to happen at all. I once had a good conversation with a New Brunswick government official at a transportation conference on the issue of cabotage, where she argued Canada should not open its airline markets to foreign competition until foreign countries do so for us first. She specifically argued we should use cabotage as a “bargaining chip”.
While I do not doubt her sincerity on the subject — I do believe she was not making that argument cynically — our trading partners are certainly thinking the same thing. Therefore, following the rule that we should never move first ensures nothing ever gets done.
As for the retroactive application of the tax, I agree with that criticism. Imagine a government tells you it not only wants to make you pay more taxes, but it wants you to do so on your historical income or spending. If it did so because of something you did wrong under clear existing rules at the time, then that is fine. But when you followed all of that government’s rules in the past, only for it to suddenly change those rules retroactively, then it will make you wonder if it will pull that stunt again in the future.
It is the same with businesses, whether Canadian-based on multinational: they will be more hesitant to invest in their Canadian operations — including hiring Canadian labour — if they think a government will suddenly change the rules retroactively.
In short, tax changes should be clear and only apply to future actions, because then the subjects of the tax have the ability to modify their behaviour accordingly. They will also have more faith in the system if there is certainty in how it works.
As for the argument that the DST specifically “targets” U.S. business, that is just malarky. As noted in the above quote, they just happen to be dominant in these markets. I am not sympathetic to businesses that work hard to become dominant in their markets — perhaps using methods that violate antitrust laws — and then complain when they also have to incur known costs of their dominance.
I also support the DST from an equity perspective. As stated in the same National Post article:
The tax was only to cover large companies, those that have worldwide annual revenues greater than 750 million euros per year and Canadian digital services revenue greater than $20 million per year.
This is an extreme version of a proportional tax: businesses with revenues below a set amount pay nothing, while those above it pay the full tax rate.
Overall, I am a big fan of the four keys to a better tax system identified and explained by Greg Mankiw:
Broaden the tax base and lower the rates
Tax consumption, not income
Tax bad things like pollution, not good things like productivity
Keep it simple, stupid!
On that note, along with my wife and partner in everything,
, I wrote the following post back in February which provides a lot more detail on optimal taxation, both from an efficiency perspective and an equity one:
But despite my concerns with the DST, I remain very worried by the signals sent by the Carney government to Trump with respect to cancelling the tax, especially since it was only two days following Trump acting like a baby who needed his diaper changed.
I understand Prime Minister Carney’s need to be a politician now, and the fact he needs to deal with passionate demands from people on opposite sides of the debate, but as I argued last Friday:
…the Carney government needs to be very careful regarding what signals it sends in response to Trump’s latest tantrum. For example, it would be a very bad optics to cancel the DST now — even if it was for completely unrelated reasons — because it would send a signal to Trump that his bullying is effective.
And what does a bully do when you give them your lunch money today? They take that as an invitation to take it again tomorrow.
During my education years and my career, I have followed advice provided by my professors, advisors, and senior colleagues to never be too certain with my predictions, because Economics is a social science so nothing is guaranteed.
But I can all-but guarantee you — based on substantial historical evidence — that appeasing Trump on the DST will only encourage him to hammer us more the next time he becomes cranky from diaper rash.
To repeat what I have written many times in the past:
And that is the problem with a lot of arguments made that we should just “negotiate” with him and convince him that this is bad policy for the U.S.: they are implicitly assuming we can appeal to rationality, and he is not rational.
…
So the only reasonable response is not to roll over and show him our bellies, hoping beyond hope he will respond to logic.
Thank you for reading this post to the end. If you value what I write, then I ask you to please consider a paid subscription, so I can continue to write more and better articles for you. Regardless, I am happy you are here!
That’s one man’s opinion.
I’m not jumping to conclusions based on the opening hand of negotiations.
We’ll see how this plays out.
Let Canadians know when you discover the existence of ‘conundrums .. & how to design, initiate & exploit them via Yellow Media .. Jenni Byrne & Danielle Smith are light years ahead of you - as is Yellow ‘conservative’ Media - which Knows No Borders.. & is of course Embedded within CPC & UCP & Rewarded in TaxPayer Dollars..
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