Rethinking Tax for the Digital Economy After COVID-19

Abstract

Before COVID-19 arrived, policymakers from around the world were busy working on the makings of a new global tax consensus to reflect structural changes in the world economy as a result of the rise of digitalization. The pandemic disrupted this process by delivering a shock that resulted in major contractions for most firms even as it created enormous windfalls for others, prompting some to call for excess profits taxes, usually associated with wartime economies, as a corrective. But an excess profit or windfall tax designed during the world war period is not effective in today’s globalized and digitalized economy. To address effectively the fiscal crisis and tackle the challenges of the digital economy in a sustainable way, the world needs a “global excess profits tax”—a GEP tax. This article demonstrates that the vocabulary, the technical tools, and the political determination that were being built for the digital economy can and should be adapted to formulate a GEP tax. We establish the core elements of such a tax and demonstrate its compatibility with currently evolving thinking about how to tax highly digitalized firms.

Keywords: taxation, excess profits, digitalization, OECD, BEPS, Pillar 1, Pillar 2, windfalls

JEL Classification: D63, D78, E62, F23, F42, H20, H25, H87, K33, K34, O19, O34, O38