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Ad tax would be bad business

by | Jul 5, 2017 | Opinion

By Peter Hong

Peter Hong is a contributing reporter at Americans for Limited Government.

President Trump and the Republican majority in Congress have pledged to do something that hasn’t been done in over thirty years: comprehensively reform our badly broken tax code.  Having stalled on legislation to overhaul Obamacare, failed to even begin construction on a wall protecting the southern border, and spent much too much time distracted by all things Russia, Congressional Republicans have little to show the voters.  Having given the GOP a mandate for change just a few short months ago, Republican voters are understandably frustrated.

In a recent Fox News poll of all voters, an overwhelming 73 percent of all voters said that Congress should reform the tax code this year, including 81 percent of Republicans, 75 percent of independents, and even 61 percent of Democrats.  Congress must pass tax reform, and it must do so this year; of that, there is no doubt.

But how Congress reforms the tax code is as important — probably more so — than when tax reform is passed.  Will tax reform create jobs or kill them?  Will it favor entrenched businesses or create a level playing field allowing new and innovative entrants in the marketplace?  Nothing quite illustrates the saying “the devil is in the details” more markedly than the federal legislative process and close scrutiny is warranted.

Whenever Congress is working on taxes, every member is on the lookout for a revenue honey pot from which to pilfer funds.  And right now, some in Congress have got their sights set on the current tax deduction for advertising expenses.

Since Congress first adopted the U.S. tax code, advertising expenses have been fully deductible as an “ordinary and necessary” business expense.  The logic of allowing businesses to treat advertising expenses as part of the cost of doing business has made sense for the past hundred years to anyone who doesn’t get their paycheck from Washington.  Businesses have to advertise their goods and services in order to conduct their business.  Just as the cost of other fundamental business expenses — such as employee compensation, rent and utilities — has always been fully deductible, so too has advertising.

But advertising adds even more benefits than simply allowing businesses to operate.  Whether by word of mouth, print, broadcasting or online, advertising provides consumers with their most powerful tool:  information.  Thanks to technological developments like the Internet and social media, businesses can use advertising to reach new and receptive audiences that were once unimaginable just two decades ago.  And advertising is the critical weapon that startup enterprises need to bring new products and services to old markets.

Dr. Kenneth Arrow and Dr. George Stigler, both Nobel laureates, praised the value of advertising: “Advertising is a powerful tool of competition. It provides valuable information about products and services in an efficient and cost-effective manner. In this way, advertising helps the economy to function smoothly — it keeps prices low and facilitates the entry of new products and new firms into the market.”

The highly regarded economic consulting firm IHS Global Insight estimates that advertising expenditures account for $5.8 trillion in economic output in the United States — or 17.2 percent of the $33.8 trillion in total U.S. economic output.   Advertising-driven sales of products and services help support 21.7 million jobs, or 16 percent of the 136.2 million jobs in our country. Every dollar of advertising spending generates just under $22 of economic output, and every million dollars of ad spending supports 81 American jobs.

In other words, advertising helps drive our economy.  The goal of tax reform should not be to simply redistribute tax incentives, but to make our tax code more friendly to job creation, new market entrants and economic revitalization.

Tax reform should also not be used to raise taxes, which is exactly what eliminating the full deductibility of advertising expenses would do.  55 percent of all voters polled by Fox News in March said their taxes were too high.  Yet, that has not stopped so-called tax reformers — Republicans as well as Democrats — from seeking to mask tax increases, like reducing the deductibility of advertising expenses, in the guise of tax “reform.”

For those reasons, watchdog organizations like Americans for Limited Government will keep eyeing the tax reform process like a hawk, ensuring that no one in Congress tries to sneak through a stealth tax hike on advertising expenses.  True tax reform advocates can rest assured that we will keep a close watch on how the tax reform sausage is made so you don’t have to.

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