Tuesday, April 07, 2015

Insert Uncomfortable Pun Using the Word "Uber" Here

by Neil H. Buchanan

This past weekend, I participated in the 18th Critical Tax Conference, which this year was hosted by Northwestern University's law school.  I suspect that I will end up blogging about more than one of the presentations that I heard there.  Today, I will focus on a new draft article by Professor Shu-Yi Oei (Tulane Law School) and Diane Ring (Boston College Law School).  The title of their draft paper asks: "Can Sharing Be Taxed?"  (Frequent readers of Dorf on Law might recognize Professor Oei's name from my recent laudatory post on her 2012 paper: Who Wins When Uncle Sam Loses? Social Insurance and the Forgiveness of Tax Debts (46 U.C. Davis Law Review 421 (2012).)

Actually, I am mostly using this latest Oei/Ring paper as an opportunity here to offer a few negative thoughts on the taxi-substitute service Uber.  In less than a year, Uber has gone from being almost completely unknown, to suddenly finding itself the hottest of hot Silicon Valley start-ups, to landing on the list of companies about which people are saying, "Wait, you mean they became a billion-dollar company by being evil?"  (For arguments that Uber is problematic, see here.  That it's evil, see here.  That it's merely inept, see here.  And if you need proof that Uber has an image problem, see Uber's CEO's defense that the company is merely "scrappy" here.)

That last step toward becoming a public pariah (even while still making money) was unexpected, and it really was mostly unnecessary.  For example, an Uber executive had to apologize last November for suggesting that the company dig up "dirt" on investigative journalists who were exposing the seedier aspects of the company's business model.

But even without that truly disturbing news, the larger point was that Uber was supposed to be a model success story, the leading example of how modern technology can profitably change the way established businesses are run.  The business model was supposed to be based on finding clever ways to match up supply and demand, using cutting-edge communications technologies.

And there really did seem to be a plausible story there.  The underlying, seductive idea is that almost everyone's car sits unused for most of its useful life, and there might be ways to allow some people to profit from selling rides in their cars such that other people do not need to own cars at all.  In short, the story is that communications technologies can put unused capital (and labor) to work, reducing waste.  If a company like Uber can put sellers and buyers together and profit from doing so, hurray!

The problem is that this story has been told before, and it is almost always a fig leaf for labor bashing.  For example, anti-government zealots had a great deal of success, especially in the 1990's, selling the idea that government functions could be contracted out to private companies, and that the wonders of competitive profit-seeking would cause those businesses to perform government functions at a lower cost than was possible in traditional government agencies.  This was an appealing idea for people whose vision of government was the Department of Motor Vehicles -- but who conveniently ignored their experiences with cable companies, or for that matter with auto mechanic shops or any of the other ripoff artists that litter the consumer landscape.

As it turned out, many of the privatization experiments were full-on failures, even on their own terms.  The Transportation Security Administration was created (with bipartisan support) after scandalous reports of the poor work that private security companies were providing (with minimum-wage workers).  An experiment with replacing the IRS's enforcement arm with private debt collectors turned out to be about half as effective in terms of collections, and the program cost so much money to run (including payments to the private companies, as well as monitoring costs to protect taxpayer privacy) that the program was a net fiscal loser.  That it became infamous for abuses of poorer citizens was also of some concern (he wrote, with deliberate understatement).

Moreover, it turned out that the private companies were not finding "efficiencies" that the government agencies had ignored.  Instead, they made whatever profits they could by being exempted from civil service laws and pay scales.  It was not, in other words, that those profit-motivated private companies had figured out a better way to combine capital and labor to provide a better product for grateful customers.  They simply extracted surplus from workers.  At most, that is an argument for asking whether labor laws accomplish their goals (and are worth the cost), but it in no way proves that private provision is inherently more efficient than public provision.

Uber and its cousins, as I noted above, also end up being back-door methods to extract money from workers and customers.  Famously, Uber claims not even to be a transportation company, but rather simply a software platform.  It thus has claimed that it need not screen drivers, provide insurance (or even do much to see that its drivers are insured), and so on.  To the extent that the company was "beating traditional taxicab companies," it was doing so not by exploiting its supposed tech-based advantage but simply by using its clout to shift costs onto others.

By virtue of being merely a tech platform, moreover, the company has entered the realm of internet giants who gather huge amounts of data on customers and drivers, with very little oversight.  For example, before I was aware of all of the bad press about Uber last year, I signed up for an account.  I never used the account, and then all the bad news came out.  When I tried to cancel my account, the only possibility was to delete the app from my iPhone, but not to cancel the account.  After a few months, the company finally provided on its website an unnecessarily difficult way to cancel an account (including a step where the departing customer receives a creepily chirpy email asking for an explanation for the cancellation), which ends with the promise that Uber will delete all of the customer's information (including credit card information) "in compliance with our Privacy Policy."  Said policy allows the company not to delete the information.

Which brings me back to the draft article by Professors Oei and Ring.  They focus on the tax aspects of the "sharing economy" (which, as Professor Oei noted in her presentation in Chicago, is a complete misnomer), pointing out that Uber -- in addition to saying that it is not subject to the same laws of liability, insurance, labor relations, and so on, with which traditional companies must comply -- also appears to believe that it need not comply with the tax laws.  The idea, apparently, is that this technology is so new that those industrial-age-era tax laws simply cannot keep up with hyper-modern commerce.

As Oei and Ring argue, that is nonsense.  There is nothing in the Uber model that is not easily handled by absolutely plain vanilla tax laws.  Indeed, the software that the company uses makes it infinitely easier to comply with the tax laws, because the data that the IRS would use to determine tax liabilities for drivers, Uber, and everyone else are being aggregated as part of Uber's business model.

As good academics, Oei and Ring also consider the possible negative consequences of applying the tax laws to "sharing" companies in the standard way.  One argument from industry apologists that Oei and Ring consider (and reject, as far as I can tell) is that forcing these companies to play by the same tax rules as everyone else might cause those companies to go out of business.

During the discussion in Chicago on Saturday, I offered a simple objection to this argument.  If these companies cannot compete by playing by the same tax rules as everyone else, even as they are being allowed to play by more favorable non-tax legal rules than everyone else, then they should definitely go out of business.  In fact, if we are really good capitalists, we should all be happy to see companies fail if they cannot play by all of the same rules as everyone else.  If there is an argument to change the rules for everyone, of course, then we can have that argument.  But if the argument is, "We need special treatment," then Uber's original hype -- that they alone have a way to find efficiencies that others have not found -- is revealed to be simply nonsense.


Michael C. Dorf said...

Here's another advantage for Uber (and like services): Many cities artificially restrict the number of taxis. In NYC, for example, there are a limited number of medallions. Thus, the capital cost of a taxi is not just the cost of the car but the cost of the medallion--about $1 million. That gives Uber (and conventional livery services, which do not need medallions either) a large cost advantage. But of course, if the city is artificially constraining the number of taxis below the equlibrium level, then the answer should be to create more medallions or eliminate the need for a medallion entirely, which is distinct from licensing, inspection, and insurance requirements.

David Ricardo said...

As far as taxing of ride or home sharing services I am astounded that there is any tax controversy at all. Mr. Buchanan and the authors he cites are absolutely correct, the existing tax laws handle this situation quite easily.

But with respect to Mr. Dorf's comment, while he is also correct he ignores the horrific economic penalty that existing holders of quasi-monopoly positions have when that quasi-monopoly is eliminated and free competition is introduced. In the situation with medallions, as he points out, some individuals (and investors) have paid $1million or more. The value of these medallions is created solely by government policy. The fact that such policy is ill adivised, economically inefficient and not in the public interest does not change the fact that changing the policy will have economically catastrophic impact on a small number of persons.

This also illustrates the difficulty of un-doing incorrect regulatory policy and why those that have a vested interest in that policy continuing are so vocal and active. Conservatives in particular may claim ideological purity, but when it comes to such policy items like subsidies for agriculture, price supports for sugar, government support for flood insurance for million dollar homes and the like conservatives are right beside everyone else feeding at the trough.


There's also a serious, underlying problem with the premise. Professor Buchanan characterized it as:

"The underlying, seductive idea is that almost everyone's car sits unused for most of its useful life, and there might be ways to allow some people to profit from selling rides in their cars such that other people do not need to own cars at all."

The bad assumption here is that "sit[ting] unused" is not a purposeful part of the design cycle, materials choices, and maintenance cycle.* Bluntly, the materials and consumables used in civilian vehicles simply are not capable of a routine, 6+ hours per day duty cycle. Vehicles would cost several times what they do to meet such an intended duty cycle. And it's even worse doing stop-and-go driving such as that required for ride-sharing services than it is for inordinately long commutes.

That's not to say that one can never take long trips in which the vehicle is being driven for twelve-plus hours a day; it is to say that such trips put inordinate wear on the vehicles, and especially when frequent or even routine. Ask any taxi fleet operator about maintenance cycles for its vehicles... and then ask if Uber has disclosed any of that to its drivers.

* I say this as a former aircraft maintenance officer; if you think there's outrage over this for privately owned vehicles, just think about what it's like for fighter aircraft!

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