For the past several months, the Trudeau government has been on a crusade against the so-called GAFA companies (Google, Apple, Facebook, and Amazon).
Different government departments have stated that these tech giants are not paying their “fair share” in Canadian taxes and use news content without compensation. They are looking to the European GAFA tax and the Australian media bill for inspiration in creating a new series of rules, including two major laws which would be the first of their kind in North America.
The problem with this regulatory project? These two measures are based on economic assumptions that do not hold water, and they will only end up hurting Canadian consumers.
The first proposal is for a GAFA tax like the one introduced in France, which is an additional tax levied on certain digital companies. This measure responds to the targeted companies supposedly having gotten away with paying less income tax than other companies, which is false. Indeed, the very name is misleading, for this tax is really a surtax, collected not on profits like an income tax, but on revenues. Revenue taxes are far more punitive than income taxes and are among the levies most strongly criticized by economists.
In France, this tax is applied in a completely arbitrary manner – not levied on all profits above a certain threshold, but rather on a specific list of companies, including just one French firm. Several countries, such as Ireland, opposed the idea of a pan-European tax, which is no surprise since they are home to the European headquarters of certain companies and would be penalized by it.
Following the adoption of the GAFA tax in France, Google announced that the fees it charges for advertising on its platform would increase by two per cent, or nearly the entirety of the three per cent tax. Once again, we can see that tax hikes largely get passed along to customers, in this case those companies that buy advertising on Google. In turn, those who buy products advertised on Google can expect to see a portion of those increased costs passed along to them as well.
The Canadian government’s second proposal is a law forcing online companies to remunerate “traditional” media companies when the latter’s content is published on the former’s websites. The government justifies this law by the loss of revenue that traditional media has suffered due to the shift of advertising dollars to the web giants.
But the adoption of this law ignores why advertisers prefer sites like Google or Facebook. Their economic incentive to reach very precise target audiences will not disappear as a result of the law. Its only effect will be to punish companies that will have to shoulder an advertising fee hike which will again be passed on to their own customers.
This law merely creates a link tax, punishing websites that share links to news sites. This kind of law is extremely exploitable by media companies, which could themselves publish their news on Facebook and Google and then demand compensation.
Moreover, Facebook’s news ban in Australia proves that the news media need Facebook more than the other way around. After all, it is the media that need the internet to reach a bigger audience. The web giants can survive just fine without them. This power relationship makes the idea of forcing these sites to pay for content as outlandish as forcing restaurants to pay customers to taste their food.
A similar economic argument can be made regarding the government’s notion to subject digital companies to Canada’s Broadcasting Act and thus to the authority of the CRTC. The idea of threatening international websites with fines if they do not respect certain standards regarding investing in local production and even banning a site in case of non-payment of such fines demonstrates glaring technological illiteracy. This operating method does not take into account the way the Internet functions today. There are more and more alternatives to popular sites emerging all the time. Banning a service or forcing content that users don’t want will only push them toward other platforms that are not subject to those standards, circumventing geolocation restrictions if need be.
Attempts to force unwanted content on the population are simply doomed to fail. An example of this kind of futile policy is the CRTC requirement for Quebec radio stations to play francophone music. To respect the quotas, stations play the vast majority of francophone songs outside of peak listening hours. Even when the government does get companies to collaborate, if the public is not interested in the content, it will end up in some forgotten corner of the platform, remaining online solely to justify respecting some rule or another. And once again, the additional costs to produce and provide this unwanted content will be passed on to customers, who will be forced to foot the bill.
In all of these cases, it’s consumers who end up being hurt by the various laws proposed by the federal government. They’re the ones who see the prices of different online services rise in response to arbitrary content quotas, to the propping up of industries that need to reinvent themselves, and to arbitrary taxes on innovative companies that create interesting products.
It’s time to stop punishing consumers for the choices they make simply because they fail to conform to the choices a bureaucrat would make for them.
Olivier Rancourt is an Economist at the Montreal Economic Institute (MEI).
Olivier is one of our Thought Leaders. For interview requests, click here.
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