Unlike conventional advertising, digital advertising increases impact by individualising ads while also reducing businesses’ advertising costs. Nobel Laureates Acemoglu and Johnson are not the first to suggest a tax on revenues from digital ads. In 2021, Paul Romer had proposed a progressive tax on such revenue. Progressivity offsets the increasing returns on investments that give bigger firms an advantage over their smaller rivals. Revenue is a better base than income for taxing transnationals because unlike income, sources of revenue cannot be shifted to low-tax jurisdictions.

Thus, taxing revenue from digital advertising is the best way to encourage companies to switch to the less dangerous and more acceptable way to shift to a subscription-based model where users pay only for the services they provide. Romer wanted it to target monopolies like Facebook or Google which have the power to influence our policy decisions.

Of course, a sufficiently aggressive tax can always drive firms to engage in tax avoidance, which is counterproductive if the objective is to raise revenue. But the objective of a tax on digital ad revenue is only to encourage such avoidance by disincentivizing the firms to expand their stranglehold of digital ads. Such avoidance can happen in two ways ~ bigger firms may split themselves into smaller ones but they will now be open to more competition from other similar sized firms, or they shift to a the usual business model where price depends on the value provided by the seller ~ in short, a model based on subscriptions, like that used by Microsoft, Netflix or Duolingo.

Such firms have no need to track all online activities of their users, or, as Romer said, “to turbo – charge animosity as a way to get people to spend more using their services.” Google already offers several subscription-based services like a premium subscription for access to YouTube. A tax on digital advertising can be so desig – ned as to make the subscription based model more attractive than the ad-based model, hence the tax has to be sufficiently aggressive.

Romer suggested a tax system that starts with a 5 per cent marginal tax rate (tax on the highest sab of income) for revenues between $5-$10 billion that progressively increases to 72.5 per cent for advertising revenue exceeding $60 billion a year, which means only the tech-titans ~ Google, Facebook, Amazon and Microsoft ~ will attract a marginal tax rate above 60 per cent, with an average tax rate of 30-40 per cent. Acemoglu and Johnson, however, proposed a much lower threshold of $500 million of annual revenue from digital ads and they proposed a flat 50 per cent tax. It is low but not too low to discourage digital innovation from new entrants.

The objective again is not to genera – te revenue “but to fundamentally alter the business model of online platforms”. Apart from addressing the evils that social media today are unleashing on people, like addiction to digital contents and games, fuelling mental health issue and fomenting hatred, anger and extremism online, a sufficiently high digital ad tax rate would also stimulate innovation by encouraging new business models that allow good ideas to scale up, something that the behemoths today are ruthlessly suppressing using their money power through acquisition or other methods, attacking and eliminating anything that does n’t fit into their business model.

For getting the best value from technology, technology must be freed from its gatekeepers, i.e. the rulers of today’s tech world, and those bought or mesmerized by their influence and power, to ensure that algorithms are working for and not against people. “Whether digital technologies should be used for automating work and empowering large companies and nondemocratic governments must not be the sole decision of a handful of entrepreneurs and engineers.” As AI permeates our economy and society, we need a ‘diverse set of responses’ from multiple stakeholders to inform us about the direction of technological “prog ress” and the future of society to be forged by these technologies.

Allowing a few companies to control that future will be extremely perilous. In general, and for too long, taxing MNCs, especially digital MNCs like Google, Facebook etc., have always been problematic even for the most advanced countries, because these companies can always shift profits across border to tax havens, depriving governments of popu – lous third world countries where they generate most of their profits. Even rich G7 or OECD nations have equally struggled in vain for decades to make the MNCs operating within their jurisdictions pay taxes to them.

Using a tax avoidance strategy called Base Erosion and Profit Shifting, MNCs have been artificially ‘shifting’ their profits year after year from higher-tax jurisdictions to tax-havens where they pay little or no tax, thus ‘eroding’ the ‘tax-bases’ of the former. Countries like Ireland, Luxembourg and Cyprus, Caribbean countries like British Virgin Islands, Bahamas or Cayman Islands, and Central American countries like Panama have used their tax rate arbitrage to attract the MNCs ~ about 40 percent of MNCs’ overseas profits are estimated to be shifted to low-tax countries in this way. The tax losses are stupendous ~ estimated to be $50 billion for the USA and over $10 billion for India.

Globally, MNCs are estimated to avoid $240 billion in fiscal revenues every year by this strategy, and the Global South is disproportionately affected because of their limited revenue sources. In a globalised and digital economy, MNCs operate through centrally managed business models, with their global profits coming from their global subsidiaries. But the current international tax rules, developed nearly a century ago, treat these subsidiaries as legally in dependent entities which trade between each other using “arm’s leng – th” prices to transfer goods and services, prices which are easy to manipulate to hide the actual income by inflating costs.

MNCs then exploit this system by shifting their profits to jurisdictions with low or zero tax rates, enticing them with investments and employment. An IMF study in 2019 found that such “phantom” investments by MNCs had pushed Luxembourg’s stock of FDI to $4 trillion, “an improbable one-tenth of the global total”. Many small countries like Ireland, Cyprus, Hong Kong and Singapore have also benefited in this manner. These tax loopholes cannot be plugged without concerted action by all governments. In 2021, as a first step towards a fair and just tax system, the G7 agreed to plug the cross border tax loopholes used by the MNCs to evade taxes by reforming the global tax system based on two pillars: first, to distribute the profits equitably among countries where these are generated, enabling them to tax such profits, and second, adoption of a corporate global minimum tax (GMT) rate of at least 15 per cent.

A global common rate would preclude countries from undercutting each other, while still giving Governments the sovereign power to set their own higher corporate tax rates but not below the floor rate of 15 per cent; if the MNCs still continue to shift their profits to a country with a lower tax rate, their home governments can ‘top-up’ their taxes to the minimum rate to eliminate the benefits from shifting profits. Currently, more than 140 countries have committed to implement the GMT domestically and 90 per cent of the large MNCs are expected to be brought under the scope of GMT by the end of 2025. Companies with earnings above $800 million are now subject to the new 15 per cent rate.

GMT is estimated to reduce under-taxed profits by 80 per cent as it applies acro – ss geographies, national income boundaries and tax haven structures. As a result, shifted profits will fall by around 50 per cent resulting in tax base gains in the corresponding jurisdictions. These taxes are of course on profits and not on revenue. But as Governments globally struggle with the challenge of taxing the digital economy, digital advertising revenue is emerging as a key target and countries are exploring ways to tax such revenues from tech giants that operate with minimal local tax obligations despite generating huge profits in their markets.

The idea is to establish a level playing field between digital and non-digital businesses and bring tech companies under the tax net. While implementing such taxes presents significant challenges in terms of assessing revenue generated within a tax jurisdiction, some governments have already taken steps towar – ds this. In 2020, UK introduced a Digital Services Tax to tax revenues generated by search engines, social media platforms and online marketplaces that includes digital advertising within its scope from their domestic users; in 2019, France had also enacted its Digital Services Tax on large tech firms based on their domestic revenues, including those that provide digital advertising services. Maryland was the first US state to levy Digital Advertising Tax in 2021 on companies with global annual gross revenues over $100 million which derive at least $1 million in annual advertising revenue from targeted digital advertising within Maryland. It is a progressive tax with rates ranging from 2.5 to 10 per cent.

California also introduced a digital services tax in 2021 on companies that provide digital services, including online advertising at a rate of 2 per cent on net income, with a threshold of $500,000 in California revenues. Since then, quite a few US states have either imposed or are contemplating to impose such a tax. With the help of machine intelligence, digital technologies can immensely augment human capabilities and build new platforms to bring people together. But to harvest their potential for humanity’s good, we must make the tech companies limit unethical practices that fuel their ever-insatiable greed for more profits. One practical way to do it is a steep tax on their digital ad revenues.

(The writer is a commentator, author and academic. Opinions expressed are personal)