The Magazinist
Critical Thinking for Publishers
The Ad Tax
The Ad Tax
February 21, 2008

In 2006, the U.S. population reached 299 million, and U.S. ad spending exceeded $286 billion. A quick calculation shows that advertisers spent about $954 per person—almost $1,000 for each man, woman, and child, or approximately $2.61 of advertising per day per citizen. 

Where did U.S. advertisers get $286 billion to spend on advertising?  From you.  Since the expense of advertising is built into the cost of goods and services, every time you bought something, the cost of selling it was part of the price you paid.

U.S. ad spending is about 2.2 percent of the total U.S. gross domestic product.  In other words, it takes about 2.2 cents of advertising to drive every dollar of sales measured by the GDP.  In round figures, the same was true 50 years ago: U.S. ad spending was 2.3 percent of the GDP in 1956

If you’re a publisher, we hope you’re satisfied with your cut.  Every million dollars in ad sales represents .00035 percent of the total U.S. advertising market. 

It’s tempting to shrug this off as a mildly amusing, meaningless exercise involving a few big numbers.  The fact remains, however, that you, your family, your friends, and your fellow Americans really did pick up the tab for almost 300 billion dollars’ worth of advertising.  The cost of all that advertising is an invisible tax on purchases, a meta-sales tax, if you will.

At $954 per year per person, the Ad Tax is also…

* $79.50 per month per person
* $198.75 per month for the average 2.5-person family
* $2,385 per year for the average 2.5-person family

As a point of comparison, about 132 million federal income tax returns were filed in 2006, or approximately one return for every 2.27Americans.  These returns generated $1.044 trillion in tax revenue, roughly $8,000 per return, or $3,480 per capita.

So, at $954 versus $3,480, the average American’s Ad Tax was a bit more than a quarter of the average American’s income tax.

By the way, the Ad Tax is going up.  Looking back, we see that total U.S. advertising spending in 2000 was $240 billion. In 1990, the total was $130 billion.  Fifty years ago, total U.S. ad spending was $9.9 billion.  So, on a per capita basis the Ad Tax has risen rather dramatically:

1956:  $59
1990:  $522
2000:  $851
2006:  $954

Given the rapid growth of advertising in new media, the $1,000 per person threshold seems well within reach… if we’re not there already.

Of course, you did get some services for your Ad Tax.  Because advertising subsidizes many media costs to consumers, including lots of radio, television, and (not least by any means) magazines, the Ad Tax probably reduced your entertainment and information expense in 2006.  That's why it’s unlikely that your disposable income would increase by $954 if advertising were outlawed... in case you were wondering.

And we shouldn’t fail to note that advertising persuades people to purchase goods and services that they might not otherwise buy, and to pay higher prices than they might otherwise consider, so the GDP would be significantly lower if advertising mysteriously disappeared.

There’s a lot to think about here, but to us three points stand out.

First, the 50-year consistency in the ratio of advertising to the GDP is quite remarkable.  Is there a law that ties a level of advertising expenditure to the size of the economy?  We hope an informed economist will stumble along and shed some light.

Second, the statistics suggest that advertising expenditures are essentially motivated by competition.  There are other reasons to advertise, of course, but if marketers didn’t need to match competitors’ voices in the market, advertising expenditures wouldn’t increase proportionate to the economy—they’d decline.

Finally, the numbers reinforce for us how effective advertising can be at supporting higher prices.  The real benefit of having a universally recognized brand name is reflected in premium pricing as well as increased unit sales.   Publishers can profit from keeping this point in mind as they contemplate the value of their own brands.

From the consumer’s perspective, however, we might begin to think about taxpayers’ rights.  The world could be a quieter place if we insisted on better use of our Ad Tax dollars.  Mr. Whipple has passed on to his greater reward, but there’s much work yet to be done.  Maybe we can get some action going on that Geico lizard or the AFLAC duck.  Forgive us if we sound like Howard Jarvis here, but an annoying ad is a misuse of our Ad Tax.  To arms!

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Information Sources:

U.S. advertising spending data is from the Advertising Age 2007 Marketer Profiles Yearbook

Population data is from the U.S. Census  in the following tables:

2006 and 2000

Tax data is from the Congressional Budget Office