Wednesday, April 01, 2015

NYU Tax Policy Colloquium, week 9: Shu-Yi Oei's Can Sharing Be Taxed? (co-authored by Diane Ring)

1) “Sharing” or cash money?
 Oei’s and Ring’s Can Sharing Be Taxed? does a great job of offering a thorough background regarding the tax issues associated with the rise of the so-called “sharing” economy – involving Internet-based businesses such as Uber, AirBnB, TaskRabbit, and all of their competitors in the fields of lateral or peer-to-peer provision of rides, cars, lodging, specialized handyman work, etcetera.  It thereby offers a valuable foundation for follow-up work that is more normatively focused, and which I gather the authors themselves plan to write.

Someone should write an article on this topic called “Thanks for Sharing!”  But “sharing” – apparently the industry’s term for itself – is a misnomer.  The sharing economy is about being paid cash money for services and/or the use of property, not about “sharing” like people on a hippie commune in the 1960s.  So there is a bit of cant in the name that the industry has given itself.

That said, the emergence of the so-called sharing economy is surely a good thing.  In completely standard economic terms, declining transaction costs have permitted the occurrence of more deals for mutual benefit, and thus the realization of more social surplus.  “Sharing” thus involves an expansion of markets – capitalism on the march – albeit, at least in the early stages, in a refreshingly decentralizing way.

This could support two pro-“sharing” narratives.  The first is that they in fact create a lot of surplus.  The second is that taxing “sharing” activities would risk eliminating this surplus.

Only, these two narratives are in tension.  The greater the surplus, the more you can tax it without causing it to disappear.

Now, the so-called sharing economy does more than just create new surplus by taking advantage of reductions in transaction costs.  A second theme is its undermining certain regulatory regimes.  This, too, might be a good thing if one happens to dislike those regimes.

What about the sharing economy and tax?  Frank Easterbrook once compared mid-1990s scholarship about “Internet law” to what he called the “law of the horse.”  Money quote: “Lots of cases deal with sales of horses; others deal with people kicked by horses; still more deal with the licensing and racing of horses, or with the care veterinarians give to horses, or with prizes at horse shows. Any effort to collect these strands into a course on 'The Law of the Horse' is doomed to be shallow and to miss unifying principles.”

Whether or not Easterbrook was correct back then on that topic (Larry Lessig disagreed), Oei and Ring refreshingly, and I think correctly, take the same view here, arguing that the tax issues posed by “sharing” businesses are readily amalgamated with those we already know.  A few new rules and approaches might be needed, and there are compliance / burden-managing challenges to consider, but no new paradigms to puzzle about.

2) Are all of the major types of sharing businesses relevantly the same?
 Possibly not.  Indeed, they may differ in ways that are relevant to how tax and other regulatory systems should address them.  Let me take 3 examples: Uber, AirBnB, and TaskRabbit.  I don’t know enough about them to say definitively that they are relevantly different – but the possibility that they might be merits further attention.

a) Uber, along with similar businesses such as Lyft and Sidecar, addresses thin markets where you can’t hail a cab.  Sure, they are frequently to be seen on the streets of Manhattan (other than right at 5 o’clock when the shifts change), but try the outer boroughs or Los Angeles and you could stand there all night.  Even insofar as you could have scheduled a car service in advance, Uber can offer far greater last-minute flexibility.  And then there’s the surge pricing option, controversial (as such things tend to be) but potentially a life-saver in some circumstances.

But there’s something else going on too.  Uber et al undermine taxi medallions, by offering competition that the holders did not expect, e.g., when they purchased the medallions.  (I was almost stranded in Milan, at a rail station several miles from my hotel, which I had no way of finding, due to a one-day cab strike protesting Uber.)

This might be a good thing if one dislikes the medallion system’s restraint of competition, subject to what one thinks about the transition issue when medallions unexpectedly lose value because competition has been allowed to emerge.  But it adds an extra issue to the story.

There is arguably a public goods character to having cabs you can hail, with pre-set prices that you know about before you go somewhere that will require hailing a cab to get home.  One could perhaps argue for subsidizing this service, but artificially maintaining medallions’ value is probably not a good way to go about this.

b) AirBnB, along with similar businesses such as Roomorama, expand a spot market that existed beforehand, but perhaps increase the convenience of using it.  However, it’s been suggested, although I lack personal knowledge on this score, that these “sharing” websites provide less added value than Uber et al, in terms of expanding what one can find.  For example, people use Facebook, Craigslist, etcetera to do the same thing, which they couldn’t really do in lieu of using Uber et al.  This suggests that placing, say, information reporting burdens on home-sharing businesses might lead to greater opt-out than doing the same thing for ride-sharing businesses.  At the least, this possibility merits further scrutiny.

AirBnB is not, however, just about the folks with a spare room or a sofa, or who are leaving town for the weekend.  Apparently some of its not-so-secret sharers are in effect in the hotel businesses, holding multiple establishments for this very purpose.

There is also a regulatory avoidance issue here, pertaining to hotel occupancy taxes (which AirBnB had not been collecting, but now concedes in some jurisdictions that it should).  As it happens, these arguably are not great tax instruments.  While there would be a clear theoretical case for a Pigovian hotel occupancy tax that charged for negative externalities, these are unlikely (even if they outweigh positive externalities) to be well-measured by the actual tax instruments.  The main reason for charging hotel occupancy taxes may be attempted tax exportation – trying to make non-voters pay – but if the jurisdiction lacks significant market power, the incidence will mainly be borne by local property-owners, and the tax’s main effect may be reduce the efficiency of local real estate usage.

Of course, even if one dislikes hotel occupancy taxes, undermining them via the sharing economy might not be the best way to proceed.  Note, however, that even if one can make AirBnB play nice, the same presumably won’t hold for Craigslist, so one faces the question of how the market will react in practice.

c) TaskRabbit – Here it seems to be clearest that what’s going on is expanding markets, without the same regulatory overlap (unless, say, people are avoiding licensing requirements such as those for plumbers and electricians).  Here, too, one has the Craigslist et al set of options, which might reduce the tax authorities’ gain from making TaskRabbit play ball, but suppose TaskRabbit adds more value than AirBnB (not that I know it does).  Then enlisting it to help, say, with information reporting would be potentially more promising.

3) In theory, should we tax sharing arrangements “neutrally” vs. other business activity?
 To income tax folk, as distinct from “sharing” enthusiasts, the answer may seem to be clearly Yes.  After all, the people who “share” their services or property are being paid money.  Nonetheless, at least 3 types of arguments to the contrary could be made:

The first would be that taxing them less, at least in the formative stages, would permit valuable “infant industries” to emerge, or reward innovation that the market does not fully reward given imitation, or respond to regulatory cartelization by existing businesses.  I’m certainly not endorsing this line of argument; just noting it.

Second, suppose sharing activity is more tax-elastic than other business activity, because it tends to substitute “down” to untaxed substitutes such as leisure and non-taxable barter, rather than “up” to more conventionally organized business activity.  This would support a Ramsey / inverse elasticity type of argument for taxing it at a lower rate.  But again, one would have to establish the factual predicate.

Third, suppose taxing sharing activity is costlier, per dollar of revenue that would rightly be collected, than taxing other business activity.  This might, at a minimum, support “rough justice” approaches that sacrificed accuracy for getting it, on average, approximately right (e.g., taxing gross income rather than net income, if the costs are hard to establish, but at a reduced rate).  But it also might conceivably support accepting lower taxation of the sector in practice

4) “Tax opportunism”
 The paper notes that prominent sharing businesses, especially initially, were often a bit aggressive in claiming favorable tax treatment – for example, by denying that they faced obligations under existing law to issue 1099s, collect hotel occupancy taxes, etcetera, where at least arguably such obligations existed.  It calls this “tax opportunism.”

Not a huge surprise, of course, to find businesses aggressively using legal ambiguity in their favor.  Perhaps the main conceptual distinction here – whether or not it matters normatively – is that, at least to date, the main source appears to have been “found” ambiguity that exists by reason of the new business model, as distinct from “made” ambiguity, as in the case of a company that, say, engineers hybrid financial instruments in order to achieve favorable tax and accounting treatment.

The paper notes “regulatory arbitrage,” a useful category for describing made ambiguity that Vic Fleischer has written about.  Such planning often involves what I have called “semantic arbitrage,” e.g., claiming that the same instrument is “debt” under a given EU country’s tax law, yet “equity” under U.S. tax law, or “debt” for tax purposes yet “equity” for accounting purposes.  This is not actually “arbitrage” in the finance sense, but the term is useful and there may often be reasons why we dislike the end result.

For income taxation of sharing activity, the question of whether the actual service providers are employees or independent contractors may importantly affect the character of the intermediary’s reporting, and even potentially withholding, obligations.  But I am not convinced that analysis either of whether, say, Uber drivers are employees or independent contractors under existing income tax law, or of how they would be classified, say, for purposes of tort law, will greatly advance our understanding of what reporting or withholding obligations ought to be imposed on Uber.

5) Compliance problem 1: Information reporting
Information reporting can be a very powerful tool that increases compliance.  Intermediaries in the sharing industry appear to be generally well-situated to do it.  The main argument against making them do it pertains to the possibility that this will distort the development in the market in some way, e.g., via exit to Craigslist and beyond.  Someone should do empirical work on these issues.

6) Compliance Problem 2: mixed-use assets
When small-time players use personal assets such as their homes or cars in a sharing business, thus creating mixed-use assets, the reporting and compliance issues may grow bad enough to raise the question: Is the game worth the candle?  An alternative is to consider not just simplified reporting (e.g,. fixed mileage charges), but even elective low-rate inclusions, with dollar ceilings, that are based on gross rather than net income.

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