Menu
Tax Notes logo

Tax History: Taxing Ads for Fun and Profit

Posted on Nov. 26, 2018

Ever since there was advertising, politicians have been trying to tax it. In 1765 Britain’s famous stamp tax included an advertising levy, requiring a payment of two shillings for every ad regardless of a publication’s cost or circulation. Much later, during the Civil War, Congress imposed a 3 percent tax on the gross receipts from advertisements published in newspapers and magazines.

These early experiments were not especially successful: The colonial levy helped pave the road to revolution, and the Civil War tax badly underdelivered in terms of revenue. However, advertising remained an attractive target for revenue-hungry lawmakers. In 1917 Congress considered an especially ambitious 5 percent tax on receipts from advertising, only to abandon it after billboard owners objected strenuously.

During the 1920s, as America’s consumer revolution began to pick up steam, intellectually minded economists continued to ponder the virtues of taxing ads. Uneasy with the rise of advertising-driven mass consumption, they were looking for ways to rein it in.

Early plans for taxing advertising differed in many ways. Some were fairly simple, often structured as a restriction on the deductibility of advertising as a business expense. Others were more intricate, featuring entirely new levies on the companies that bought advertising or the companies that supplied it (and sometimes both). What all these proposals shared, however, was an isolation from the actual tax policy process. Most were devised and defended by philosophically inclined economists in the academy, rather than their more pragmatic cousins in government service.

By the early 1940s, this gap was beginning to close. Faced with the prospect of American involvement in World War II, lawmakers were on the hunt for new revenue, and advertising taxes seemed promising. In 1940 Rep. Jerry Voorhis introduced a widely noted proposal to tax advertising. His plan — which frightened both media companies and the customers to whom they were selling ads — was among the more straightforward. Voorhis wanted to disallow advertising expense deductions in excess of $100,000 for purposes of both the income tax and the recently enacted excess profits tax. (Notably, the Voorhis bill defined advertising to include not only billboards, print ads, radio spots, and the like, but also lobbying and legal expenses designed to influence legislation.)

The Voorhis bill died a quiet death, but over the next two years, Congress considered other proposals to tax both radio ads and billboards — the latter calibrated to square footage and the former to receipts from advertising time sales. In an interesting twist, the radio tax was also graduated, with rates ranging from 0 percent to 15 percent depending on the amount of money earned from time sales.

Despite this flurry of interest, tax experts at Treasury remained skeptical of proposals taking aim at the advertising industry, especially those that involved the creation of entirely new levies. By the mid-1940s, however, Treasury officials decided they could no longer ignore the idea’s popularity, at least on Capitol Hill.

Accordingly, Treasury’s Division of Tax Research decided to survey the topic, producing a comprehensive report on both broad issues and specific proposals. The study, completed on March 20, 1944, made no formal recommendation about the general advisability of taxing advertising, but its discussion clearly implied a distaste for the idea. In a nod to pragmatism, however, the study also endorsed a few of the less objectionable versions of an ad tax.

What’s an Ad?

Treasury began by casting a wide net. “While the general opinion is that advertising is a device used by business firms to induce people to buy their products or services, not all advertisements are used for this end,” the report noted. Like Voorhis, Treasury was inclined to include political ads and lobbying under the rubric of advertising, which led to a very broad definition of advertising as “all forms of presentation aimed at influencing people to take some action or develop certain opinions.”

Equally broad was Treasury’s definition of what business groups constituted the advertising industry. Clearly, companies buying ads were part of the definition, as were ad agencies and media owners, but Treasury also included ancillary industries that made advertising possible, such as sign manufacturers, printers, photographers, and mailing service providers. In calculating the overall size of the advertising industry, therefore, the department estimated that some 49,000 of these ancillary business establishments should be added to the roster of 2 to 3 million advertisers, ad agencies, and media companies.

The Treasury report described at length the central players in the ad industry, including the operations of ad agencies and media companies, as well as the ad buyers who ultimately paid the bills. It outlined how print ads differed from display ads (like billboards or store displays), as well as radio spots; each of these forms of advertising had a distinct set of business practices and pricing techniques, all of which figured centrally in efforts to tax the broader phenomenon of advertising.

Taken together, advertising was a big business; Treasury cited the estimate made by Neil Borden in his 1942 book The Economic Effects of Advertising: $1.7 billion of ad spending in 1939 (when U.S. GDP was roughly $93 billion).

Economic Effects of Advertising

The case for taxing ads, especially in the mid-20th century, typically hinged on its broader economic effects. Specifically, ad tax champions focused on the ways in which ads distorted economic decision-making by consumers; by increasing the appeal of some goods rather than others, ads could induce consumers to buy the “wrong” item, leading to efficiency losses. Defenders of the ad industry cited the consumer’s lack of important information about products and services; ads supplied some of that information, thereby helping them make better decisions about their purchases.

In its report, Treasury walked a careful, studiously neutral line in this debate (which also encompassed a wide range of other arguments both for and against advertising). However, department experts were especially clear in outlining the case against advertising. “The four major charges against advertising,” they summarized, “are (a) it is a wasteful form of distributive effort, (b) it helps create monopoly, (c) it is stimulated by the excess profits tax and offers a method of tax avoidance, and (d) it impairs the impartiality of the press.” The report quoted a statement by a contemporary anti-monopoly crusader, Thurman Arnold, to underscore the first two points:

Where advertising stresses the peculiar qualities of common goods under a particular trade name, competitors must either go out of business or spend like large sums in building up their own trade names for the same common commodity. The result is either a wasteful system of distribution on the one hand or monopoly on the other.

Treasury was careful not to endorse Arnold’s controversial view. But the department’s tax experts were clearly sympathetic to several elements of the anti-advertising argument, concluding that advertising probably did raise prices in many instances, and might well encourage monopoly in industries dominated by a few large firms able to spend lavishly on advertising.

Perhaps more compelling, at least from the perspective of government tax experts, was the suggestion that companies used advertising to avoid income and excess profits taxes. “It has been asserted that advertising is stimulated by the excess profits tax and is a legal but undesirable means of avoiding the tax,” the report concluded. “It is quite obvious that the high rate of this tax tends to make nominal the cost of advertising.”

As long as World War II continued to absorb much of the country’s productive capacity, manufactures didn’t need to do much advertising to sell their limited supply of consumer goods, Treasury noted. But facing the prospect of a competitive postwar consumer marketplace, these same manufacturers were inclined to spend heavily in advertising, since its deductibility from gross income made it cheap in a high-tax environment.

Tax-induced advertising was wasteful, Treasury concluded, but it also served to support cherished institutions like a free press. “A drastic reduction in advertising expenditures would force radical readjustments by these media which might be undesirable,” the report warned.

The report also dismissed suggestions that advertising revenue somehow compromised the objectivity of the free press. “Experience in other countries seems to show that the press tends to draw subsidies from one source or other as molasses attracts flies,” Treasury observed, “and that the absence of advertising would not offer any guarantee of an unbiased press.”

Overall, Treasury experts took a firm stance straddling the cases both for and against advertising. “A clear-cut case cannot be made either for or against advertising,” they concluded. “Competitive advertising in numerous cases is undesirable from the point of view of the economy as a whole, but the alternative conditions that would arise if advertising was not available as a selling tool must always be weighed.”

The Least Bad Ad Tax

The Treasury report concluded with an overview of various ad tax possibilities. In general, it focused on broad but still limited proposals to tax advertising in all its forms, rather than narrower levies on specific forms of advertising. Taxes targeting a single form of advertising would have the tendency to simply drive ad dollars from one medium to another. At the same time, however, excessively broad taxes, such as the one proposed in 1917, would create myriad administrative and compliance problems.

Treasury preferred a broad-based tax at a relatively low rate, probably not exceeding 10 percent. Levied on the suppliers of advertising, it would target magazines, newspapers, radio, billboards, and a few other forms of media. In all cases, receipts from advertising, rather than advertising space (print) or time sold (radio) would be a preferable tax base, the department concluded.

Finally, Treasury endorsed a flat rate tax rather than a graduated one. “If the purpose were to discourage advertising, a flat tax rate would be just as effective as a graduated one,” the report noted. On the other hand, if lawmakers were trying to tax the profits earned by large advertising agencies or media companies, or to discourage the growth of large magazines and newspaper companies, then a graduated tax might make sense. “But because the degree of prosperity does not always vary with the receipts of the advertising media, a graduated rate of tax would not be too equitable,” the report warned.

Treasury opposed any exemptions from its theoretical tax, including those for small firms and nonprofit organizations. The former should have little difficulty in complying with the tax, Treasury contended, and the latter — however admirable for their social function — should not be subsidized relative to for-profit entities: ”Exemption of nonprofit organizations would subsidize these groups; and while no doubt the subsidies would be well spent, permitting these groups to provide a tax free advertising service hardly seems an appropriate method of subsidization.”

The report considered new levies targeting the expenditures of ad buyers, as opposed to the receipts of ad sellers. Such a tax posed administrative issues but was probably feasible, the department concluded. In general, however, if ad buyers were going to be targeted for a tax increase, Treasury preferred to simply disallow the deduction of advertising expenses from gross income for income tax purposes. As a practical matter, such a disallowance should be partial rather than complete, since some amount of advertising was probably useful to the general public. A complete disallowance, moreover, would seriously disrupt the operations of media companies, since it would probably cause a drastic decline in receipts from advertising.

In summation, Treasury was distinctly lukewarm on every idea for raising the tax burden on advertising. It acknowledged that some curtailment of advertising might be reasonable during the wartime emergency, but said that goal could be best achieved by simply limiting deductions for advertising expenses, not creating some new tax or set of taxes.

From an intellectual perspective, Treasury’s tax experts were clearly intrigued by the idea of taxing advertising as a means of social and economic regulation, but as pragmatic policymakers they were even more skeptical that lawmakers could draft a regulatory tax that would actually improve the functioning of the economy. “Business will press for sales or attempt to escape from price competition in all possible ways and to curtail one avenue of effort would only transfer the ingenuity of businessmen to other fields,” the report concluded.

An ad tax, in other words, might seem like an elegant idea in theory, but it was almost certain to be a mess in practice. Such a skeptical conclusion was hardly surprising, coming from the nuts-and-bolts experts at Treasury. And while it didn’t cool congressional enthusiasm for the idea of taxing ads (in 1951 the Joint Committee on Internal Revenue Taxation would be compelled to publish a major report on the topic), Treasury’s tepid response was a good sign that the status quo had staying power.

Copy RID