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Nobel economist Paul Romer says the path to tech privacy may be taxes.
May 10, 2019

Nobel economist Paul Romer says the path to tech privacy may be taxes.

Specifically, taxes on targeted ads online.

This week, Google showed off lots of new privacy-oriented tools and products and user agreements at its big developer conference, Google I/O. Apple is marketing privacy. Facebook is promising privacy, eventually. Federal officials are still trying to figure out privacy laws and regulations. But Nobel Prize-winning economist Paul Romer says company promises and even regulations won’t change anything because the ad-supported business model is what’s broken. He argued in The New York Times this week that the United States should tax revenue from targeted advertising.

Host Molly Wood talked with Romer about this idea in “Quality Assurance,” the segment where we take a deeper look at a big tech story. He said companies need to creatively evolve their businesses. The following is an edited transcript of their conversation.

Paul Romer: The [digital] ad model was very important. It made possible the emergence of Google and Facebook and supported open-source software. So it was very valuable at a crucial point in time. But we’ve outlived the usefulness of this model. We need to move on. What we’re stuck in right now is a bad equilibrium. And we’ve got to think creatively about how we are going to get back to the vision and the optimism that many of us had when we first saw the potential of digital.

Molly Wood: Well, then tell me more about the creative solutions that they might come up with to change the business model.

Romer: Well, one of the models that works is a subscription model. People pay to have access to a music service, to the game supplier. There are lots of workable subscription models if you tax ad revenue. Eventually it’ll be in the interests of these firms to develop subscription models. The other thing is if you make that tax on the ad revenue progressive, what happens is you’re going to end up with a version of the [marriage penalty]. You remember the marriage penalty, when two people with income get married and then their total tax bill goes up with progressive taxation? We want a marriage penalty in the market. If two firms join together, we want their total tax bill to go up because we don’t want more big firms. We’d actually like to have lots more small ones. So a really creative, innovative firm that keeps developing new products, it can just spin off independent firms, get the value when it spins those off and keep the total tax bill low by not letting any one of them get too big.

Wood: There is also an argument, though, that subscription models are themselves kind of inherently regressive and that increasingly we’re finding that access to good information is almost based on your income level. And I wonder what your response is to that, if this would put information services out of reach?

Romer: I mean, I’m sorry, I just have trouble with this idea that these firms that are generating tens of billions dollars for a relatively small number of people were doing this as an effective policy for redistribution. I just don’t think that that argument passes the test.

Wood: Well, that’s not what I’m arguing. I’m just saying that a lot of information is now stored within these platforms that people may no longer be able to access if they have to pay for it.

Romer: Yeah, but look, who really provided the world’s information to everybody on Earth? That was Wikipedia, right? And if you’re asking what could we do to make the digital world work for people, the Wikipedia model is great. It’s a donation model. A subscription model would work, a combination of subscriptions and donations, all of those things are possible. This ad model is not helping the users or they wouldn’t be called users. And it’s not helping the most vulnerable users either.

Wood: Is the business model the problem here, or is it the scale, is it the size of these companies?

Romer: It’s both. But the point of a progressive revenue tax is that you create incentives both for breakups, you penalize the acquisitions, and you encourage the development of models where the customers are customers and they know what they’re giving up. And they can compare that with the services they get back. I’d rather live in a world where firms don’t have these enormous incentives to spy on individuals. So if we had, they had, an advertising model that didn’t involve all of this, you know, deep surveillance of individuals, I’d be more comfortable with that. I still think a firm that’s collecting revenue on that scale is probably not a healthy thing for a society where we want to have competition and free discourse and freedom to take unpopular stands.

Related links: more insight from Molly Wood

You’re probably asking yourself: What about those stories about how Amazon paid zero income tax in 2018 on $11 billion worth of profits? Wouldn’t companies just dodge any new taxes anyway? Romer told us that income is a big fuzzy pot that can be stashed in a place with the lowest possible tax rate. But a revenue tax would apply to revenue that’s earned in a specific place, like by showing ads to people in Illinois or California, so there’s less opportunity for creative accounting.

European regulators have made a similar argument in favor of their digital tax. France has pushed hard for that one, but not all European Union regulators are on board. U.S. officials have already said it would be unfair to American companies and potentially present a trade barrier. So I guess they might not be in favor of Romer’s idea either?

For a complete counterpoint to the tax idea, you should also read another op-ed in The New York Times, this one by Chris Hughes, one of the co-founders of Facebook. He says it’s time to use our existing antitrust laws to break up Facebook immediately. He thinks a new government agency should be in charge of safeguarding user privacy and also deciding what speech is appropriate for social media.

Two super provocative pieces. Read them both and then tell me what you think. Email mptech@marketplace.org.

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