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August 8, 2013
Should We Tax Advertising?
Joseph J. Thorndike

Full Text Published by Tax AnalystsTM

Should the federal government tax advertising? The question has been kicking around for decades, often framed as a debate over the deductibility of advertising expenses. But every so often, lawmakers have considered more straightforward levies on advertising and associated marketing costs. And in the 1950s, Congress even considered using those taxes as a tool for managing the business cycle.

The deductibility of advertising expenses has been a topic of debate at regular intervals. Since the 1980s, advertising industry groups have repeatedly mobilized a full-court press to defend the deduction.1 And some industries have had to fight to keep their deductions. Lawmakers have repeatedly sought to disallow advertising deductions for socially problematic items like alcohol and tobacco. They have also targeted direct-to-consumer ads by pharmaceutical companies.2

Just last month, Rep. Rosa L. DeLauro, D-Conn., introduced legislation to eliminate the deductibility of expenses associated with marketing "unhealthy food products" to children. This idea has been around the block a couple of times, with DeLauro's bill a close cousin to an earlier proposal by former Rep. Dennis Kucinich in 2010.

Disallowment of the advertising deduction is really just a form of sumptuary taxation. "We're basically finding an indirect way to create an excise tax," observes Marc Goldwein, senior policy director of the Committee for a Responsible Federal Budget. There's nothing inherently wrong with that, assuming that you think sin taxes have a place in the tax code. But Goldwein has proposed a different sort of reform for the advertising deduction.

In a recent Tax Notes article,3 Goldwein and coauthors Jessica Stone and Adam Rosenberg included the advertising deduction in their list of "non-tax-expenditure base provisions" or NTEBPs. Defined as provisions that narrow the tax base but aren't classified as tax expenditures (let alone loopholes), NTEBPs "do not represent a clear divergence from a 'clean' tax code," the authors explained.

But specific NTEBPs might still be tightened up a bit, especially if lawmakers are looking for new revenue. Goldwein and his coauthors suggested, for instance, that lawmakers could require that advertising costs be partially capitalized, with some portion (say 25 percent) written off over a 15-year period (similar to the treatment of goodwill expenses). The balance could still be expensed immediately, as allowed under current law. Such a change might raise $20 billion annually, they estimated.

Historical Precedent

History offers some precedent for taxing ads, but past episodes are not exactly encouraging for modern advocates of the idea. In 1765 the infamous stamp tax included an advertising levy, requiring a payment of two shillings for every ad regardless of its cost or circulation. Given the Stamp Act's role in paving the way to revolution (and the quick repeal of the tax in 1766), that levy might well be considered a cautionary tale.4

During the Civil War, Congress imposed a 3 percent tax on the gross receipts from advertisements appearing in newspapers and magazines. The first $1,000 was exempt (the exemption was later reduced to $600), and small newspapers with circulations under 2,000 escaped the levy. But the tax did not long survive the war.5

By far the most interesting argument over advertising taxes, however, focused on a proposal that never advanced very far in the legislative process. In the early 1950s, congressional experts working for the Joint Committee on the Economic Report suggested a new tax on advertising designed to serve as an economic stabilizer.

After the end of World War II, advertising taxes drew some modest attention from lawmakers and policy experts. But the debate didn't begin in earnest until 1952, when advertising executive Max A. Geller published Advertising at the Crossroads, a critical assessment of the industry and its role in U.S. society.

Geller's book appeared as U.S. political leaders were still wrestling with inflation concerns. Rising prices dominated economic policymaking during World War II, and as the United States began a new war in Korea, inflation again posed a serious threat. Lawmakers used a variety of weapons to control prices, most notably individual tax increases designed to curb consumer demand.

Geller argued that in such a context, advertising was problematic. "If we are fighting inflation and one of the important features of the battle is to curb consumer demand for civilian products which will not be available, then how can we encourage and permit the unrestrained and unregulated 'all-out-effort' of advertisers to sell, and sell, and sell still more?" he asked.6

"The time has come to recognize the fact that our national policy, which is aimed at preventing a disastrous inflationary economy, can be negated and thwarted by permitting the unrestrained expenditure of billions of dollars for advertising at the very time when the government -- proclaiming a national emergency -- has sought to restrain increased consumption," Geller said.7

Congressional experts had come to the same conclusion. "From a general economic point of view, one of the most desirable excise taxes that could be levied would be a tax on advertising, especially on that urging consumers to buy consumer goods," declared a 1951 staff report from the Joint Committee on the Economic Report. "This is obviously not the time to whip up inflation further by stimulating consumer buying, nor is it a time for making still worse the already grave shortage of so vital and critical a material as newsprint or woodpulp. Yet notwithstanding this, an increased volume of advertising continues to spur consumers on to additional spending."8

In mulling over the effect of a heavy tax on advertising, the joint committee saw much to like. Advertising for some products might disappear entirely, while other ads might simply decline in frequency. Media companies could slow that decline by lowering rates and absorbing part of the tax, and advertisers might shift to untaxed promotional tools, like direct mail. But a general decrease seemed certain.

The revenue effect of a heavy advertising tax was uncertain, the committee experts concluded. "If the heavy tax had no effect on the volume of advertising or the prices charged, the yield from a 20 to 25 percent tax would be well over $1 billion," they predicted. But if fewer ads made for fewer sales, corporate income tax revenues might suffer.

A new tax, however, might also discourage so-called goodwill advertising -- thought to have little effect on sales and often commissioned to absorb taxable income and lower excess profit and regular corporate income tax liability. In that case, income tax revenues might actually increase.

Leaders of the joint committee did not exactly embrace the ad tax proposal -- which was no surprise given the torrent of complaints that greeted it. Panel chair Sen. Joseph C. O'Mahoney notably refused to endorse it. The American Advertising Federation launched a full-throated campaign to derail the proposal, as well as any other advertising curbs that might replace it. The group prepared statistics on the minimal inflationary impact of even the biggest ad campaigns. A big cigarette campaign, for instance, added only half a cent to the cost of a pack, the federation contended; the biggest gasoline campaign, just a fifth of a cent. Bread advertising cost less per unit than the wrapper used to contain a loaf.9

Similarly, the president of the National Sales Executive Association denounced the joint committee plan as "another socialistic measure," and he moved quickly to wrap himself -- and advertising -- in the flag. "With selling and freedom of choice the only difference between our type of economy and that of the socialism and communism, a tax on our freedom of choice and the salesman that appeals to it most cheaply, advertising, would give us the very thing we are fighting in Korea."10

In a blistering editorial, the Chicago Daily Tribune ripped into the plan. Calling it concocted by "a group of bureaucrats who have never been elected by anybody to any public job," the paper attacked the plan as disastrous. "It can only be said that no more unconstitutional or pernicious proposal has emanated from the New Deal since its inception," the editors wrote. (Apparently, the paper considered the joint committee a stronghold of unreconstructed Rooseveltian refugees.) "The scheme to tax advertising is a direct challenge to the freedom of the press as enunciated in the 1st amendment," the paper continued. "Advertising under that article partakes of the same immunity as news content, editorial expression, or any other form of utterance in a newspaper."11

Newspapers, of course, had self-interested reasons for hating the ad tax. "The plain intention of the New Deal bureaucrats who advance this scheme is to cripple newspapers and thereby protect the ruling politicians from criticism," the paper said.12

For his part, Geller disliked the joint committee proposal, arguing that its effects were too numerous and hard to predict. But he had a better idea: simply limiting the deductibility of advertising expenses. Geller suggested that ad costs might remain deductible up to a point, but that spending beyond that threshold would not lower tax liability.

Geller, in fact, envisioned a flexible threshold, with deduction limits varying according to the economic climate. Companies might still be allowed to create an advertising contingency fund, contributions to which would be tax free. But that contingency fund could be used only when Congress declared that the country needed more, not less, consumer spending. "In other words the aim must be, at all times, to integrate the advertising expenditure with national welfare," he said.13

Geller noted that he was not the first to envision that sort of countercyclical role for advertising. In 1927 Secretary of Labor James J. Davis had proposed something similar. "Modern advertising and merchandising can be utilized to keep labor employed and thereby preserve the demand for merchandise of all kinds," he had written.14

Critics pointed to problems with the Geller plan, including the different advertising needs of various industries. "The trouble is that the volume of advertising varies so much from industry to industry that an overall limitation bearable by the soapmakers would be no limitation at all for anybody else," noted one reviewer of Geller's book. "But if you impose different limitations on one industry than on another, perhaps using a historical basis, you introduce factors requiring administrative discretion. To whom should it be entrusted? Under what legislative standards?"

Those problems were not insurmountable, but they were still daunting. As a result, Geller's plan never moved far beyond the level of idle speculation. And in retrospect, it seems almost charmingly naïve, conceived in the heady days of the early Keynesian revolution, when ambitious technocrats hoped to manage the business cycle with great precision, using a variety of levers and policy tools.

But it is worth noting that the macroeconomic role of advertising has remained a topic of debate for much of the last half-century, at least among scholars. And some recent research suggests that Geller might actually have been on to something, even if his plan for revising the advertising deduction was little more than half-baked. Advertising expenditures do seem related to economic growth, although the precise nature of that relationship remains murky.15

It's safe to say that today's policymakers would not be tempted to regulate advertising for the good of the economy. Indeed, Republicans seem generally unwilling to consider even more traditional approaches to countercyclical policymaking. But would-be social reformers like DeLauro continue to consider the larger consequences of advertising. Advertisers shouldn't take the status quo for granted.


1 See, e.g., Beth Snyder Bulik, "Industry Goes on Offense to Guard Ad Tax Deduction," Advertising Age (Mar. 7, 2011), at 2-30.

2 On the targeting of drug ads, see Matthew Arnold, "Lawmakers Eye Tax Deductions on Drug Advertising," Medical Marketing & Media 44, at No. 8 (Aug. 2009); "Franken Introduces Bill to End Tax Breaks for Drug Company Advertising," press release, Oct. 8, 2009, available at

3 Marc Goldwein et al., "Beyond Tax Expenditures," Tax Notes, July 15, 2013, p. 253 .

4 Max A. Geller, Advertising at the Crossroads: Federal Regulation vs. Voluntary Controls (New York: The Ronald Press Co., 1952), at 97.

5 Id.

6 Id. at 19.

7 Id. at 268.

8 Joint Committee on the Economic Report (1951), at 58-60.

9 John Stuart, "Advertising Group Combats Tax Plan," The New York Times, June 13, 1951, at 53.

10 "Advertising Tax Is Opposed Here," The New York Times, Apr. 5, 1951, at 42.

11 "A Tax on Knowledge," Chicago Daily Tribune, Apr. 16, 1951, at 20.

12 Id.

13 See supra note 4, at 274.

14 Quoted in id. at 20.

15 For a useful discussion of the debate and some recent findings, see Dennis A. Kopf, Ivonne M. Torres, and Carl Enomoto, "Advertising's Unintended Consequence," Journal of Advertising (Winter 2011), at 5-18.