An Ad Tax Would Kill the Trump Reform Plan

Published on October 21, 2017

By Michael Foudy

Recently, President Trump unveiled the White House’s framework for tax reform. At the unveiling in Indiana, the president’s cautionary remark was accurate – this is “a once-in-a-generation opportunity,” so it is critical that Republicans get the job done this year.

On the whole, the White House has already put together a good skeleton, which involves slashing the corporate tax rate to 20-percent, simplifying the tax brackets, and doubling married and single filers’ standard deduction. Given the current political climate, though, “good” won’t be good enough. In the Senate, all but two Republicans need to be on board with the proposal. To ensure passage, leadership needs to spend a bit more time making it favorable to more members.
One of the most vocal critics thus far has been Sen. Bob Corker (R-TN). At a committee hearing, he remarked that “unless it reduces deficits and does not add to deficits with reasonable and responsible growth models, and unless we can make it permanent, I don’t have any interest in it.”

Many Laffer Curve-minded Republicans believe that when it comes to tax cuts, debt is the only genuine economic concern, because the effects of conservative fiscal policy can take care of the short-run revenue concerns. In any event, to appease Corker and other Republican detractors, the GOP tax reform panel will likely be exploring new revenue raisers to plug holes in the projected deficit. If that is what is necessary to create a passable bill, fine, but they must ensure that these new pay-fors do not significantly detract from future economic growth.

In 2014, one of the significant revenue-raisers that former Ways and Means Committee Chairman Dave Camp (R-MI) attempted to impose was a new tax on advertising, which the Joint Committee on Taxation said would have raised $169 billion from 2014 to 2023. Some have speculated that Congress is considering bringing it back to life this year. Is this tax worth it from a long-run economic or short-term political standpoint? I would argue not.

Enacting Camp’s ad tax proposal might bring in more immediate revenue, but to what end? Ad spending is a significant driver of economic growth that no one should want curtailed. In 2014, IHS Global ran a study on the economic effects of advertising on the United States’ economy. The company found in that year, the country’s $297 billion in advertising stimulated 16-percent of total domestic economic activity, all while helping to generate 20 million American jobs. Instead of putting the hammer down on something that brings significant returns on investment to the working class, a deficit-conscious Congress should explore other revenue raisers – perhaps close loopholes on hedge funds, a long-time Trump campaign promise.

Aside from these empirical growth numbers, the White House tax reform panel needs to realize that Sen. Corker is not the only Republican who has qualms about the new plan. Sens. Mike Lee (R-Utah) and Rand Paul (R-Ky.) have also expressed some concern about the Tax Policy Center’s calculation that it will end up raising taxes on some taxpayers making $50,000-150,000 a year. One would assume that, by likely raising consumer prices, the Camp advertising tax would add more fuel to the Tea Party Republican fire.

Grocery stores, discount outlets, and other shops with slim profit margins have their prices sizably reduced due to co-operative advertising programs. When a retailer releases an ad that features a given manufacturer’s product, that company will typically put down 30 to 50 percent of the advertising costs. Changing the requirements for advertising expensing will reduce these natural subsidies, which will almost certainly tack onto the working class’s shopping bills in the form of higher prices. Over their tenures in Washington, both Sens. Lee and Paul have kept a keen eye on hidden consumer taxes, including the impact of Federal Reserve open market operations on prices, so it would be hard to imagine them letting this one slide – especially when considering how vocal both have already been on the current tax blueprint.

In its current form, the White House tax reform plan provides a solid foundation for relieving the American people. However, even the president has said that “we’ll be adjusting” the framework to make it pass the smell-test of more Republican members. That is great, but when doing so, they need to make sure that the changes do not detract from the original goals of the proposal. Implementing an advertising tax would do just that, and for that reason, such talks should be abandoned.

Michael Foudy is a principal founder and Chairman of the Board of Radiant Marketing Communications, Inc., which owns Rainmaker Data Solutions, and a Chief Marketing Officer at Gramercy LLC. He also serves on the Board of the Citizens In Charge Foundation.