What does Agenda-Setting Theory Teach Us about the Digital Economy Tax Proposals?

By Wouter Lips

Problems and inadequacies of applying the common OECD tax standards to an increasingly digitalized economy have been predicted for nearly 20 years 1. Yet, The Base Erosion and Profit Shifting (BEPS) outcomes did not provide satisfactory answers to these challenges and the OECD interim report does not give much hope of a breakthrough in 2020. The EU Commission in March released a proposal for a virtual permanent establishment as a long-term common solution, that many appreciate as good rational policy. Yet few people think the proposal has an actual chance of succeeding, pointing to the US who will very likely object to a measure that seems aimed at “their” digital multinationals. Meanwhile, the Commission also proposed an “interim” measure, a three percent tax on the turnover of digital companies with a turnover exceeding 750 million euros, which in absence of permanent agreement could become quite permanent.

International tax policy making is messy and complicated and made in multiple rivaling policy arenas (OECD, EU-level, US, UN, national legislations, …) at the same time. The eventual policy makers, (ECOFIN ministers), themselves often are not tax technical experts – they are often not experts in many subjects they cover – and do not have time to become so. Therefore they rely on limited resources and imperfect information when deciding policy. Moreover, both left- and right-wing politicians have interest beyond choosing the most adequate or equitable tax policy: being seen “doing something” about tax scandals, returning favors to business lobbyist, protectionist tendencies, ideological interests, etc… Economist Herbert Simon 2 dubbed this situation “bounded rationality”, where individuals’ rational decision-making ability is impaired by time, resource and cognitive factors. In this view, decision makers prefer satisfactory solutions to optimum ones.

Political scientists have been trying to capture the complexity of policy making in light of limited resources, multiple arenas and bounded rationality. These frameworks act as lenses that provide richer explanations of the messiness of politics than rationalist behavior of functionalist explanations can.

One such lens political scientist use is the Multiple Streams Framework developed by John W. Kingdon 3. Kingdon tried to explain why some ideas made it to the top of the policy-makers agenda while others didn’t. Some ideas could be out there for decades without ever getting enacted, while sometimes out-of-the blue a new policy could be agreed upon in a matter of weeks.

Kingdon divided the agenda setting process into three independent “streams”. The first one he identifies is the problem stream. It consists of the issues policy makers pay attention to. Policy makers naturally have limited attention spans and not every issue stays at the forefront of their thoughts. International tax policy for example sees a surge in the problem stream after each tax scandal, and then slowly returns under the radar.

The second one, policy stream, consists of all the rivaling ideas that are floating around in the “policy primeval soup”. These ideas can be developed by policy administrations, think thanks, NGO’s, academia,… In digital tax policy, a wide range of ideas float around: The Common Consolidated Tax Base, virtual PE, Destination-based Cash flow taxes and border-adjustment taxes, extended profit splits… An idea like unitary taxation has been around since the 1930’s and pops up every now and again. Most recently by the report of the independent commission for the reform of international corporate taxation 4, yet it does not seem its time has come already.

The political stream is the third relevant stream. Kingdon defined movements in this stream mainly as domestic administrative and legislative turnovers, but changing political constellations apply to international or multilateral politics as well. The election of Emmanuel Macron as president of France, and his good relationship with Angela Merkel has clearly given a higher profile to tax policy in the EU for example.

Another important concept for Kingdon is coupling. The three streams move independently and with different dynamics, but there are instances in which they coincidently align. In such cases, a window of opportunity arises in which skillful policy entrepreneurs (which can be policy makers, but not always) can couple the three streams to move their favored policy to the top of the agenda.

Take FATCA for example. The idea of automatic exchange of information has been kept alive in the US during the 2000s in the policy stream by politicians such as Senator Carl Levin and NGO’s such as Global Financial Integrity. In 2009 a democratic congress and democratic presidency made for a favorable political stream. The Financial Crisis, the UBS banking scandal and Sen. Levins’ hearings opened up the problem stream. This meant a window of opportunity existed during 2009-2010 for automatic exchange of information. An example of skillful policy entrepreneurship is the tacking-on of FATCA on the HIRE employment restoration act. A separate FATCA law would have meant scrutiny in the Ways and Means committee where it would have led to much more resistance. Making it a part of the HIRE act meant it was handled in the Appropriations committee, out of the eye of the tax experts in congress, strongly improving its eventual chances of enactment.

So what can Kingdon teach us about the likability of the EU digital proposals passing? First of all, we have to identify the policy arenas where this process plays out. The most obvious is the EU itself. The second arena where these policies will have to be decided is the OECD task force on digital economy in 2020. A third relevant policy arena are the EU-US external relationships. The digital tax proposals are seen by the US as a GAFA (Google, Amazon, Facebook, Apple) cash grab, and not every EU country is prepared to let relations with the US sour over tax policy.

When weighing both policy proposals in the policy stream, the digital revenue taxation route is generally not seen as a viable or adequate solution for the problems of digitalization and corporate taxation. Nevertheless, several countries have recognized them as temporary solutions, as the OECD interim report5 indicates. The virtual PE concept has also been floating in policy circles for quite some time. It was hinted at during BEPS for example, and it is discussed frequently in the OECD digital economy public consultation submissions. This indicates that stakeholders are anticipating and debating the introduction of such changes to the PE definition.

In the political stream, both proposals however are facing rabid opposition in all three arenas. Within the EU, there is heavy opposition from Ireland, Belgium, The Netherlands and Denmark against the interim measures. While a bloc of Central European countries fear that the thresholds in the virtual PE proposals might mean that small countries will get cut off from their fair share of the tax6. While the leadership of Macron has given a new dynamic to corporate taxation of digital giants in the EU, it is unknown if this opposition can be overcome.

In the OECD arena, the interim report and presentation released in March ’18 clearly delineated three groups of countries who basically “agreed to disagree” on the desirability of interim measures5, while a long-term proposal is to be delivered in 2020. In this forum, no consensus is present at the moment either. The US is staunchly against both proposals. Under the Obama administration, there already was irritation at what was perceived as the EU singling out US Multinationals7 . The Trump administration, which has a far more zero-sum view on economic matters, will be undoubtedly aggravated and might even retaliate. Germany fears this last scenario might play out in trade and tariff disputes6.

Whether or not entirely true, the framing of the digital tax proposals as cash grabs is very tenacious. While Pierre Moscovici is being very staunch in his communication that non-EU digital firms will also be targeted, French ministers have been on record applauding the “GAFA”-tax.  The inability to change this framing can be seen as bad policy entrepreneurship on the EU’s side.

However, within the EU politically, the interim tax proposal has one edge over the virtual PE proposal: it can still be done unilaterally or through enhanced cooperation if nine countries agree to it. One Commission official even went on record saying that if there is not agreement in the Council of Ministers on the temporary measures by the end of 2018, there will be a move towards enhanced cooperation” 8. We will probably see at least some countries within the EU go through with a form of revenue tax for digital economy, even in absence of EU agreement.

With regards to the problem stream, it is difficult to predict windows of opportunities and how long they will keep open. Right now, there seems to be an opening. We’re still in the wake of the paradise papers scandal, and the recent Facebook scandal have a lot of politicians worried about the adverse effects of digital giants on societies. A digital revenue tax in the eyes of policy makers could also function as a symbolic measure to show the primacy of politics and that even mega-companies are subject to the law. Because of Fear of populism and Brexit, pro-EU politicians also need a victory to show a rationale for the EU. A tax on digital companies that seem to exist above nation states, may fit that need.

It’s impossible to predict if this opportunity will still exist two years down the road, when the long-term proposal has to be agreed upon in the OECD. There is however a distinct possibility that it won’t and that taxation of the digital sector will be off the public agenda for other items of the day. In that case, it seems unlikely that EU negotiators will want to spend much political capital against the US to push the long-term proposal of a virtual PE.

Interim proposal (revenue taxes) Long-term proposal (virtual PE)
Policy Stream Generally seen as unsound policy, but gets more traction around the world Generally seen as rational policy, hinted at repeatedly and anticipated upon in OECD.
Political Stream Can be introduced unilaterally or though coalition of the willing. Requires EU consensus

Requires US approval

Requires OECD consensus

Problem Stream On the agenda now, in wake of several tax and Facebook scandals Won’t be on agenda until 2020, window might close


In conclusion, while policy-wise a revenue tax is hands down a worse outcome than the proposal of a digital PE, the political constellation is far more favorable to the first idea. While right now, a window of opportunity due to the three streams coupling seems to exist, and France is showing leadership on the issue, it might not be down the road. It seems that the revenue tax proposal has a chance of being realized, at least in some large EU countries. This moment might be long gone when it’s time for the long-term proposals to be negotiated within the OECD, while opposition from the US is likely to remain rampant.  As many commenters predict, the interim proposal will very likely become quite permanent.


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  2. Simon H a. Rational Decision-Making in Business Organizations. In: Nobel Memorial Lecture, 8 December, 1978. ; 1978. doi:10.2307/1808698.
  3. Kingdon J. Agendas, Alternatives and Public Policies. Second Edition. Essex: Pearson; 2014.
  4. Faccio T, Picciotto S, Brockmeyer A, et al. Alternatives to the Separate Entity / Arm ’ s Length Principle. 2017;ICRIT.
  5. OECD. OECD/G20 Base Erosion and Profit Shifting Project Tax Challenges Arising from Digitalisation – Interim Report 2018.; 2018. doi:10.1787/9789264293083-en.
  6. Plucinska J, Vinocur N, Smith-Meyer B. Europe’s digital tax map: Where countries stand. Polit EU. 2018. https://www.politico.eu/article/europe-digital-tax-map-where-countries-stand-analysis-deep-divisions/. Accessed April 16, 2018.
  7. US Department of the Treasury. The European Commission’s Recent State Aid Investigations of Transfer Pricing Rulings. White Pap. 2016.
  8. Kirwin J. EU to Impose Two New Taxes on Digital Giants. Bloomberg. 2018. https://www.bna.com/eu-impose-two-n57982088898/. Accessed April 16, 2018.