If Europe is the stage, a new social contract is the next act

Addressing the European Parliament in Strasbourg yesterday (19 January), French President Macron acknowledged that Europe requires a new growth model to adequately address growing inequality and today’s most pressing challenges. Tackling those in the digital world is among the top priorities of France’s European Council presidency.

It’s no mystery that Europe is in need of a new social contract. Coined during the Enlightenment in Europe, the term ‘social contract’ refers to the agreement in which members of a society are expected to pay taxes, with public services and social benefits guaranteed by the state in return.

The three basic services provided by governments in modern societies are healthcare, housing and education. These are identified as the necessary components needed to conduct a dignified life. They also go by the name of ‘social levellers’, as not only do they ensure that citizens can achieve economic prosperity, thereby enabling them to enter the taxation cycle which underpin our social benefits, but they are also pivotal to narrowing inequality gaps and ensuring a fairer society for all.

Taxes are the key enabler of the new social contract.

A 2021 McKinsey Global Institute report asserts that the world has never been wealthier. However, such unprecedented wealth has never been so poorly distributed. Over the past number of decades, our society has been rattled by global forces, such as climate change, neoliberalist policies and disruptive technologies, notwithstanding the upheaval our society has undergone over the last two years alone. Our society is now characterised by high unemployment, an ever-ageing population, educational curricula that are impeded by the speed of change and can’t keep up with the skills required by modern jobs, staggering inflation, massive public debt, climate change and disruptive digitalisation.

Has society regressed, or are we entering a new age? Our assumption that it is always darkest before the dawn may yet be proven right. Perhaps our society is actually experiencing the debut of a modern Renaissance?

With governments bailing out businesses and borrowing from capital markets, they now owe society, and particularly the next generation, productive and sustainable investments for a better future. The EU planned to source its financing from three new tax revenue streams: an expanded Emissions Trading System (ETS), the Carbon Border Adjustment Mechanism (CBAM) and a digital levy.

A taxation overhaul was long overdue – both for the international community and the EU. Current corporate tax rules are not fit for purpose. Take a look at digital companies, for example, which do not necessarily incur taxes in the same countries where their headquarters are domiciled, their services provided, or their profit captured.

This is all at the expenses of consumers and taxpayers. Big Tech, commonly referred to as GAFA (Google, Amazon, Facebook, Apple), has too often set the rules of the game itself, ignoring privacy and other ethical concerns. Big Tech has also grown exponentially, monopolising the market for digital services, and is now too big, even for itself. As the 2021 Frances Haugen whistleblower saga illustrated quite aptly, Facebook (now rebranded as Meta) has become an unconstrained force so powerful that it can shake entire societies. The events on Capitol Hill in the United States just over a year ago serve as a stark reminder.

However, this year will be different. 2022 has been hailed as the year when the world’s parliaments and regulators finally start to pass substantial laws to govern the tech industry.

The world sent a strong signal when the OCED approved a new global rulebook for taxation in October 2021. Within this framework, 136 countries will be able to tax 100 of the world’s largest, most profitable multinational corporations at a rate of 15% and reallocate more than €110bn in profits.

The European Commission’s ‘Business in Europe: Framework for Income Taxation’ (BEFIT), scheduled for 2023, will go even further and provide a single corporate tax rulebook for member states – the first attempt to unify the bloc’s collection of taxes came in 2011 with the proposal of a ‘Common Consolidated Corporate Tax Base’ (CCCTB), which failed miserably.

Both of these ground-breaking initiatives do well to ensure a fairer distribution of taxing rights. However, although BEFIT should be celebrated as a much-needed step towards greater European integration and completion of the single market, a new framework for business taxation is not enough to maintain the social contract’s legitimacy. Accountability from business is also paramount.

The EU has well understood this: even if it put on hold its own proposal for a digital levy to facilitate the global tax agreement, on digital, the Commission wants to go beyond taxation.

The Commission’s proposed Digital Services Act package aims “to create a safer digital space in which the fundamental rights of all users of digital services are protected [and] to establish a level playing field to foster innovation, growth and competitiveness, both in the single market and globally”. With the last digital regulation on e-commerce dating back to 2000, European regulators have long struggled to regulate the explosive market for digital services and products ex ante, and have historically punished wrongdoings ex post.

The EU now needs to get things right. The digital package is not only the opportunity to create a fairer market whose shares better contribute to society, but also the occasion to strengthen the geopolitical clout that this Commission has long sought.

The stars may be aligning for a new social contract, as France pushes to have the package approved before the end of its European Council presidency, together with other important sources of tax revenue for the bloc, such as CBAM. Macron is also very keen to strengthen the Union’s social pillar by establishing a European legislation on minimum wages — another much-needed piece to complete the single market puzzle.

France’s presidency comes at a critical time to reform the Union’s tax ecosystem and secure a modern legal framework that can finance sustainable and fairer growth. Can this policy push finally set into motion a new social contract for Europe?

The timing could not be more ideal, as Macron is determined to fill the void left in the continent by former German chancellor, Angela Merkel, while advocating for greater ‘technological sovereignty’ and limiting the power of tech giants throughout the EU bloc. Despite tricky elections ahead for him at home, Macron could very well kickstart a modern European Renaissance.