Storm in the cloud: A study on the macroeconomic impact of the UK’s digital service tax

Abstract

The nature of the digital economy puts pressure on traditional taxpractices, as it is frequently characterised by high returns from intan-gibles. In this paper, we assess the macroeconomic impact of thedigital services tax introduced in the UK in 2020. We employ theCORTAX model, which is a macroeconomic model elaborated for theMember States of the European Union, the UK, the US, and Japan.The model strongly focuses on corporate taxation and multinationalfirms. To be able to represent the digital sector, a major extension ofthe model has been introduced to expand the model from one sec-tor to two, allowing the digital sector to be modelled separately fromthe rest of the productive economy. The results suggest a negativeimpact on GDP from the introduction of the tax but a gain in welfareand consumption for the UK and small positive spillovers for closetrading partners