We’re in the season of full-blown economic madness.
No, not that madness. This madness: A Nobel Prize-winning economist is recommending that to save democracy, the Federal Government should tax advertising. That’s right—the preservation of democratic institutions will come not from encouraging more voter participation, not from decreasing (or increasing) the military budget, not from spending more on education and literacy—it will come from taxing advertising.
We would suggest that Paul Romer, the economist who made this recommendation last week in the New York Times observe a bit more closely what digital advertising has accomplished.
Advertising is the stimulus for economic activity in nearly every sector. Research by the late Nobel Laureate Dr. Lawrence R. Klein demonstrated that advertising generates around 16 percent of all U.S. sales, or approximately $5.6 trillion.
Considering the economic importance of the digital advertising industry, a tax on digital advertising revenues—which fund not only Google and Facebook, but also millions of newspapers, small publishers, and app developers—is clearly a ham-fisted and arbitrary solution to Mr. Romer’s concerns.
And to what end?
It is unlikely that such a tax would have any meaningful impact on the policy issues that Mr. Romer highlights. Take the issue of misinformation. The most pernicious form of misinformation is government-sponsored propaganda which is immune from a tax on advertising, as this content is driven by political, rather than economic, incentives.
And even if this approach did have some negligible impact on misinformation, any benefit would be far outweighed by the reduction and availability of legitimate and necessary content and services. By Mr. Romer’s logic, shutting off the internet would also be an effective solution to address online misinformation, but the solution is far more harmful than the problem. Considering Mr. Romer’s past economic research about the power of information and ideas, I would hope he recognizes the paradox in his suggestion that we reduce Americans' access to information.
Mr. Romer is also incorrect to say that a tax on advertising would simply encourage companies to move to an ad-free business model. The vast majority (85 percent) of U.S. adults would prefer an ad-supported internet where most content is free to a paid internet where everything costs money because there is no advertising. Many people would be unable or unwilling to pay thousands of dollars in additional subscription fees on top of their internet bill.
Furthermore, research has shown that the taxes on online services won’t just be felt by ad-funded services. Advertisers (i.e. nearly every American business) and consumers would also be significantly negatively impacted. Just this year, a study by Deloitte Taj on a highly controversial French digital advertising tax proposal found that it would mostly be borne by consumers and advertisers, not tech companies. Indeed, 55 percent of the tax burden would be passed on to end consumers, who would pay higher prices for every good and service they use, online or offline.
Focusing on Mr. Romer’s lazy assault on targeted advertising, targeting and social media advertising are simple and cost-effective methods of increasing sales, and they also help further a relationship with customers, which is increasingly what Americans are craving with their online retail and content consumption. The tax idea that Mr. Romer floats would affect far more companies than Google and Facebook—it would negatively impact the Boston Globe, and Pandora, perhaps even your favorite cooking blog.
We are in a moment when Americans are rightfully skeptical, curious, and upset about how their online data is shared and sold, and companies both large and small have gotten the wake-up calls about the necessity for increased transparency and accountability. But recklessly asserting that online platforms have “undermined trust in democratic institutions” is a flimsy soundbite, and Mr. Romer’s further assertion that they “stifle innovation” is even more galling.
In playing Mr. Romer’s theory forward, to save democracy, let’s tax Anthony Morganti, a Buffalo photographer who uses YouTube to market his Adobe Lightroom and Photoshop presets to other photographers across the US.
To save democracy, let’s make it more expensive for ThirdLove, an online size inclusive lingerie startup, and Warby Parker, the digitally native eyewear brand that’s made lower-priced glasses available to millions, to advertise on Hulu—thereby forcing them to raise prices for their consumers.
If we want to address the legitimate policy issues that Mr. Romer raises, including privacy, competition, and misinformation, then we should address them with thoughtful and targeted policies, not blunt instruments that risk America’s economic prosperity.
A thoughtful and targeted approach to legislating in the digital economy is our best hope of addressing important policy concerns. Taxing American businesses that are trying to reach new customers is not.