Taxation in Digital Media Markets

Digital media goods and digital media platforms exhibit cost structures and network effects that imply that price and quantity effects of consumption taxes are qualitatively different compared to what we typically find for physical goods. For instance, in most European countries and US states, printed newspapers and books face favourable value-added taxes (VAT) or sales taxes. This has probably increased their circulation. However, reducing the VAT rate on digital newspapers has the opposite effects; it increases prices and leads to lower sales. This is not true for ebooks, but a low-tax policy is still ineffective if the aim is to reduce prices. The primary effect of exempting such product from value-added taxes is to increase profits for publishers.