The Trump Tango: Was Mark Carney Right To Cancel the Digital Services Tax?
It's good to have a strategy. It's good to deploy tactics to serve that strategy. But at some point, the government needs to deliver a big win.
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Prime Minister Mark Carney is pledging legislation to rescind the digital services tax (DST) that has cheesed off the United States for years. The Americans didn’t like that the tax would disproportionately affect US companies, which it would because big tech companies are disproportionately American. But Canada now says it won’t collect the tax, which was due this week and would have raised billions in revenue from tech giants who pay little to no tax in the country. It was dramatic, 11th-hour stuff. After years of griping and threats of trade dispute challenges, the Americans went (figuratively) nuclear. Donald Trump broke off trade talks, citing the DST. So Carney went elbows…neutral? Down? To the side?
Was it the right call? It’s not obvious to me one way or another, but I come down, somewhat reluctantly, on yes. With a caveat.
In the Disconnect, Paris Marx casts the move as caving. It was precisely that. The White House itself branded the move as such and I suspect more than a few Liberals would privately agree. Marx notes the robust and growing influence of tech companies in Washington and Ottawa, and the Carney government’s big-tech friendly agenda. In the who whom of this one, tech seems to be calling the shots, with the government doing the work of mananging the country in their interests.
Over at the National Post, Tracy Moran writes that the tax had to die so that trade between the US and Canada could have a shot at life, which is probably true, too. But then there’s the fact that the DST was a giant mess. Michael Geist threw up his hands at the whole thing. His June 30 piece on the cancellation of the tax is worth quoting at length for its summary of how poorly Canada has handled the file.
It is hard to overstate how badly the government managed the DST issue over the past five years. It alienated allies by pushing ahead with the DST despite efforts at an international deal at the OECD, stood alone in rejecting an extension of a moratorium on new DSTs, made the DST retroactive which solidified opposition, and continually downplayed the concerns of successive U.S. Presidents and Members of Congress from both sides of the aisle. Meanwhile, when companies began passing along the costs of the DST to Canadian businesses, it did nothing. And when they urged the government to delay implementation to at least allow for the issue to be incorporated into a broader trade pact, it ignored the advice.
Again, I hate to say it, I really do, but cancelling the tax was probably the right move. I’m the last person to argue we should let tech companies off the taxation or regulatory hook. We shouldn’t. But in governing a country, principle must often yield to practical goals. You might call it utilitarianism — in short, the good is what produces the greatest good for the greatest number (please note the considerable oversimplification). But I think of it more in terms of Aristotelian practical wisdom: you need to do the right things, in the right ways, at the right times, and for the right reasons. The DST didn’t fit the bill.
Critics who point out that scrapping the DST won’t necessarily placate Trump and help secure a trade deal raise a fair concern. Moran argues that it can’t hurt, and I think that’s true. But we must be realistic about what killing the tax does: it gets us back at the trade negotiation table, which is to say it gets us back to where we were last week. That’s progress…of a sort, but it’s nothing to strike a monument to commemorate. You’ll also recall that Trump has deployed a variety of justifications for applying tariffs to Canada, including border security and fentanyl trafficking to military spending to supply management in the dairy industry to the DST and beyond. One gets the sense he’s making it up on the hoof. How do you negotiate with someone like that? By golly, you just have to try your best!
The most cogent criticism of Carney for ending the DST isn’t that he ended it, but that up to and including now he’s presented himself as the elbows up, tough-on-Trump guy who was here to Make Canada Great Again. The DST was a mess executed messily, so a reset, or even a tactical retreat, isn’t necessarily a bad move provided Canada comes up with a long-term plan for taxing (and regulating) tech giants, ideally in concert with other states (which was the initial plan). But at some point, Carney is going to have to admit that some circles can’t be squared: you can’t simultaneously do a John Wayne at high noon bit while cosplaying Machiavelli’s prototypical wily prince. I mean, you can try, but people are going to notice the inconsistency and have something to say about it.
Canada is better served by a strategy that counsels a careful, realist approach with tactics to match. That includes deference where necessary, tactical retreats, and trade-offs. It assumes we know our place, our strengths, our goals, our values, and our limitations. Then we bargain as best we can. We ought to maintain red lines because we ought to have some self-respect and at bedrock a commitment to at least something approaching a set of principles.
Under this paradign, the DST as designed and deployed still doesn’t rise to the level of a non-negotiable. And yet, while the government has a reasonable enough case for ditching the tax and working Trump with concessions and flattery, at some point it will need to deliver results on trade while being clear where the boundaries of negotiating become inflexible. Carney has sold himself as the man with the plan — “plan beats no plan,” he says. He’s asking the country to trust that plan and by extension his government. For now, the country is obliging. It won’t forever.
A pledge to Trump is only worth as much as a Trump pledge.
It’s just a stalling tactic to allow focus to be maintained on trade talks.
Will it actually be rescinded?
I’d guess only if the trade talks result in enormously larger wins for Canada.
Even CRA has just said that they won’t process refunds on previously paid DST until after legislation recinds the tax (no sooner than mid September).
Don’t get sucked into US media-driven drama.
💪💪🇨🇦
Minutia first: you strike a medal, not a monument; and High Noon was a Gary Cooper movie, not John Wayne.
Signed,
Your friendly neighbourhood pedant.
But seriously, getting rid of the DST was a good idea for all the reasons you note, plus one more:
Income beats consumption as a tax base for individuals, because income is a better gauge for how much individuals benefit from government (i.e. why we pay tax in the first place). Sure, consumption may be more economically efficient but that's not the point - efficiency isn't the critical criteria.
The benefit corporations receive though, isn't best measured by their income, and certainly not their revenue (like the DST), but by how much they invest, in both capital and labour, in CANADA. Taxing both labour and capital instead of income puts the onus on management to ensure that they are both invested productively. Yes, that will no doubt reduce prices for each, but prices will only retreat until the ROI reaches a point that makes it worthwhile to invest. The result will be that efficient corporations (and industries) will attract more investment, which is what you want for a productive economy.
As far as reducing wages, that can be mitigated by a partial basic income, which would also negate the need for minimum wages. The best part is that all this can be done without actually increasing the tax take overall (both corporate and individual). A major overhaul of the individual tax/welfare system, augmented by the basic income replacing provincial transfers would be sufficient. If the provincial transfer idea seems out of left field, consider that the basic income provides a federal transfer where it's needed most on a far more granular (i.e. accurate) level than provincial government transfers. And best of all, integrating it with the individual tax system (treating it as a negative tax) provides a mechanism for people earning their way out of needing it, without further intervention by government.
You can argue the point of an excise tax for products where the tax can be directed to paying for the cost some government product (fuel and highways, tobacco/alcohol and health) or just because it's in a general social interest to reduce usage (oil), but the DST has no such rationale.
It was just plain bad tax policy.