VAT-exemption or tax credits for newspapers?

News­pa­pers are con­sid­ered to be impor­tant providers of infor­ma­tion, cul­ture and lan­guage, and have a reduced Val­ue Added Tax (VAT) in most coun­tries. In Nor­way, news­pa­pers are not sub­ject to VAT at all, but this pol­i­cy might change. A Media Sup­port Com­mit­tee was appoint­ed by the Gov­ern­ment last autumn, and will sug­gest a new regime for media sup­port in a Green Paper that is expect­ed to be issued before New Year 2010.

The cur­rent tax exemp­tion amounts to about NOK 1.5 bil­lion of the NOK 1.8 bil­lion com­pris­ing total Nor­we­gian press sub­si­dies. Today, the tax exemp­tion is reserved for news­pa­pers’ print edi­tions, and news­pa­per com­pa­nies are fight­ing des­per­ate­ly to retain this priv­i­lege. At the same time, they want to bring this eco­nom­ic advan­tage over to their elec­tron­ic initiatives.

In a time where dig­i­tal dis­tri­b­u­tion is becom­ing increas­ing­ly impor­tant, it will be dif­fi­cult for the Media Sup­port Com­mit­tee to argue that the largest sup­port com­po­nent should be reserved for print­ed news­pa­pers. This can be com­pared to finan­cial­ly sup­port­ing com­posers under the con­di­tion that they release their music on vinyl records!

A pos­si­ble solu­tion could be to intro­duce a plat­form-neu­tral reduced VAT. The Media Busi­ness­es’ Asso­ci­a­tion recent­ly agreed on a com­pro­mise pro­pos­al in which a reduced VAT on “cul­ture” will be an impor­tant part of the future media sup­port. This com­pro­mise is expen­sive. Accord­ing to the pro­pos­al, print news­pa­pers will keep their tax exemp­tion, while online news­pa­pers, mag­a­zines and the spe­cial­ist press will get a reduced VAT, rather than today’s full VAT. 

Intro­duc­ing a reduced VAT for the press will also cre­ate prob­lems of delim­i­ta­tion. Decid­ing who qual­i­fies for tax exemp­tion can be dif­fi­cult enough under the cur­rent regime, but it may present a far more urgent prob­lem in a dig­i­tal world where the dis­tri­b­u­tion of jour­nal­ism, music, tele­pho­ny and sheer enter­tain­ment increas­ing­ly con­verges. It is there­fore impor­tant to com­ply with the intend­ed aim of the VAT, name­ly to raise mon­ey to the Trea­sury. Sub­si­dies should be pro­vid­ed through oth­er, more tar­get­ed arrangements.

Accord­ing to the Media Sup­port Com­mit­tee’s man­date, media sup­port is pri­mar­i­ly aimed at main­tain­ing a diver­si­ty of media and cul­ture to ensure broad pub­lic access to news and high qual­i­ty debate. Exist­ing sub­si­dies are large­ly a prod­uct of polit­i­cal horse trad­ing and his­tor­i­cal coin­ci­dences. The impor­tance of the tax exemp­tion has grown over time and has result­ed in an extreme­ly dis­tort­ed dis­tri­b­u­tion of total sub­si­dies towards the major news­pa­pers. This is hard­ly inten­tion­al. Had the press been sub­si­dized in the form of jobs, the Media Sup­port Com­mit­tee would have some 2,000 jour­nal­ists to spread among the coun­try’s news­rooms. The cur­rent norm of dis­tri­b­u­tion cor­re­sponds to a sit­u­a­tion in which 540 such jour­nal­ists would have been des­ig­nat­ed to the two largest news­pa­pers, VG and Aften­posten, both locat­ed in Oslo. From a qual­i­ty per­spec­tive, sup­port­ing large edi­to­r­i­al envi­ron­ments is impor­tant, but such an extreme sub­si­dis­ing of the largest media com­pa­nies in the coun­try is hard­ly a cost-effec­tive way to cre­ate media diversity.

An inter­est­ing alter­na­tive sug­ges­tion comes from Sven Egil Omdal of Sta­vanger Aften­blad. Omdal sug­gests sup­port­ing jour­nal­is­tic work direct­ly through, for exam­ple, geo­graph­i­cal­ly dis­persed work grants chan­neled to tal­ent­ed indi­vid­u­als. Jour­nal­ists are impor­tant pro­duc­ers of knowl­edge and eco­nom­ic research sup­ports the claim that the free mar­ket fails to pro­duce enough knowl­edge on its own.

Selec­tive and direct sup­port of the type Omdal pro­pos­es would be more accu­rate than the VAT exemp­tion, but exten­sive direct sup­port also has its draw­backs. Eval­u­at­ing a large num­ber of project appli­ca­tions requires a large admin­is­tra­tive appa­ra­tus and may eas­i­ly end up as an are­na vul­ner­a­ble to lob­by­ing. Indi­rect sup­port through the tax­a­tion sys­tem is cheap­er, more robust and pro­vides greater pre­dictabil­i­ty for the indus­try as it is not allo­cat­ed over the state bud­get from one year to the next.

One sug­ges­tion that has been pro­mot­ed in the Amer­i­can debate on press sub­si­dies is tax deduc­tion for edi­to­r­i­al positions[1]. This form of sup­port finds its par­al­lel in the Nor­we­gian “Skat­te­funn” scheme, where com­pa­nies receive tax cred­its for invest­ments in R&D — anoth­er form of knowl­edge production[2]. As major news­rooms car­ry greater labor costs than small­er news­rooms, such an arrange­ment would also ben­e­fit the major com­pa­nies, how­ev­er this sup­port would not be tied to cir­cu­la­tion and would not be linked to the VAT rate. This pro­vides more free­dom both in terms of over­all sup­port and in terms of dis­tri­b­u­tion. The Nor­we­gian R&D tax cred­it scheme, for exam­ple, applies dif­fer­ent tax rates for large and small busi­ness­es, and places a lim­it on the total tax cred­it to pre­vent large com­pa­nies such as Sta­toil and Telenor from cap­tur­ing more or less the whole pie.

Today’s tax exemp­tion implies that the five largest news­pa­pers in Nor­way obtain 40 per­cent of total press sub­si­dies. The Media Sup­port Com­mit­tee will need to pro­vide a very good jus­ti­fi­ca­tion should this sit­u­a­tion continue.

Foot­notes
1. See e.g. “The Death and Life of Amer­i­can Jour­nal­ism” by Robert McCh­es­ney and John Nichols.
2. The Dutch R&D tax cred­it scheme, WBSO, may rep­re­sent an even bet­ter mod­el for indi­rect media sup­port than the Nor­we­gian Skat­te­funn-scheme as it is based on researchers’ wages. The tax ben­e­fit con­sists of a reduc­tion in wage tax and social secu­ri­ty con­tri­bu­tions paid for employ­ees car­ry­ing out R&D. In 2010 the R&D deduc­tion is 50% of the first € 220,000 in R&D wage costs and 18% for the remain­ing R&D wage costs. Start-up com­pa­nies receive as much as 64% of the first € 220,000.