Price Increasing Tax Reductions for Electronic Newspapers

Abstract

The economic implications of indirect taxation have long been understood. Reducing indirect taxes results in lower prices. This straightforward and intuitive result has been an undisputed input into State aid policy, allowing robust legal analyses of tax exemptions. However, recent advances in the economic theory of two-sided markets yield new predictions for the impact of one type of indirect tax, the value added tax (VAT), on electronic newspapers. The surprising new theoretical prediction is that reader prices increase following VAT reductions. The prediction is driven by low marginal costs and the fact that advertisers would pay more for an ad seen by more readers. We bring this insight into the State aid literature and assess the implications for State aid policy. In particular, we raise questions over the legal assessment of a Norwegian State aid scheme, where a VAT exemption for print newspapers was extended to digital newspapers. If prices go up instead of down the policy will not have the intended effect and, under the given argumentation, the aid should not be viewed as compatible with the functioning of the internal market. The economic and legal arguments we present are important for the wider European debate on whether to reduce VAT on electronic newspapers. Keywords: VAT; Electronic newspapers; Two-sided markets