Effects of Taxation of Advertising in Platform Markets

Taxation of advertising has been a recurring policy idea in recent U.S. tax reforms and around the globe. In this paper we take a comprehensive look at the effects of taxation of ads on prices, welfare, and the business model of media platforms. In particular, we study the effects of different tax instruments under different market structures and business models and distinct assumptions about consumers' ad preference, all in a unified theoretical framework. We present a set of results that both synthesize some of the existing ones and contain many new discoveries. In mixed-financed platform markets, taxation of ads reduces welfare and platform profits regardless of how consumers view ads. When consumers dislike ads, taxes lead to lower total profits but higher profits on the subscription side. On pure ad-financed platforms, even though taxes can increase the customer base, advertisers are still worse off. Different tax instruments produce qualitatively the same results under consumer ad aversion but may generate opposite effects with ad-seeking consumers