The Sharing Economy II: Taxes
In my previous essay on the new sharing economy I discussed the matter of regulation in regards to such companies as Uber and Airbnb. In this essay, I’ll cover the subjects of taxes.
As with regulation, some people are quite opposed to taxes. Other people are fine with taxes—at least with imposing taxes on others. In general, though, people prefer to not pay taxes. As such, it is hardly a surprise that the new sharing economy includes various attempts to avoid taxes. One example of this is the case of services like Airbnb. On the face of it, these services are just providing a means by which a person can rent out his spare room, condo or apartment. For example, a person who will be in another state for a few months might use Airbnd to rent out his apartment so he can have some income to offset the rent. Looked at one way, this service is just a more organized version of the old informal economy in which people do a sublease, rent out their camp, or get a temporary tenant for their house.
One aspect of the informal economy is that taxes are usually not collected. For example, if Professor Sally informally rents out her house to her grad student Bob while she is in Europe as a visiting professor, Professor Sally and Bob will almost certainly not pay taxes—although Bill and Sally would certainly be involved with tax payments if Bob was renting a hotel room from Sally. While there are no doubt people who would like taxes paid on even informal transactions such as this, the informal nature of these transactions tend to make this impractical—this part of the traditional informal economy is small and decentralized so that having a tax system would be cost prohibitive in terms of what is gained in regards to the public good. There is also the legitimate concern that such private transactions (“okay, you can stay at my house for two months while I am in Europe, but you need to pay the utility bills, take care of the plants and walk my dog”) can fall outside of the legitimate domain of state control.
However, when a company such as Airbnd gets involved, then things change. The once purely informal economy becomes centralized around companies and there is also an increase in the scale of operations. After all, it is one thing if Professor Sally’s grad student is paying a modest fee to stay in her house while she is in Europe, it is quite another if Professor Sally starts running her house as a hotel. It also becomes a somewhat different matter if the number of people renting out property increases significantly. To be clear, there would seem to be three important changes. The first would be the centralization. Instead of people reaching informal agreements as individuals (who often know each other), these would be actual business transactions through a central company. The second would be the character of the process—short term renting out via a company would be rather closer to the hotel model than to the old informal model. The third would be the number of people involved: the sharing economy would presumably be considerably larger than the old informal economy.
From a practical standpoint, two of the changes could be used to justify using a similar tax approach to the sharing economy as is used in the traditional business economy (such as that of hotels). To be specific, with a centralized company and a large operation the collection of taxes becomes a more practical matter.
From a moral standpoint, if it is acceptable for the businesses with the same model (such as the traditional hotel) to have taxes imposed, then the same would seem to apply to the new sharing economy. So, if Sally would have to handle taxes if she ran a traditional hotel, then she should have to do the same if she ran her sharing economy hotel through an online service like Airbnb. Or perhaps Airbnb would be the one to handle the taxes.
Naturally enough, it might be wondered why taxes should be imposed on the new sharing economy—even if the new sharing economy is rather similar to aspects of the old economy. Of course, the people who make money through sharing rides or apartments do pay taxes for that income. However, there has been some controversy over services like Airbnb paying the hotel tax.
One reason for sharing companies to pay taxes and fees like traditional companies that they are analogous to is fairness. After all, the free market is not as free if some companies enjoy special breaks. Another reason is that the taxes and fees are needed to pay the public services and infrastructure that such companies (and their sharers) utilize. It might be contended that this is already covered by the taxes paid by individuals for their income. However, by that logic, businesses would seem to be exempt from taxes and fees on the grounds that their employees pay taxes.
Also, the growth of the sharing economy imposes new costs on the community in a way comparable to the costs of having a similar business. For example, having many Uber drivers in an area is like adding a large cab company to the area. As another example, having Airbnb rentals in a community makes the area more like a hotel area, with the accompanying burden on the community. As such, if the community (which includes many people who are not part of the sharing economy) faces increased costs then it is clearly acceptable to pass these costs on to those who benefit from this new economy.
There is also the cost of regulating the industry—as noted in my previous essay, when the sharing economy becomes comparable to the normal businesses (such as hotels and cab companies), then comparable public good (such as safety) regulations should apply. Naturally, these come with costs and it makes sense that the costs should be connected to the profits, rather than just be taken from the community in general. For example, with non-professional drivers acting like cab drivers and people renting out apartments and homes like hotels, there are legitimate concerns about public safety. Cab companies and hotels bear some of the cost of their regulation and so too should the sharing companies.
Naturally, there is still the more general debate about what is a fair tax/fee and concerns about the impact of taxes on the economy. However, it seems reasonable to believe that the sharing economy is analogous to the non-sharing economy and that it should bear a fair share of costs imposed upon the community.