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 a 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.

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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.” Google already offers several subscription-based services like a premium subscription for access to YouTube. A tax on digital advertising can be so desig – ned as to make the subscription based model more attractive than the ad-based model, hence the tax has to be sufficiently aggressive.

Romer suggested a tax system that starts with a 5 per cent marginal tax rate (tax on the highest sab of income) for revenues between $5-$10 billion that progressively increases to 72.5 per cent for advertising revenue exceeding $60 billion a year, which means only the tech-titans ~ Google, Facebook, Amazon and Microsoft ~ will attract a marginal tax rate above 60 per cent, with an average tax rate of 30-40 per cent. Acemoglu and Johnson, however, proposed a much lower threshold of $500 million of annual revenue from digital ads and they proposed........

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