The Digital Services Tax as a Tax on Location-Specific Rent

Abstract

In 2018, the European Council and the UK and Spanish governments each proposed to introduce a Digital Services Tax (DST), to be levied on the revenue of large digital platform companies earned from advertising, online intermediation, and/or the transmission of data. We offer a rationalization of the DST as a tax on location-specific rent (LSR). That is, just as many countries already levy royalties on rent earned from extracting natural resources, one can think of the DST as a tax levied on economic rents earned by digital platform companies from particular locations. We provide stylized examples showing how rent earned by digital platforms can be traced to specific locations, even when users from multiple jurisdictions participate. We then elaborate the analogy between the DST and resource royalties, and analyze the DST’s economic incidence as well as its effect on consumer welfare using a simple model. Finally we explain why the DST’s significance goes beyond current concerns about multinational tax avoidance, in that it indicates directions for redesigning international taxation in the age of labor-replacing AI technology.