Answers to questions about by my proposal for a tax on targeted digital ads. (New FAQs added 9 am EDT on May 7.)
Can't tech firms evade any tax that a government tries to impose on them?
Firms can easily avoid a corporate income tax. The problem with a tax on income is that income has no location. It is defined as revenue (which can be pinned down in one place) minus cost (which for a big firm will be incurred in many other places.) Using clever accounting, all firms have used this ambiguity to move income to low tax jurisdictions. Tech firms have been particularly good at this. As a result, the revenue collected from the corporate income tax has been falling and will continue to fall.
Because revenue has a location, a tax on revenue will not be subject to this problem.
If states set their own ad tax rates, won't there be a race to the bottom?
Tax revenue is the product of a rate times a base. There is a “race to the bottom” when states try to tax a base that is highly mobile. It moves to the jurisdiction with the lowest tax rate. Eventually competition drives the tax rate and revenue to zero.
My proposal is a tax on a type of corporate revenue. Revenue is not mobile. It is attached to a user with a location. As a result, a digital platform has very little opportunity to use accounting conventions to change the origin of the revenue it collects. There is no race to the bottom.
How would this work? Suppose a company collects $100 million for ads it displays to people who live in the United States and that 7% of the users who see the ads live in New York. New York could tax the $7 million in ad revenue that the company collects for showing ads to its residents.
Won't they find another way to avoid the tax on targeted digital ads?
I hope so. This is a tax that we don’t want tech firms to pay. We want them to switch to a more normal subscription model that yields revenue that is not subject to this tax.
Why isn't there a conversation about a progressive corporate tax?
I’m sure that someone has proposed this somewhere. If you have a reference, send it to me via the Other Inquiry form. But it is not something that I’ve ever encountered in a policy discussion among economists and I don’t know why. For someone like me who thinks that unchecked, concentrated power is dangerous, a progressive tax seems like a natural solution. If big is bad, tax big.
I’d rather live in a society where innovative firms get a tax benefit when they spin out profitable new divisions as independent firms; and where new entrants can survive and thrive. I don’t want to live in a society where the business model for every new entrant depends on being absorbed into some dominant monolith.
Where would you put the brackets for this progressive tax?
Let’s focus on the United States. To get started, set the tax to zero for ad revenue under $1 billion per year, then increase the marginal rate on each additional billion.
How high should the tax rates be?
High enough to change behavior. The goal is make the market work, not to collect revenue. If a small increase in the tax increases revenue, it isn’t high enough. We want to be on the back side of the Laffer curve.
What if a single firm, controlled by a single person, that produces everything is efficient in the sense that it minimizes total cost of production. Would you still want to use the tax system to prevent the emergence of this über-firm?