Taxing gatekeepers ~ II

Apart from addressing the evils that social media today are unleashing on people, like addiction to digital contents and games, fuelling mental health issue and fomenting hatred, anger and extremism online, a sufficiently high digital ad tax rate would also stimulate innovation by encouraging new business models that allow good ideas to scale up, something that the behemoths today are ruthlessly suppressing

- GOVIND BHATTACHARJEE

Unlike conventional advertising, digital advertising increases impact by individualising ads while also reducing businesses' advertising costs. Nobel Laureates Acemoglu and Johnson are not the first to suggest a tax on revenues from digital ads. In 2021, Paul Romer had proposed a progressive tax on such revenue. Progressivity offsets the increasing returns on investments that give bigger firms an advantage over their smaller rivals. Revenue is a better base than income for taxing transnationals because unlike income, sources of revenue cannot be shifted to low-tax jurisdictions. Thus, taxing revenue from digital advertising is the best way to encourage companies to switch to the less dangerous and more acceptable way to shift to a subscription-based model where users pay only for the services they provide. Romer wanted it to target monopolies like Facebook or Google which have the power to influence our policy decisions.

Of course, a sufficiently aggressive tax can always drive firms to engage in tax avoidance, which is counterproductive if the objective is to raise revenue. But the objective of a tax on digital ad revenue is only to encourage such avoidance by disincentivizing the firms to expand their stranglehold of digital ads. Such avoidance can happen in two ways - bigger firms may split themselves into smaller ones but they will now be open to more competition from other similar sized firms, or they shift to the usual business model where price depends on the value provided by the seller - in short, a model based on subscriptions, like that used by Microsoft, Netflix or Duolingo. Such firms have no need to track all online activities of their users, or, as Romer said, "to turbo-charge animosity as a way to get people to spend more using their services."