Remixed Revenues

After reading Josiah’s post about the philosophical and cultural implications of strict internet publishing laws, I decided to write my own response rather than a long comment. The reason being that his thoughts really got me thinking.

Originally, I was going to comment, saying that I agreed with his post at a fundamental level, but that a) restrictive copyright laws affect not only the youth but any artist who wants to express their creativity using the internet as a platform and b) that I thought the reason the government was so restrictive and uptight about remixes of copyrighted work was because they would make less of a profit from tax revenues on royalties. But did I actually know that? How much is the government actually making under the current system?

To summarize my brief and not-so-in-depth research, the government loses money for individual pieces of work published on the internet because individuals don’t make much money from it, and the hosting sites (while they do generate a huge profit) do not get much revenue from individual works– they rely on the volume of the content that they host.

You can read my process under the cut.

Let’s take three scenarios into account:

  • An artist produces a piece of work, gets a copyright on it with the government, and publishes that work through a publishing company, keeping the rights to his work.
  • An artist produces a piece of work, gets a copyright on it with the government, but forfeits the rights to his work to his publishing company.
  • An artist produces a piece of work, does not copyright it, and publishes the work online with a site that gives a minimal income based on ad revenue.

In the first scenario, the artist receives a royalty for his work, in addition to any advances the publishing company has given him in order to produce the work. The government can tax a standard income tax (contingent on his income bracket) (1) on his advance, and then an additional 0-30% on the royalties (2) if the royalties are not considered a part of his income– the percentage of the royalty tax depends on the type of work that’s produced (3). The government also taxes the publishing company, with the income tax depending on the income bracket of the company or special deals with the government(4). However, the publishing company is subject to a tax deduction for all its royalties as a business expense deduction (5). The second scenario is the same, except the artist only receives the advance and whatever the company pays him for his copyright. Thus, the total tax comes to the income taxes for both parties (with no tax deduction for the publishing company), in addition to a capital gains tax  of either 15% or 5% (depending on the seller’s income bracket) on the sold copyright (5).

In the third scenario, the artist gets no royalty, but does receive taxable income from the site. The site itself pays an income tax to the government.

In either case, there are quite a few factors that play into how much the government actually makes via taxes. These factors are:

  • How popular the piece becomes
  • The medium of the piece (i.e. whether it’s a book, piece of music, photograph, etc.)
  • Whether the IRS considers the artist’s work to be his job, i.e. his primary source of income
  • How much the author makes from other sources of income and other factors with how he files his taxes
  • How much the publishing company or internet publishing platform makes
  • How much all parties receive in tax deductions

And this is assuming that we’re in America when considering all this.

So, let’s assume that the artist in question is publishing a book. In one year, the book sells 20,000 copies at $15 per copy OR makes $13000 in ad revenue. The artist himself makes $35,000 a year outside of the profits from his book, for which he receives a $10,000 advance plus any royalties, which, if he receives them, will equal 10% of total profit (royalties can range from 7.5 to 15% (3)). Additionally, we know that the artist files his taxes singly and does not write professionally. For the second scenario, we will assume that the copyright of the book is valued at $5000 and can be taxed at 15%. For the third, we’ll assume he’s working under a similar setup as a standard blog with advertising, giving him around $500 a month, with the remainder going to the hosting site. The publishing company makes close to $10 milli0n a year, and we’ll say that he published online on a site that makes about $30 million annually.

To determine how much money the government makes, we can crunch the numbers for each scenario:

  • In scenario one, the government makes about $13k from the artist, and about $100k from the publishing company
  • In scenario two, the government makes about $8k from the artist, and about $105k from the publishing company
  • In scenario three, the government makes about $8.5k from the artist, and about $2.5K from the online site.

This isn’t accounting for any money that they end up giving back as a result of tax deductions. As you can see, there’s a significantly higher profit margin for either of the publishing scenarios.

Obviously, I am not an economist and my knowledge of this subject is superficial at best. My calculation’s aren’t even close to being solid, and a lot of them are based upon assumption and guesswork rather than facts. But I would venture a guess that online publishing, whether it be an original work or not, is costing the government money. People don’t have to pay as much to get access to art, and a lot of content can be hosted cheaply and effectively. The rise of internet hosting sites as big businesses have resulted in higher incomes on the whole for those companies, but the profit for each individual work is minimal simply because of the total volume of content hosted by the site.

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