Paul L. Caron

Friday, October 9, 2020

Weekly SSRN Tax Article Review And Roundup: Eyal-Cohen Reviews Lunney's The Copyright Tax

This week, Mirit Eyal-Cohen (Alabama) reviews Glynn S. Lunney, Jr. (Texas A&M), The Copyright Tax.

Mirit-Cohen (2018)

This empirical Article makes the claim that copyright should be viewed as a form of government-imposed tax and a government-provided subsidy. Although Lord Thomas Babington Macaulay of the House of Commons had made this claim almost 180 years ago, the author reiterates it by examining the scope of such tax and comparing consumer price increases in copies of popular books and public transmissions of sound recordings. He observes the Amazon prices of top 250 books written in the 19th century and in the 21st century and the analog v. digital (Kindle) prices of these books on Amazon. The 19th century book market was unregulated allowing free entry so multiple publishers could offer paper or electronic books while the 21st century book market has been subject to copyright regulation that restricted entry. This empirical study aspires to provide insights on the scope of the “copyright tax”, its incidence, and the return that end users receive.

Copyright regulation aims to increase creative output and ensures wide, vibrant, and varied supply of books, movies, music, and dance. Nevertheless, the author points out that on average, copyright regulation (of the type that restricts market entry) increases the mean price consumers pay for analog or paper copies of top 21st century books by $5.38- $6.34, which is viewed as imposing an effective “copyright tax” on readers of 46.6%- 56%. The scope of the “copyright tax” on electronic copies is even greater with an increase in the mean price consumers pay for top 21st century book by $9.34 -$9.99 accounting for more than 93.8 percent of the average retail price.  The move from analog to digital distribution, then, has increased the “copyright tax” by 55.4%-73.2%.

This data set, according to the author, further proves copyright creates monopoly in the 21st century book market because the prices for copies, whether analog or digital, are higher, on average, than prices for the copies of the 19th century books and that the cost savings that switching from analog to digital copies generates are passed along to consumers for the 19th century books, but not for the 21st century books. The author claims that such high “copyright tax” rate is exceedingly punitive (and event higher than the cigarette sales in the nation) and may discourages reading. He dismisses the claim that such “copyright tax” is deadweight loss or lost access or that it accounts for copyright’s social cost. He argues that if Congress wants to maintain the same copyright tax-and-subsidy levels for digital books as it had for paper copy, applying a narrower or shorter copyright protection for digital books is the appropriate policy intervention. This is especially relevant in light of increasing lobbying efforts of copyright owners in the last two decades to tighten the regulation of digital markets.

As for public transmission of songs, the author compares 1990s terrestrial broadcasting to current Internet streaming. He finds that for traditional transmissions the effective rate of the “copyright tax” on public transmissions is 4.3%. Such “copyright tax” serves primarily as a rent redistribution mechanism by taking rents that the radio station would collect from consumers in any event and forces the radio station to share some of those rents with content creators. In such cases, copyright imposes no social costs at all, or at the very least, may impose fewer social costs for a given amount of tax-and-subsidy. In contrast, the “copyright tax” has sharply increased as music transmissions have shifted to new digital models of distribution with an effective tax rate of 40% to 80%. While there was free entry and robust competition during the late 1990s and early 2000s, the licensing requirements copyright imposes on present-day Internet streaming has re-created, according to the author, the oligopoly market structure for streaming similar to the high fixed, low marginal cost structure of broadcast radio. Such increase in the “copyright tax” on digital media is a hidden cost because Congress did not amend the Copyright Act to increase the regulatory oversight over digital media.   

Moreover, examining the rise and fall of the sound recording copyright provides the author the opportunity to engage in a natural experiment to customer satisfaction and the return from copyright regulation. He examines Spotify Hot 100 music stream count from during the period after Congress regulated sound recordings in 1972 and confirms that there isn’t statistically significant and positive correlation between industry revenue in one year and music output in the next. To the contrary, where a statistically significant correlation was found, it was negative. More revenues in one year were associated with less or poorer quality music in the next. Thus, the author concludes that Congress decision to impose copyright regulation on sound recordings in 1972 either did not affect the quantity and quality of music output, or it reduced music output, ceteris paribus. Customers received nothing in return for the newly imposed “copyright tax”.

As for the incidence of such hidden “copyright tax”, the author argues it is passed directly on to book consumers rather than bookstores or other intermediaries while in the case of other media might fall on third parties like advertisers. In the copyright tax for music streaming the tax was paid to the copyright regulated industry by the intermediaries, whether radio stations or streaming services.

Engaging this article with current property law scholarship that views copyright as a property right determined by “the invisible hand” and via efficient operation of competitive markets, this Article takes the contrary position. The government uses copyright to regulate the production and distribution of products and forces consumers to pay a higher price than they would pay in the absence of copyright regulation. Thus, such copyright-as-tax-and-subsidy doctrine equates copyright entry regulation to Congress directly imposing an express tax on book sales and re-distributing the resulting tax revenue to book publishers through an express subsidy. It is irrelevant, according to the author, that the price surcharge for copyright use is not set by Congress nor collected by the government.  

Towards the end the author acknowledges that “copyright is not just a tax”. But then he declares it is worse than a tax because it has the same distortionary consequences as an express tax-and-subsidy system but also bypasses the need for express congressional action and oversight. Here, it seems, that the article’s assessment of copyright regulation as taxation could be refined. While regulatory oversight may have a similar effect to taxation, equating it to a direct government tax-or-subsidy seems a bit far-reaching. Nor is rent-seeking behavior a determinant factor for the existence of tax, subsidies, or lack thereof. There are many legal rules pertaining to urban development, financial accountability, sports, public health, consumer protection—that while they place a burden on producers that affects the supply and demand of associated products—are not considered a tax because the government does not directly collect, redistribute, or consider it part of its budgetary process. Price fluctuations can have a similar effect to that of a tax-and-subsidy system but could also derive from intrinsic and extrinsic market variances. If it swims or quacks it is not necessarily a duck. For example, price increases between 19th to 21st century books could be attributed to the function of supply and demand of such products as a result of changes in culture, tastes, or technological advancements.

Here's the rest of this week's SSRN Tax Roundup:

Scholarship, Tax, Tax Scholarship, Weekly SSRN Roundup, Weekly Tax Roundup | Permalink