The Wrong Way to Reinvent Media, Part I: Taxes on Consumer Electronics, Mobile Phones & Broadband

by Adam Thierer & Berin Szoka*

PFF Progress on Point 17.1 [PDF]

With many traditional media operators struggling, and questions being raised about how journalism in particular will be supported in the future,[1] Washington policymakers are currently considering what role government can and should play in helping media providers reinvent themselves in the face of tumultuous technological change wrought by the Digital Revolution. For example, the Federal Communications Commission (FCC) recently kicked off a new "Future of Media" effort with a workshop on "Serving the Public Interest in the Digital Era." Likewise, the Federal Trade Commission (FTC) has hosted two workshops asking "How Will Journalism Survive the Internet Age?" Meanwhile, the Senate has already held hearings about "the future of journalism," and Senator Benjamin L. Cardin (D-MD) recently introduced the "Newspaper Revitalization Act," which would allow newspapers to become tax-exempt non-profits in an effort to help them stay afloat.

In a series of forthcoming essays leading up to the May 7 filing deadline for the FCC's "Future of Media" proceeding, we will discuss and critique some of the leading proposals being put forward that would have the government play a greater role in sustaining struggling media enterprises, "saving journalism," or promoting more "public interest" content.

In this essay, we discuss an old idea that's gained new currency: taxing media devices or distribution systems to fund media content. We argue that such media income redistribution is fundamentally inconsistent with American press traditions, highly problematic under the First Amendment, difficult to implement in a world of media abundance and platform convergence, and likely to cause serious negative side effects.

The BBC Model: Taxing Devices

Taxing devices to subsidize media content has never gained much traction here in the U.S., but it's been used by some foreign governments for many decades. Most famously, taxes on radios, eventually replaced by taxes on televisions, have sustained the BBC in the U.K. since its inception as the world's first national broadcasting system in 1922. According to the most recent BBC annual report, the annual "fee" was raised to Â£142.50/year (currently $213.43) as of April 2009. Failure to pay the fee is, of course, a crime and punished with stiff fines up to Â£1000 ($1497.75)--and radio emissions from unlicensed televisions can be detected by government vans that rove Britain's streets looking for violators. The revenue generated by the tax is then allocated among various BBC media products, with most of it going to the BBC 1 and BBC 2 television channels.

The U.S. has taken a different approach. We've not embedded a tax in the cost of new media devices to pay for the content delivered over those devices. (Of course, that's at least partially because we've had a strong tradition of free markets in media ever since we revolted against the Brits and mercantilism, their system of state-directed economic planning!) Generally speaking, private media operators have been expected to pay their own way in this country and not look to government for direct support.

America has had some indirect subsidies in the form of reduced postal rates for print media, as well as tax treatment for advertising. And taxpayer dollars have been channeled to the CPB/PBS/NPR regime, of course. But such public subsidy is small potatoes when compared to private media in the U.S. For example, the Corporation for Public Broadcasting's 2010 budget is just $400 million.[2] While many look to CPB to fund children's programming (among its many other activities), its entire budget is no more than a quarter of the total amount of U.S. advertising revenue produced by children's programming from food and beverages products alone: $1.6 billion in 2006 by the FTC's most conservative estimates.[3] That comparison illustrates the vital importance of advertising to media,[4] but subscriptions, direct sales, and private patronage have also been major economic engines of media in United States.

But the idea of more direct government support for media (and journalism, in particular) has always been lurking out there. There's long been a small but vociferous crowd of academics and policymakers advocating huge increases in government spending on non-commercial or public media. And some of them have even toyed with a tax on technology to cross-subsidize the media content that flows over those devices or networks. Most recently, Robert W. McChesney and John Nichols, authors of the new book The Death and Life of American Journalism, have proposed a 4-part tax plan to raise money ($18-21 billion) for a massive $35 billion/year "public works" program for the press (with the remainder coming from other sources):[5]

a 5% tax on consumer electronics (they estimate it would bring in $4 billion/year)

a 3% tax on monthly ISP & cell phone bills (estimated $6 billion/year)

a 2% sales tax on advertising (estimated $5 to $6 billion/year)

a 7% tax on broadcasters (estimated $3-6 billion/year)

Similarly, Leonard Downie, Jr., Vice President at Large of The Washington Post, and Michael Schudson, a Professor at the Columbia University Graduate School of Journalism, have advocated the creation of a "Fund for Local News" that "would make grants for advances in local news reporting and innovative ways to support it."[6] The Fund would make grants to news organizations through "Local News Fund Councils" and would be financed by "fees paid by radio and television licensees, or proceeds from auctions of telecommunications spectrum, or new fees imposed on Internet service providers."[7] (Note: Proposals to impose fees on radio and television licensees will be discussed in a subsequent installment of this PFF series. But for purposes of this installment, we reference the Downie & Schudson plan because of its call for fees on ISPs as one method of financing media going forward.)

More Platforms, More Taxes

McChesney and Nichols don't go into a lot of detail about their tax proposals, but the consumer electronics tax they favor appears to be based on the 1967 Carnegie Commission Report, which called for a 5% tax on all new television purchases--a variant on Britain's annual licensing fee. But instead of just taxing "televisions"--which would be very difficult in a world of technological convergence where consumers can "watch television" on any number of devices (PCs, mobile phones, portable gaming devices, portable media players, etc.)--they apparently want to tax all consumer electronic devices. Thus, they seem to recognize the reality of convergence but their answer is to just tax everything!

The British themselves have struggled with technological change: In 1971, the radio fee first introduced in 1922 was abolished, and in 1972, so was the BBC's radio monopoly, with commercial radio stations being allowed to compete with BBC Radio for the first time. One might argue that abolishing the radio tax and relying on a single tax (on televisions) to fund the BBC's television programming (67% of BBC spending) as well as BBC radio (17%) was simply more efficient--since most consumers had a television as well as a radio. Indeed, actually implementing any media device tax in the U.S. could prove very difficult, since countering evasion would require imposing sales taxes on online retailers ranging from Amazon.com to TigerDirect.com to countless small operators who sell TVs, DVD players, cell phones, and a wide variety of other gadgets. So much for the Internet sales tax moratorium!

But the evasion problem is a real one. The BBC estimates an 8.7% evasion rate, and it's not clear how much more (or less) of a problem evasion might be when the tax is imposed at the point of sale (as McChesney and Nichols propose) rather than every year (as in Britain). But clearly, the problem can't be solved simply by trying to tax all consumer electronics: The higher the tax rate, the more likely a black market will develop for discounted devices--with all the problems that generally come with black markets, such as funding organized crime. Whenever someone proposes a single-digit tax rate for anything, it's worth remembering that the federal income tax started out at 1-7% back in 1913--and, well, we all know how that turned out! (Top rates rose to 67-73% during World War I, fell again to the mid-20s under Coolidge, then jumped again to 63% by 1933 and didn't fall below 50% till 1986!) Maybe McChesney and Nichols realize how ugly black markets would get if tax rates on devices rise in the future--and perhaps that's why they're trying to spread the pain around by taxing broadband and wireless service, advertising and broadcasting, too. But, as discussed next, that's another problem with the plan.

Taxation's Negative Disincentives

Taxes distort markets and human behavior. Long ago, Chief Justice John Marshall taught us that "the power to tax is the power to destroy." As the late Clarence B. Carson noted in an article of the same name:

Any level of taxation will make some undertakings unprofitable or submarginal. In practice, any increase in taxes will drive some people out of business, prevent them from going into business, or make it difficult or impossible for them to sustain themselves by whatever they are doing.[8]

This helps us understand why raising taxes on mobile phones and broadband bills would be particularly foolish way of supporting media: it will distort beneficial behavior by both providers and consumers of communications conduit.

The FCC just recently reported that cost is a major factor for many households who decide not to buy broadband service (even though it's available). Why, after the FCC spent 13 months producing a 376-page, Congressionally mandated National Broadband Report on ways to increase the utilization and affordability of broadband, would we want to do anything to boost broadband bills, even in the name of "saving journalism"? Increased taxes on broadband bills might discourage some broadband providers from rolling out innovative new services as rapidly as planned. And once the new service tax is passed along to consumers--as all business taxes inevitably are--they might be less likely to adopt broadband, or might even cancel existing service. How would that benefit media and journalism?

The same goes for mobile phones. CTIA--The Wireless Association estimates that wireless users already pay an average 15% tax (local state and federal) on their cell phone bills. Moreover, if there is one thing we can count on, it's that taxes inevitably rise once they get on the books, whatever the intention of their initial architects. That's especially true when the tax creates a new class of subsidy recipients who have a vested interest in keeping the scheme alive and growing. Thus, what starts out as 3-5% tax on phones, broadband, and consumer electronics, will likely grow to be much higher over time. Pretty soon the FCC will look like the massively inefficient Department of Agriculture, doling out subsides to everybody and his brother who qualifies for media industry corporate welfare.

How Will the Government Spend Your Money?

But the more interesting question about such a media tax may be on the payout side of the scheme. Herein lies a fundamental difference between the BBC model and what McChesney and Nichols are proposing: The BBC fees have always been used to fund BBC content only, not for all media. True, the BBC once held monopolies in radio and television, but those monopolies died long ago, and when they did, the British did not share fee revenue with the BBC's competitors. Instead, commercial radio and television in the UK have had to rely on subscription and advertising revenues, just as in the US. Thus, the British model does not answer a profoundly difficult question: Even if we assume government could create a reasonably effective media tax collection regime, who would qualify for a cut of the money?

In an age of user-generated content and a wide variety of hybrid media products, it would seem that defining eligibility criteria for the subsidy might be significantly more challenging than it was in the past. Would blogs qualify? What about live reporting via Twitter or photo-journalism via Flickr? Who gets to decide what qualifies as news worth subsidizing, as opposed to mere opinions or aggregation? Similarly, the "Fund for Local News" and "Local News Fund Councils" favored by Downie and Schudson would be doubly problematic. They propose that, "The criteria for grants should be journalistic quality, local relevance, innovation in news reporting, and the capacity of the news organization, small or big, to carry out the reporting."[9] But, again, who determines "journalistic quality" and "the capacity... to carry out the reporting" or even what constitutes "local" news?

Beyond such practical problems, determining eligibility raises profound First Amendment questions because, as the Supreme Court has held, "in the realm of private speech or expression, government regulation may not favor one speaker over another."[10] The Court has also held that "Both tax exemptions and tax deductibility are a form of subsidy that is administered through the tax system."[11] Thus, the government may not pick preferred classes of speakers for subsidies, just as it may not single out disfavored classes for penalties. For example, a state university may not selectively deny funding to a gay and lesbian students association, because, as the Eighth Circuit has held:

a public body that chooses to fund speech or expression must do so even-handedly, without discriminating among recipients on the basis of their ideology. The University need not supply funds to student organizations; but once having decided to do so, it is bound by the First Amendment to act without regard to the content of the ideas being expressed. This will mean, to use Holmes's phrase, that the taxpayers will occasionally be obligated to support not only the thought of which they approve, but also the thought that they hate. That is one of the fundamental premises of American law.[12]

And there's also a First Amendment-related concern here associated with the potentially--if subtly--coercive effects of subsidies on the independent editorial discretion of news-gatherers. Downie and Schudson insist they "understand the complexity of establishing a workable grant selection system and the need for strict safeguards to shield news organizations from pressure or coercion from state councils or anyone in government."^{^[13]} Yet they hope political pressure can, somehow, be kept to a minimum. Likewise, McChesney and Nichols largely dismiss such concerns about undue political influence on subsidized entities--even though they cite several examples of politicians attempting to use the purse strings to influence PBS and NPR funding over the past four decades![14]

Regardless, these scholars fail to account for the fact that, going forward, political pressure would likely grow in proportion to dependence of media entities upon such public subsidy and the overall amount of those subsidies. After all, we're talking about taxpayer funding for the press on an unprecedented scale here. Moreover, the more visible these subsidies become--especially then the funding goes to highly controversial media content or outlets (e.g., involving pornography, vulgarity, politics, religion, abortion, homosexuality)--the more likely the public and politicians are to clamor for rules on who gets what. We've already seen a microcosm of that concern with National Endowment for the Arts funding for controversial art and culture in the past. Now imagine media subsidies on the scale that McChesney and Nichols envision coupled with Downie and Schudson's "Local News Fund Councils" sorting out competing claims and concerns. Media funding will quickly become a political circus--and another front in the ongoing Culture Wars.

Here's another concern: Will this scheme lead to more or less media competition? It would be misguided to argue that such a tax system couldn't fund some quality journalism and even entertainment. After all, there's some wonderful stuff on the BBC. But without having run the numbers for all countries, there seems to be a correlation between the level of government investment in media and the overall number of media outlets at the public's disposal. When visiting Europe, one is struck by how even the largest European countries have so few choices compared to what we have here in the States, and that's true across media (video, audio, print, online). Could that be because government spending / investment in media has had a crowding-out effect on private media? That possibility is at least worth considering as some look to broaden public support for media here in the U.S. Government simply doesn't have a very good track record of creating innovative, competitive businesses and markets.

How the Death of Private, For-Profit Media Becomes a Self-Fulfilling Prophecy

Which leads to a final concern: There's just a gut-level discomfort many of us would have with the idea of government imposing even more taxes on us to support industries or interests we might find distasteful or not deserving of corporate welfare. It's one thing to say that the government should play a role at the margin funneling some money into public broadcasting efforts via the CPB for limited purposes, but it's quite another to suggest that this should be the new model upon which all media should rest. That's essentially what McChesney and Nichols propose in their book, on the grounds that "the old order is collapsing" and private media is dead.

Of course, it's virtually a self-fulfilling prophecy that private media operators will fail if you impose a smorgasbord of new tax burdens on them and related devices and distribution channels--and then channel the money to "public media" competitors! As will be discussed in a future installment in this series of essays, taxing advertising is particularly harmful because those taxes come straight out of the advertising revenues upon which most publishers depend for their lifeblood.

But raising prices of innovative consumer electronics like readers (e.g., Amazon's Kindle, Barnes & Noble's Nook, Sony's Reader or Apple's iPad) and the wireless broadband services that connect them isn't such a bright idea either at a time when traditional publishers are hoping that new media distribution and consumption technologies will also allow them to experiment with new business models (like selling subscriptions for magazines or newspapers tailored for these devices). Unlike the British annual license fee, a tax imposed at the point of purchase would discourage users from buying new devices. This, in turn would slow adoption of new technologies and retard innovation in a market that has seen consumers move increasingly towards replacing their old devices every few years, due to the constant increased in processing power and functionality made possible by Moore's Law.

Taken together, these tax proposals are a sure-fire way to achieve McChesney's true radical end: the destruction of private, commercial media and journalism. Let's not forget, after all, that McChesney has argued (during this interview with the Canadian-based "Socialist Project") that "the ultimate goal is to get rid of the media capitalists," and that, "unless you make significant changes in the media, it will be vastly more difficult to have a revolution."[15] And in his book with Nichols, he concludes by noting that "We have responded in a time of crisis not with tinkering reforms but with revolution."[16]

Indeed they have! But such radicalism must be rejected if we hope to sustain a truly free press and uphold America's proud tradition of keeping a high and tight wall of separation between Press and State. Americans would do well remember to remember the (other) Golden Rule: "Whoever Has the Gold, Makes the Rules!"[17] The more control politicians have over funding media, the more control they will inevitably have over media itself.

Related PFF Publications

Testimony at FCC's Hearing on "Serving the Public Interest in the Digital Era," Adam Thierer, March 2010.

Public Option for Press Should Get the Red Pen, Adam Thierer, The Daily Caller, Jan. 2010.

Chairman Leibowitz's Disconnect on Privacy Regulation & the Future of News, Adam Thierer & Berin Szoka, Progress Snapshot 6.1, Jan. 13, 2010.

Socializing Media in Order to Save It, Adam Thierer, City Journal, March 2009.

A Manifesto for Media Freedom, Adam Thierer & Brian Anderson, 2008.

Media Ownership Proceedings, W. Kenneth Ferree, Testimony before the Federal Communications Commission, Nov. 3, 2009.

Media Myths: Making Sense of the Debate over Media Ownership, Adam Thierer, June 2005.

[1] The Pew Project for Excellence in Journalism reports that: "The numbers for 2009 reveal just how urgent these questions are becoming. Newspapers, including online, saw ad revenue fall 26% during the year, which brings the total loss over the last three years to 43%. Local television ad revenue fell 22% in 2009, triple the decline the year before. Radio also was off 22%. Magazine ad revenue dropped 17%, network TV 8% (and news alone probably more). Online ad revenue over all fell about 5%, and revenue to news sites most likely also fared much worse. Only cable news among the commercial news sectors did not suffer declining revenue last year." Pew Project For Excellence in Journalism, Introduction, The State of the News Media 2010, March 2010, www.stateofthemedia.org/2010/overview_intro.php.

[2] Corporation for Public Broadcasting, FY 2010 Operating Budget, www.cpb.org/aboutcpb/leadership/board/resolutions/090915_fy10OperatingBudget.pdf.

[3] See FTC's 2008 report, Marketing Food to Children and Adolescents: A Review of Industry Expenditures, Activities, and Self-Regulation, at ES-1-2, www.ftc.gov/os/2008/07/P064504foodmktingreport.pdf.

[4] Adam Thierer & Berin Szoka, The Progress & Freedom Foundation, The Hidden Benefactor: How Advertising Informs, Educates & Benefits Consumers, PFF Progress Snapshot 6.5, Feb. 2010, www.pff.org/issues-pubs/ps/2010/ps6.5-the-hidden-benefactor.html.

[5] Robert W. McChesney & John Nichols, The Death and Life of American Journalism (2010) at 210-11.

[6] Leonard Downie, Jr. & Michael Schudson, The Reconstruction of American Journalism, Columbia Journalism Review, Oct. 20, 2009, at 92, available at www.scribd.com/doc/21268382/Reconstruction-of-Journalism.

[7] Id.

[8] Clarence B. Carson, The Power to Tax is the Power to Destroy, The Freeman, Vol. 26, No. 10, Oct. 1976, www.thefreemanonline.org/featured/the-power-to-tax-is-the-power-to-destroy.

[9] Downie & Schudson, supra note 6 at. 93.

[10] Rosenberger, 515 U.S. 819, 828 (1995).

[11] Regan v. Taxation with Representation of Washington, 461 U.S. 540, 544 (1983).

[12] Gay & Lesbian Students Assoc, 850 F.2d 361, 362 (8th Cir. 1988).

[13] Id.

[14] McChesney & Nichols, supra note 5 at 193-99.

[15] Socialist Project, Media Capitalism, the State and 21st Century Media Democracy Struggles: An Interview with Robert McChesney, The Bullet, Socialist Project, E-Bulletin No. 246, Aug. 9, 2009, www.socialistproject.ca/bullet/246.php.

[16] Id.

[17] The Big Apple, Golden Rule ("He Who Has the Gold Makes the Rules"), June 13, 2009, www.barrypopik.com/index.php/new_york_city/entry/golden_rule_he_who_has_the_gold_makes_the_rules.

Wrong Way to Reinvent Media Part 1 - Media Taxes [Thierer & Szoka - PFF]