Tax Revenue, Privacy, and Profits under Taxed Targeted Advertisements

Regulators implement Digital Service Tax (DST) – a tax applying to services of online advertisers and publishers – to generate tax revenue from the online advertising industry. Implementing DST on targeted ads increases their price and potentially decreases their number, thus mitigating the processing of consumers’ data. Consequently, the online advertising industry’s profits might decrease, and consumer privacy might improve. To this point, the impact of implementing DST on tax revenue, the number of targeted ads, and profits remain unquantified, preventing the regulator from understanding and resolving the resulting trade-off. This article estimates these impacts and derives a tax-revenue-maximizing tax rate. This tax rate establishes a helpful benchmark because a different tax rate reduces tax revenue, and a higher tax rate improves privacy but decreases profits and vice versa. The article’s empirical study of 20 million bid prices from 1 million real-time bidding auctions reveals that the tax-revenue-maximizing tax rate yields (i) a tax revenue equaling 10.00% and 13.85% of advertiser and publisher profits, (ii) reduces the number of targeted ads by 59.40%, and (iii) decreases the advertiser and publisher profit derived from targeted ads by 45.67% and 37.36%. These findings support regulators, consumers, and the online advertising industry in understanding the consequences of DST implementation and may help regulators select a tax rate