Tuesday, March 23, 2021

Luigi Zingales, Bethany McLean, and Paul Romer: "Why we should tax digital advertising"

From McLean and Zingales' Capitalisn't podcast via ChicagoBoothReview: 

The political power big tech firms wield, and the limited competition they face, have prompted warnings from politicians, regulators, economists, and others. Many have argued we should turn to antitrust laws as a way to address these concerns, but Nobel laureate Paul Romer says they may not be enough.

On this episode of the Capitalisn’t podcast, hosts Luigi Zingales and Bethany McLean speak with Romer about how the implementation of a digital advertising tax could address the size and business models of these tech firms.

Paul RomerWe shouldn’t underestimate the ability of these firms to capture the apparatus of government and use it for its own benefit. 

Bethany: I’m Bethany McLean

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism. 

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process. 

Luigi: The Stigler Center at the University of Chicago, which produces this podcast, last year had organized a conference with the ambitious title of “Monopolies and Politics.” At the end, we reserved a special place for people who have some proposals on how to move forward. Among those, a particular role is played by Paul Romer. So, we decided to invite to this podcast Paul Romer, who is a Nobel Prize-winner for his ideas about endogenous growth. Today, we’re going to focus on one particular aspect of his vast production, which is an idea he has about how to tax digital advertising and why this tax could be a way to deal with the problem generated by digital monopolies. So, it’s with great pleasure that we welcome to our podcast Paul Romer

Bethany: I read your essay in the New York Times on the tragedy of the commons. And I thought, for the noneconomists who are listening to this, it might be interesting to start with the concept of the tragedy of the commons and why it applies to big tech. 

Paul RomerWell, the commons is this evocative phrase and this analogy that helps us think about things we share, and where one of us could damage it. And that hurts all of our fellow citizens. And I thought that digital advertising was like a form of pollution. It was causing significant harm in the economy. The kind of harms included the incentives to collect all of this invasive information. This process, it’s been called surveillance capitalism, but “commons” here I think is partly trust that when people are afraid they’re being tracked, they lose the ability to trust firms. This became a real holdup in terms of our ability to do something like digital contact tracing during the pandemic. So, trust is something that we share but can be eroded. Also, some sense of, like, comity, goodwill towards those with whom we disagree.

One of the problems with this model of digital advertising is, is that the incentive for a firm like Facebook is to maximize engagement. They don’t want you to feel happy about using Facebook. They want you to spend a lot of time on it. And what they discovered is by getting you angry and in some acrimonious exchange back and forth with somebody else, this is the best way to keep you online for a longer period of time, thereby giving them the chance to expose you to more advertising. My proposed solution was this tax on advertising. We say, well, if you don’t want people to do something, tax it. And tax it, not because you’re looking for the revenue, because you want them to stop doing that bad thing. 

Bethany: Explain what the tax solution is.

Paul RomerThe idea is just to put a tax on the revenue earned from this digital advertising model, on the theory that it’s a dangerous business model. It creates bad incentives. And we want firms to shift to some other business model, like subscription fees in exchange for digital services. And the reason it makes sense to make it a tax on revenue is that you know the geographic location where revenue is earned. Income is the difference between revenue and cost. Cost is earned in other places. So, we don’t have, even in principle, any way to define where income geographically is earned. That means that firms can shift income to jurisdictions that have lower taxes. And so that means that a corporate income tax is always going to be subject to this kind of race to the bottom between different jurisdictions. But now, if a particular state like Maryland, which has decided to try this, passes a law that says we’re going to put a tax on revenue that a firm earns from showing ads to people in Maryland, Delaware can compete by saying we’re going to have zero tax, and that doesn’t cause any race to the bottom. 

Bethany: I was thinking about the ability of firms to either gut their regulators or evade them in other ways. And I think that’s true more often than not. When you think of Fannie and Freddie and the runup to the financial crisis with their regulator, or the big banks with the New York Fed, it does strike me that you need the government not to be the sleeping beast or asleep at the switch. You need the fear of the government. You want the government to be trustworthy and not to abuse its power as well, but you need firms to believe that the government can see and can act, or all of these things just evolve into all of these wrinkles and ways to evade and play games, right? ....