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By Thomas Baekdal - January 2020

Should media be tax exempt?

Taxes in the media is a topic that many talk about. Most recently we heard the story that News UK successfully argued that it shouldn't have to pay sales tax (VAT) because their digital editions were periodical.

As the Guardian reports:

Newspapers, books and some other printed products have historically been VAT-exempt because their consumption is considered to benefit the public.

News UK has fought a long-running legal challenge against the decision to charge VAT at 20% on the online editions of the Times and Sunday Times, arguing that because the tablet edition and website are only updated four times a day they meet the legal definition of a newspaper.

This, of course, sparked quite a discussion, not just in the UK but around media Twitter overall, because if one newspaper can be exempt for sales tax, then what about all the other newspapers?

However, as a media analyst, I have a wider view of this, because the system (regardless of country) is deeply unfair. And the way I see people talk about this in the press seems to be designed to make it even worse.

But let me explain why this is such a complex thing to talk about.

Note: When I talk about tax exemption, I'm referring to all types of reduced taxes, or even negative tax rates. This can be a lower sales tax (VAT) or even no sales tax. It can be a lower tax rate overall, a reduced corporate tax, or how some publishers in some countries define themselves as non-profits and don't pay taxes at all. But it can also come in the form of government subsidization, where you as a publisher are being handed money that other people paid in taxes ... effectively giving you a negative tax rate.

Before we start, I also just want to point out that I am generally in favor of the idea of granting the media some form of tax exemption because of its importance in society. But what is critical to me is that we create a fair system, and not just one where only the (big) old traditional media companies get a financial advantage.

The problem with the system

The argument that everyone makes when discussing taxes is that you are doing a 'public good'. You say that journalism is important for a functional society, and therefore having reduced or no taxes is a way to ensure its existence.

In theory, I mostly agree with this, the problem is with how it is defined.

First of all, it's important to remember that taxes themselves are a public good. We can have a long discussion about the overall tax rate and whether the government is spending it efficiently. But the purpose of taxes is for the government to collect a bunch of money so that it can then provide a public good instead.

They are using these taxes on things like infrastructure, healthcare, social security, childcare, police and fire services, nature preservation, culture, education, as well as investments or support for various services.

And so when people argue that because "we are providing a public good, we should not have to pay taxes", what we are actually saying is that the government should have less money to spend on infrastructure, so that we in our industry can make more money.

I can understand why people in the media say this, but it's not really a good argument. From the public's perspective, all you are doing is to move money from one public good to another.

This doesn't change that journalism overall is important for society, we all agree on that, but so are all the other things taxes are spent on. Is a newspaper more important than a fire department?

There is also the problem that a lot of things in society might be good as a concept, but in practice giving it a tax exemption doesn't contribute to it.

Medicine is a perfect example of this dilemma. Over the past many years we have clearly seen how the medical industry has turned into this overly greedy and terrible industry.

So, giving this industry a tax reduction will not benefit the public at all. If some medicine costs $100 per dose today, and you give this medical company a 25% tax reduction, they are not going to lower their prices, they are just going to keep this money for their owners and investors.

But the media industry is different... right?

Of course, in the media industry, we will all argue that we are different, and that if we get a tax exemption, then we would use it to produce more public good. We would spend it on hiring more journalists, produce more content, do more investigative reporting, and take greater care creating more in-depth and researched stories.

I would like to believe this is true, but there are a number of issues here.

First of all, if we look at the largest newspapers, what we have seen over the past several years is that we simply produce too much content. For example, when the Guardian reduced the number of articles they publish, it had no negative impact on the newspaper overall.

So, from a trend perspective, we are actually producing too much content, and the content we produce is too similar.

This is an important topic, think about efficiency and waste.

If a country wanted to make sure the public was always informed, what would be the most efficient way to achieve that? Well, there are two factors to consider here.

First, what we want is a diverse news coverage (and with this I mean topically diverse), and secondly we want to it to be cost-effective.

So, let's look at traditional newspapers. Here are the Guardian, the Independent, and the BBC:

You see the problem here?

There is no diversity here, and every one of them is covering exactly the same news in the same way.

So from the public's perspective (the ones actually paying the taxes) this doesn't seem like an efficient use of tax money. By arguing that media companies should be subsidized, you are essentially asking the public to pay for the same content three times.

Why would the public agree to that? From a cost-efficiency perspective, it would be much better for each person to just pay for the one newspaper that they prefer.

Of course, people in the media will then point out that "we are also doing so many other things", and this is certainly true.

But this leads us to another problem.

When a newspaper gets a tax exemption, it applies to the company overall across all the topics that they cover.

It covers the news, business, sport, culture ... and even things like recipes.

Take something like the Guardian. It is, overall, doing a lot of good work, but one thing it also publishes is Guardian Recipes.

So imagine that the Guardian also becomes tax exempt, would get subsidized, and wouldn't have to pay things like sales tax. Would that be a fair system?

The answer is obviously no, because what about all the other sites that also publish recipes? What about, for instance, YouTubers?

Let me give you an example:

Here we have the Guardian as a newspaper on one side (now getting a tax exemption), and a YouTuber who publishes recipe videos on the other (who has to pay full taxes).

Would this be a fair system? Would this create an equal marketplace?

The content is the same, so why should a newspaper get this financial advantage over new media publishers?

And we see this problem in so many variations. For instance, here in Denmark, certain things like arts and culture are tax exempt today, but only in certain circumstances.

For instance, if a theater puts on a show and hires a bunch of freelance actors, paying them is exempt from sales tax. But if the actors themselves put on their own show, then they are not exempt.

Think about how insane that is. It means that as an individual you are put at a massive financial disadvantage compared to traditional companies.

I have also experienced this first hand, which is one of the reasons I feel so strongly about this.

Last year I was hired by the Danish media site MediaWatch (a site similar to Digiday) to write a number of articles for them. The articles were written uniquely for them, but the work I did was the same as what I do directly for you here on Baekdal Plus.

The problem is that MediaWatch is a part of Watch Medier, a group of niche publications owned by JP/Politiken, the largest media company in Denmark.

And you know what they are getting? Yep, government subsidization.

Think about what this means.

If I write an article and publish it here on Baekdal Plus, then I have to pay full taxes, including a 25% sales tax on every subscription (no really!) ... but if I publish it on MediaWatch, then they are getting millions in tax money to support their publication.

This means that they have a massive financial benefit. They can either sell their subscription at a more effective rate, or (which is what they do) simply have a higher revenue than anything I can ever do directly.

How is that fair?

Mind you, I'm not arguing against them getting this money. MediaWatch (and Watch Medier) is a great publisher who have added a lot of new diversity to the Danish media landscape. I'm arguing against the unfairness of the system. If I write an article, it shouldn't matter where I publish it, especially not since both MediaWatch and I am targeting the same audience.

It shouldn't matter whether a journalist is providing valuable information to the public directly, or via a traditional media company.

I want a fair system that applies equally to all. I want a system that makes it just as easy for new publishers to compete as it is for old publishers. And I want a world where we can have price parity.

For instance, in the UK, printed books are exempt from sales tax, while ebooks are not. This is something the book publishing industry is really angry about because it creates so many problems.

For instance, when you sell a book, you end up with the printed book costing less than the ebook, simply because of the difference in sales taxes. It makes publishers look like idiots through no fault of their own.

So what I want is a very different type of discussion about this.

I don't claim to have the solution, but there are six ways that I would consider to be fair.

Method 1: No exemptions

The first approach is to simply get rid of the whole idea altogether, and just have every media company pay their taxes like every other company.

Obviously, most media executives would disagree with me on this, but publishing is essentially just a product. Why shouldn't we also help contribute to the cost of building infrastructure, schools, healthcare and all the other things that taxes are usually spent on? We use all those things too!

Method 2: All media gets the same tax exemption

The other approach, of course, is to give everyone a tax exemption and apply it equally to all. Meaning that any company registered as a media company will, for instance, not have to pay sales tax, or may get a reduced overall tax rate.

This way, media (as a whole) is defined the same way as 'culture and arts' or other forms of charities or companies that we generally define as a public good.

The key thing here, however, is that the tax exemption must be equal to all, so with this model we cannot do government subsidization.

Method 3: The non-profit model

The problem with method 2 is that not all media companies are the same. Some truly are focusing on producing a public good while others are just in it to make their owners and investors rich.

So, one way to limit who can get a tax exemption is to define it around non-profits. The definition of a non-profit varies a bit between countries, but the US model is that, as a non-profit, you are tax exempt, but it comes with the condition that any profit is spent on furthering your focus on the public good ... as opposed to paying it out to owners or investors.

Method 4: Only hard news is tax exempt

Another way to limit who can pay, but still make it fair, is to limit the tax exemption to only very specific categories of news. So hard news like politics, crime, fraud, and similar topics would be tax exempt, but nothing else would.

But to make this work we need to put in some safeguards.

First we need to be very specific about how this is defined. For instance, covering that Apple is launching a new iPhone wouldn't be included, but covering problems internally about harassment would.

Secondly, we need to demand that publishers clearly separate their hard news from the rest of their reporting, because otherwise we end up with the problem described above with Guardian Recipes vs every other recipe site.

A newspaper should not be allowed to use a tax exemption for one thing on something else.

But think about what this means. This means that as a publisher, you would have to create separate subscription models. To get the tax exemption, you had to sell one subscription model just providing access to that, but if you want to do anything else, or combine it, you would have to pay full taxes.

And finally, we also need to look at journalistic ethics so that we don't end up giving fake news sites or publishers run by political parties the same tax exemptions. But this is where it gets really complicated.

Method 5: It's an investment

The model that I personally prefer is that we shouldn't just give tax money to media companies in general, but limit it to an investment.

There are two ways we could do this. We could either create a system so that when a new media company is formed, over the first several years, it won't have to pay any taxes, after which the tax rate slowly climbs back up to the standard level.

This would not only provide new media companies with a better chance, but also force them to become profitable within those years.

Method 6: Link it to the contribution of the workforce

Finally, another way is to link it to the level of revenue and their employees, similar to how tax rates work overall. So, you could make a rule that, per employee, the first $20,000 is exempt from taxes.

Meaning that, if you are a publisher with 30 employees, $600,000 of your revenue is exempt from taxes, but anything above that is taxed normally. And if you are a big publisher with 1000 employees, your tax exemption is $20 million.

The advantage of this is that it recognizes how many people you are employing as a factor in how much you contribute to the public good.


So which one is best?

Well, as I said, I personally prefer method five because it is the model that creates the most diverse media landscape while at the same time forcing the market to constantly renew.

Of course, this wouldn't help all those local newspapers who are struggling, but that's also kind of the point. What we want is a system that solves problems, not one that keeps declining models in place.

Mostly though, my main concern is that we need to make it fair for all. Because the current tax models, and the way I hear most people talk about this is deeply unfair. It shouldn't matter where you publish something, or what company you work for.

One thing I didn't touch upon here, of course, is whether we are a public good at all? This is a complex discussion that I won't go into here. My personal view is that journalism itself is very much a public good and that it is very much important for society as a whole ... but also that the day-to-day production of journalism often isn't.

Every single day I come across examples of journalism that are directly harming society (in a measurable way).

I also didn't touch upon the issues around tech companies. Today they have the advantage of being global, but one thing I heard in the past was media executives say that "Google should pay more taxes because as publishers we pay full taxes" ... and then at the same time claim that media companies shouldn't pay taxes.

There is something disingenuous about that argument.

Again, I give you the example of the Guardian Recipes and YouTubers. Both are monetized in the same way, so if publishers should be tax exempt, the YouTubers (meaning YouTube itself) should also be tax exempt.

Why should a newspaper be able to sell ads with no sales tax when YouTube can't? From the perspective of a YouTuber, who is also a publisher, this isn't a fair system.

There are thousands of YouTubers who do incredible journalistic work every single day. Why should they not get the same benefit as other journalists?

This is what it all really comes down to. What is fair?

 
 
 

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Thomas Baekdal

Founder, media analyst, author, and publisher. Follow on Twitter

"Thomas Baekdal is one of Scandinavia's most sought-after experts in the digitization of media companies. He has made ​​himself known for his analysis of how digitization has changed the way we consume media."
Swedish business magazine, Resumé

 

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