Ten years ago, AMC’s Mad Men dazzled us with a new type of high-concept, prestige-format television drama. In the show’s second episode, Don Draper gives a particularly soaring speech about America, hope, and—yes—the value of advertising.
Draper’s firm Sterling Cooper has been hired to do damage control after 95 people lost their lives in an American Airlines crash (which actually happened in 1962). To rally the troops, Don opines:
American Airlines isn’t about the past any more than America is. Ask not about Cuba, ask not about the bomb, we’re going to the moon. Throw everything out. There is no such thing as American history – only a frontier.
Now Don Draper is fictional, but real people helped turn the story around on American Airlines and keep it flying—if it weren’t for them, media negativity could have grounded the airline permanently. (All the planes that don’t crash rarely get reported on.)
Paid media—advertising—is a critical way for companies to tell their stories, connect with consumers, and provide revenue to content creators like—incidentally—the publication you’re reading now. So it’s vital that Congress protect advertising from an unnecessary and damaging new regulation.
As part of broader tax reform, the House of Representatives is considering a measure to change how businesses can expense advertising. Whereas businesses can now expense 100 percent of their advertising costs in the year the money is spent, under this new measure, business can expense only 50 percent that year, with the remaining half amortized over the following 10 years.
Now, I don’t want to get into the details of time value of money or straight-line vs. double-declining depreciation. So suffice it to say that this plan is bonkers. (Not a technical financial term, but accurate.) That kind of amortization schedule is usually reserved for allocating the useful life of a large, tangible asset—like, say, deep-sea drilling equipment—not business-related service expenses, which are no different than any other expense.
So, this measure—originally proposed by Rep. Dave Camp in 2014—amounts to a tax on advertising. This idea is terrible for America.
The old cliché is probably true: “Half of advertising works and half of it doesn’t. But you never know which half.” We may not know which half, but Investor’s Business Daily reported that every $1 spent on advertising generates $19 of sales activity.
Advertising has a profound impact on the broader economy, according to a study by IHS Global that found:
– Companies spend $297 billion in advertising in the US per year.
– Those ads generate $5.5 trillion in sales, or 16 percent of the nation’s total economic activity.
– Advertising helps create 20 million jobs, or about 14 percent of total U.S. employment.
In the 1980s, Florida experimented with such a tax and it failed. Ad revenue declined by 12 percent, 50,000 jobs were lost, it was repealed after just six months, and the Republican governor was humiliated when he had to flip-flop on it.
Moreover advertising—as long as it’s not libelous or otherwise misleading—is free speech protected by the U.S. Constitution. Now I realize that free speech isn’t very popular if you’re trying to crush independent thought on a college campus, but the rest of America is, I hope, still America.
The good news is, a bipartisan coalition—124 House members led by Kevin Yoder (R-Kan.) and Eliot Engel (D-N.Y.)—has signed a letter stating, “The potential for strengthening our economy through tax reform would be jeopardized by any proposal that imposes an advertising tax on our nation’s manufacturing, retail and service industries.” (I’ll note, with just a dash of sarcasm, that getting 124 members of the House to agree to anything is a big deal.)
The unprecedented stock market boom of the last 10 months didn’t happen by accident – it happened because investors have faith in the Trump administration to jump-start the American economy. They believe there’s no such thing as American history, only a frontier. Slashing harmful taxes and regulations will solidify the market’s gains and roll out the next generation of American prosperity.
We may not know which half of advertising works and which doesn’t, but we do know that none of the ad tax will. Please, Congressional leaders, let’s throw it out.
