A Nobel Economist's Plan To Tax Digital Ads

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3:29Back in March of this year, MIT economist Derone Asimoglu and MIT Sloan's Simon Johnson published a paper called The Urgent Need to Tax Digital Advertising, where digital advertisers will be levied with a flat tax of 50 % on all revenue above$500 million. And today I'm joined by Derone to walk through it. Derone, thank you for coming on. Thank you. Thanks, Ed. It's It's my pleasure. So walk me through the idea. It seems pretty simple, but maybe there's more nuance to it. Well, it's very simple to implement. It's very simple to explain. The question is why? Why do something like this? After all, who doesn't love something free?

4:05And we're getting a lot of free things because the entire online ecosystem is monetized via digital ads. Right. The issue is, I think this ecosystem creates a number of problems which are set to get worse with AI. Right. The most obvious of those is something that's been discussed quite a bit over the last few years, which is that monetizing via digital ads means that you are going to encourage platforms to collect more and more data about people. and this creates a much more intrusive lower privacy and potentially distorted sort of system right the second perhaps corollary or separate thing which has started receiving more attention is that this also means you want to make sure that the eyeballs are glued to the screen which or large screen, small screen.

5:18And that itself might generate a lot of other problems, including perhaps mental health problems, because you try to get people to stay on the platform by inducing strong emotions, envy, jealousy, anger, outrage, and so on. And sort of it creates a very different type of social environment than we are used to with widespread negative consequences. But I think the one that I'm most worried about is that this reduces competition. It is impossible today for any service by a newcomer to come in and say, okay, you're going to get this from Google, Facebook, Instagram for free, and I'm going to provide higher quality content for which you have to pay a subscription fee or something else.

6:10Especially difficult because newcomers are not going to have the network. There's going to be uncertainty about their quality. So it really cements a system where everything is going to be monetized via digital ads. And that's going to discourage the entry of new products, new services, and especially new technologies. For example, everybody worries about what social media and other online platforms and AI will imply for democracy. Well, something that actually creates more pro-democratic conversations, higher quality content, that's going to be very difficult to get off the ground today. Right.

6:50So how does this tax actually change the incentive though? Well, I think the main way in which it changes the incentives is that it makes it possibly more likely that both existing platforms and new platforms will now say, let me experiment with new products that are higher quality for which I can build a clientele via subscription fees or other things. Because if I get$100 million via digital ads, half of it is going to go away. If I can get that money via subscription fees, that's good. It's no longer so inferior to doing it via digital ads. But I think one of the things that concerns me with it, or maybe it's less of a concern and more just the after effect will be, is that people are used to not paying for social media.

7:42That's why this needs to be high. You know, if this was a 10 % tax, it wouldn't make so much of a difference. So in some sense, when I mentioned ecosystem, I was intending to imply by that both what the offering side, the platforms are doing, and what the consumers are expecting. So there's a synergistic relationship between users, consumers, and the firms. And you want to change that relationship. Again, you wouldn't want to do it if the market system was working perfectly and everything was hunky-dory, but I think there's a lot of evidence that's not the case at the moment. So, and the incentives would be that they just can't make that much money off of digital ads so they will have to find new business lines.

8:25But could this not potentially kill off the idea of the free social network? Well, first of all, I think that idea has become excessive. If we scale it back, it wouldn't be so bad. And in some sense, I think the purpose is to scale it back because once everybody expects everything for free, that does create a race to the bottom in terms of quality, in terms of data protection, in terms of new technologies that will actually change the face of the kinds of offerings that we get. Right. And I remember in the past, we've had companies try paid social networks, and it just hasn't worked. Well, it didn't work because they were up against free social networks, monetized via digital ads, especially at a time when people didn't understand what the costs of these things were.

9:20You know, I think even today, there are consumers who do not fully recognize the amount of data that's being collected about them. So, if you go back 10 years ago, I think both the sort of addictive or quasi-addictive nature of social media, the extensive data collection and how that data can be used both, you know, to guide you towards certain products, perhaps to behaviorally manipulate you, or perhaps to charge you higher prices. All of these things were not completely understood. And I get what you mean. It's like the later stage model of Instagram and Facebook is so different because when everything's free, you don't really have a mechanism to control the customer other than just tricking them, just continually manipulating.

10:12I mean, I'm not going to say everything is tricking. There is tricking. There is tricking. It's not everything. So, you know, when you get an ad, it's useful. Right. You're finding out about products. But what is the trade-off between how much of your private data you want other people to have access to versus getting some of those products? And second, once people, once platforms have access to that data, what is there to stop them from offering some of the manipulative products as well as some of the useful products?

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14:17So, perhaps the biggest thing, because just while prepping for this episode, I went and did some math. And what you're suggesting would kill Meta. Now, I'm not saying that you're suggesting you should kill Meta. I'm just saying that Meta's, for the last four quarters, their net income was$51.35 billion. Off of$130 billion worth of revenue. So this would make their business model untenable. Is that? Well, first of all, no. I mean, you know, instead of$55 billion, if they make, you know,$30 billion, it's not the end of the world. I would be happy to have a company that is worth$30 billion. Oh, as would I.

14:55But the hope is that they would also then offer products and services that are higher quality, that are subscription-based. You know, we know people still, you know, pay for certain things, although less like Netflix. Netflix is also now being sort of being forced to move more in that direction. You know, is there a world in which higher quality Netflix for which some people pay is viable? whereas some lower quality one, monetized via ads, also coexist? I think those are questions, and I think it sort of opens up the market system to different sort of forces. So if there is a paid WhatsApp that has better security features, and you don't get these completely unexpected, annoying things that have started popping up in WhatsApp, perhaps that's attractive, and some people would be happy to pay$10 a year for that.

15:57Kind of feels like the advertising model is a lazy man's business as well, because it doesn't incentivize you to make a better product. It incentivizes a monopoly. Right. And how did I arrive to this idea? My shtick for the last two decades at least, and especially with regards to AI and digital technologies, is these technologies are extremely malleable. We can develop them in different ways. We can have higher quality technologies that increase worker productivity, or we can have rot automation, lazy automation. Right. We can have addictive social media that makes you go into your cocoon and you become uninterested in forming bridges and engaging in democratic citizenry.

16:49Or we can have platforms that actually encourage different types of communications and the active citizenry that democracy requires. Which ones of those will be? And I think since we have gone more and more in the automation way and in the sort of toxic environment of social media, a change requires new products, new technologies. And that means a more open system. And so the way that I sort of started sort of coming towards this idea was, well, what's a barrier to this? Well, the fact that there are a few big tech companies that can acquire competitors is a barrier. But so is the fact that even if they don't acquire you, they pigeonhole you into the same ecosystem in which they exist.

17:42And I think that's a big problem. how do you mean they pigeonhole you even if they haven't acquired you as a user because to compete against them you need to also offer your products for free which means the only thing you can do is for digital advertising if you need high quality data you can't afford it you're not going to have an incentive to get it if you need for high quality niche products you know nobody's going to buy them because everybody is used to this free freebies and it's everything right so it creates a kind of race yeah a race to the bottom but also just there's no way to there's no reason they would have to compete like you couldn't compete as they it we haven't really seen any new social networks in years other than blue sky and threads and threads is a part of a part of the facebook machine and we have seen tiktok but tiktok is just a amplification of the same business model same monetization system same sort of weaknesses being exploited as instagram facebook and so on and they burned and they burned billions and billions of dollars to get there it wasn't like the people try and i don't know why people would possibly think this but they frame bite dance some plucky upstart versus just a massively funded chinese juggernaut actually why i actually use the word ecosystem because this model itself is highly synergistic with companies growing very fast.

19:05And why do they grow very fast? Because they want market share, they want to dominate the market, but they also want data. And how is that possible? How can you grow so fast? Well, you get venture capital or Microsoft to bankroll you as in the case of OpenAI, So you burn through a lot of cash early on in order to get data dominance and market dominance. And again, it's not a pro-competitive picture that's emerging here. I feel like generative AI is something separate because with that, they don't have a business model yet. They do not have a business model. But you know what that does? It makes it even more likely that we're going to just repeat the same sins of earlier social media.

19:49Look at what is OpenAI doing? It's burning through a lot of cash in order to acquire market share and data. It's not monetizing through anything. And I think the most likely cash cow ideas that are coming up is we're going to use generative AI for internet search, and we're going to take over the digital ad revenues. Well, that's more of the same. And I don't, different conversation. I don't think that'll work, but it's, nevertheless, I can see the idea. It's funny, these incentives really have, I've never really thought about it before this conversation, but it feels like digital advertising really did harm the tech industry in that they found something very profitable that got more profitable without making the user's life better at all.

20:32Well, Larry Page and Sergey Brin, when they first formed their company, said, we don't want ads. That's not like a good model. Yeah. It's antithetical to a good search product. The moment somebody came and gave them venture capital money and said, but we do it so that You can actually start monetizing it via digital ads, yes. What if you were super rich? But it doesn't sound like this would kill the digital ads industry. I don't think we should kill it either. I mean, I think, again, if we created a monolith, a monoculture, that wouldn't be good. If everything was online, everything was based on subscription, that wouldn't be a good model either.

21:12So you want a variety. but so well here's a more operational level i'm guessing that this would also have to have some way of uh cutting through things like if people set up subsidiaries to try and pass off the tax as well you would have to make sure that there was a way of rounding that out you know that's why this is not a sort of a graduated tax that is easier to gain but if you know 500 million you know it's like a very small amount of money so you just set a minimum like that perhaps a little bit more so that the really small companies are not burdened by it we know one problem for example with the european gdpr is that once you put a regulation like that the burden is heavier on smaller companies and so it actually creates a competitive advantage for the large platforms you don't want to do that but i think 500 million would actually that would make a very healthy market for smaller companies which is great we want more smaller companies as well but wouldn't i i think that this would help with the problem a great deal but don't we also need something to do with the algorithms themselves because i feel we could do this and it would solve some problems it would begin incentivizing them in the right direction theoretically yeah but you still have this problem of they wouldn't stop algorithm in fact this might encourage them to be more algorithmically abusive absolutely and that's why i don't think this is a silver bullet You know, you need a range of policies.

22:41But the hope is that at least such a policy would create some push towards some platforms and products to have better quality algorithms that don't trap you like that. But, for example, if we're talking about social media, we should also be talking about repeal or relaxation of Section 230 of the Digital Act so that companies that algorithmically boost content cannot then say, well, this is not our speech. This is somebody else's thing. We have nothing to do with it. So there are some details there that we have to think about. And I think Section 230, which was written at a different age in the 1990s, is definitely not up for dealing with issues of algorithmic boosting.

23:29And debating Section 230 aside, because that is also a separate conversation, it does feel like we have just kind of not given tech companies much responsibility for what they're doing. No, exactly. There's just none. That's the main reason why I want to have a conversation about Section 230, because it can't be optimal that corporations that are arguably the largest and the most powerful humanity has ever seen can then wash off their hands and say, we're not responsible for anything that happens on our platforms. yeah it feels with with 230 and i am not as well read as i should be about it but it feels as if that responsibility side is the real niggling issue but also the most thorny because on some level it makes sense with social media platforms that they should be able to say we're not responsible for all the posts and if they had to be they would be absolutely and and look i think free speech is a major issue.

24:26I am worried about erosion of free speech, but, you know, I'm also not like a 100 % free speech absolutist. I think we have to balance it. And the way that I would suggest as is, again, so now we're changing topic a little bit. That's fine. Second 230 is, you know, subject to whatever legal requirements there are on, you know, abusive content, etc. If you post something on Instagram or Facebook and the company doesn't algorithmically promote it, then it's completely fine. It's there. It's my speech. If my friends find out about it, they can go and look at it. If somebody stumbles on it, that's fine.

25:08But algorithmic boosting is like New York Times putting you on their front page. We can't say New York Times is putting you on your front page and you can say all sorts of lies and crazy things. And that's just freedom of speech. Yeah, okay, fine. I know what you mean, though. If you have a more preferred newspaper, I'll use that example. No, no, no, but I know what you mean. And it seems like the problem that you're saying is it isn't 230 itself. It's the fact that the algorithms boost these particular things. That's why I'm saying 230 was fine for the age it was written where nobody could have understood the onslaught of algorithmic boosting promotion and manipulation that would come.

25:48And it feels like it's an incentive problem. It's almost that platforms should either move away from the algorithm model. Because the amendment section 230 that just says it should go away kind of doesn't sit right with me. I don't think you should. It would make platforms like WordPress impossible to use or like blogging platforms. but the idea of what they promote being more intentional. Absolutely. That I actually really like. This rule that I suggested completely protects WordPress. WordPress doesn't promote. Right. So this sort of reformed 230 is completely fine in that respect. So as far as this 50 % tax, do we have any kind of historical precedence for something like this being done?

26:29We do not. And that's why, you know, am I sure 50 % is the right level? Absolutely not. perhaps 40%, perhaps 30%. I think 50 % is great. Thank you, Ed. Well, because the thing is, the way I look at it is, these companies are so adept at avoiding responsibility, and they're so unwilling to change their ways, and so unwilling to be responsible with what they're doing, that it needs to be like this. And I'm sure that if this actually got anywhere near a government, they would have the world's biggest tantrum. But I feel like we need stuff like this. It needs to be a shock to the system, absolutely.

27:09And I think that, well, actually, maybe that's the question. How practical would this be to actually implement? Well, it depends on what you mean by that. Well, I mean, how hard would it be to get this actually into existence with a government able to levy that tax? Well, it would be extremely hard because of the lobbying, as you pointed out. But if there was agreement, if the Chinese government wanted to do it, They could do it overnight. It's all out there. The judicial ad revenue is there. It's measured. And the flat tax is very easy to implement. You could do it at source when advertisers, companies pay for advertising.

27:55You could do it in many different ways. So it's very easy. And it's a version of a variety of VAT-like ad volorem taxes. we have them in under much more complicated situations when there is much lower quality data about what's going on you know many middle income countries have a very complex sales tax or a vat tax yeah and it almost feels that you could have a little fun with it as well maybe you could do this 50 tax and feed it directly into some sort of national venture fund that would end up funding the few it feels as if the as go like on a larger scale it feels like governments are just 20 years behind technology not even putting aside even section 230 it feels like we should have an epa or an fda for data it feels like we should have ways of actually we don't know how these algorithms work and it just feels a little crazy to me yeah absolutely but the way i would say it is i'm not sure that i would say they are 20 years behind in terms of knowledge i actually oh not knowledge just legislation legislation yeah so like a completely different but related topic is we actually need an infrastructure for data markets right so you know i think everybody says data is going to be one of the most important factors of production for the future right more important than land imagine that i told you that today, land that is still pretty relevant for many businesses, it's up for grabs.

29:31You can just go and get whatever piece of land you want, and you don't have to pay for it. You know, that tragedy of the commons is well understood from history. It will be disastrous. Yeah, it's just the Wild West. Yeah, it's Wild West. Nobody produces high-quality data. Nobody gets compensated for the data that they have. And it encourages, you know, the monetization, that model that we talked about where you actually sweep people's data without their permission or without their understanding and you try to monetize it via digital ads.

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