Sharing economy requires new tax policies, Baker Institute expert says

The sharing economy – the growing segment of industry that includes enterprises like Uber and Airbnb – poses sweeping challenges to governments grappling with unprecedented taxation issues, according to an expert in the Center for Public Finance at Rice University’s Baker Institute for Public Policy.

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Joyce Beebe, a fellow in public finance, outlined her insights in a new report, “How Should We Tax the Sharing Economy?” The report reviews and analyzes key federal tax considerations for companies and workers in this expanding sector of the economy and offers recommendations for the future.

“Although the sharing economy could potentially lead to higher tax revenues for governments, it also reinforces the well-known challenges of taxing large numbers of small taxpayers,” Beebe wrote. “Taxes under this model are more difficult to collect, more distortionary (because compliance costs consume a larger portion of revenue earned), and generate only modest revenue gains from small businesses. Some analysts also caution that while digitalization makes transactions more traceable, if tax compliance does not improve as overall economic activities grow due to the sharing economy, the portion of the informal economy in relation to the total economy will increase.”

One problem is there is no clear understanding of what the sharing economy encompasses, Beebe said. All definitions include the typical ride-hailing and home-sharing websites like Uber and Airbnb, but there are questions about whether the industry includes two other types of business models: peer-to-peer sales (like Etsy) and platform ownership of assets (like Zipcar). Many research studies use the term “sharing economy” interchangeably with gig economy, peer economy, collaborative economy, on-demand economy, matching economy, access economy or platform economy, she said.

(Video by Brandon Martin)

The sharing economy includes many more users and consumers than workers and suppliers, Beebe said. A PwC survey indicated that about 20 percent of the U.S. population had engaged in a sharing economy transaction in December 2014, about 7 percent of which involved service providers earning gig income. This study also estimates that five major sectors (travel, car sharing, finance, staffing, and music and video streaming) generated $14 billion in 2014 and that revenue would grow to $335 billion by 2025.

Most of the people working in this sector of the economy rely on their gig work as secondary sources of money supplementing their primary incomes, and many of them work part time, Beebe said. A JPMorgan study shows that 0.4-0.6 percent of the working-age population earned gig income in a given month, whereas a McKinsey Global Institute study estimates that less than 1 percent of the U.S. working-age population were non-permanent workers who secured gigs or customers through digital marketplaces.

While total employment in the sharing economy is small, it may be expanding the number of low-income workers who don’t qualify for basic worker protection and benefits, Beebe said. “The current system, which classifies them as independent contractors and subjects them to similar tax treatments as small business owners, will only exacerbate the issue, especially for the large portion of gig workers who are young and financially inexperienced,” she said.

The current worker classification system may not have a solution for this problem, Beebe said. “Portable benefits or new worker classifications would be useful alternatives,” she wrote. “A bill introduced in Congress in 2017 recognized the importance of allowing independent workers to maintain both worker and entity-contributed benefits upon changing jobs and called for additional research on portable benefits for them.”

Beebe said tax compliance in the sharing economy is lagging. “A significant number of taxpayers who receive income from the sharing economy are not aware of their filing and reporting obligations and therefore fail to make quarterly estimated tax payments or pay self-employment taxes,” she wrote. “When gig workers venture into expense deductions, the compliance is even less accurate. IRS has a Sharing Economy Tax Center that features information on many topics relevant for gig workers; however, adding industry-specific guidance in layman’s terms would be more helpful.”

A Senate proposal in 2017 addressed some of these issues, Beebe said. “The New Gigs Act clarifies worker classification standards for those claiming independent contractor status,” she wrote. “It proposes to have third-party networks in the gig economy use Form 1099-K, and payers in traditional independent contractor relationships file Form 1099-MISC, with reporting thresholds of $1,000 for both. Finally, the bill requires gig businesses to withhold a 5 percent income tax from their contractors. Although the bill has not advanced, Congress is likely to return to these issues in the future.

“Although there is debate about the size of the gig economy and whether it is the future trend of employment, it is increasingly likely that one may experience a mix of traditional and independent work over the course of his/her career,” Beebe concluded. “These two work styles do not need to be mutually exclusive, since consumers may view the platforms as providing an additional option to the existing choices. There is no doubt that the sharing economy poses sweeping legal, commercial and social challenges. Policymakers should proactively work to manage these issues.”

About Jeff Falk

Jeff Falk is associate director of national media relations in Rice University's Office of Public Affairs.