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How Uber Distrupts the Taxi Market

Last year, millions of mom and pop retailers across the country collected sales tax for state and local governments, as required under the law. Amazon, one of the largest retailers in the world, did not collect the same taxes in many states. The trick is that Amazon sells over the Internet and does not have a physical presence in many states. It is therefore able to claim an exemption from this legal obligation. The amount of the tax in most states is comparable to the profit margin in the retail sector.

This massive implicit subsidy for Amazon should infuriate supporters of the free market everywhere, even if it might have many conservatives applauding. After all, it is difficult to find a rationale for government subsidies to one of the largest corporations in the world to the detriment of local family-owned businesses.

This is the situation that we face with Uber and other “sharing economy” companies. Uber is using the Internet to disrupt the taxi market. In most cities this market has been dominated for decades by a small number of well-entrenched incumbents who used their control over the regulatory apparatus to limit competition. The result was higher prices and often bad service.

Uber and other new entrants to this market have already led to a substantial improvement in the quality of taxi service in many cities. In addition to the increased supply of taxis, many incumbents have responded to the challenge by improving service quality in the form of newer cars and the adoption of Internet apps. This is good news.

However, the incumbent cab companies are still largely subject to a set of regulations that Uber is trying to evade. Many of these regulations serve legitimate public purposes, even if they may not be the best way to achieve the goal intended.

For example, taxis are required to undergo regular safety and brake checks. This is both expensive and time-consuming. (In many cities the checks require going to understaffed city facilities.) It is certainly arguable that the safety requirements could be relaxed in many cases (e.g. do brand new cars need to be inspected every year?), but it is reasonable to have regulations that ensure an out-of-town traveler who gets a cab at the airport at 2:00 in the morning will find it has working brakes. Of course, this traveler could research on the web, and seek out a cab company that has a record of high standards, but many people may not want to go through this effort after a long day of traveling.

Similarly, drivers for incumbent cab companies typically have to get special chauffer licenses and also go through a criminal background check. The former ensures driver quality and the latter guarantees the safety of a passenger. Again, these requirements both involve time and money. Uber has largely avoided such requirements, although it is now doing some screening of drivers in some cities.

Incumbent taxi services also typically have to carry substantial insurance policies to protect passengers who are involved in accidents. Many Uber drivers are effectively uninsured when they are working because standard policies do not cover commercial driving. Here too, Uber is moving to provide insurance to passengers and drivers.

In addition to this set of regulations, incumbent taxi cab companies generally face some requirement to serve the handicapped. This usually means having a minimum number of handicap accessible vehicles. There is also an issue of serving cash-paying customers. Uber is designed as a credit card only service. Those without credit cards would not be able to use Uber. This would effectively exclude a substantial portion of the population from using taxis, if Uber came to dominate the industry. Since lower income people disproportionately do not have credit cards, this could leave many poor people unable to make trips to the doctor or other necessary travel.

There are also labor market regulations that often apply to incumbent taxi services. They are required to pay for workers’ compensation if a driver is injured on the cab. They also have to pay towards unemployment insurance if a worker loses their job. And they have to meet minimum wage and other labor standards. (This is not always the case with incumbent taxi services, since many treat drivers as independent contractors.)

In all of these cases, regulations serve a public purpose. It may not be necessary to maintain the same scope of regulation in all cases, and it certainly is not necessary to maintain the regulations in their current form, but it does not make sense to have one set of rules that apply to incumbent taxi services and a whole different set that applies to Uber. The appropriate policy going forward should be to modernize the regulatory structure and establish rules that apply equally to Uber and incumbent taxi services.

This should not in principle be a difficult task, but it requires some good faith from the parties involved. Amazon argued for years that it should not be required to collect sales tax because its programmers were not smart enough to keep track of the tax rates in different states. We saw similar silliness from Uber when it shared its data with Alan Krueger, a Princeton economist and former head of President Obama’s Council of Economic Advisers.

Krueger used the data to analyze the gross pay of Uber drivers and compare it to the government data on the net pay of drivers for traditional cab companies. However, he was not able to go beyond this apples-to-oranges comparison because Uber chose not to share its data on miles driven. Without some data on miles driven it is not possible to produce estimates of drivers’ costs, and thereby convert gross revenue into actual earnings.

Presumably Uber didn’t make this data available to Professor Krueger because it knew that it would lead to earnings numbers that looked bad compared to those of drivers of traditional cabs. We can only speculate on this question, since Uber is sitting on the data.

But if we scrap the “sharing” nonsense, the basic story is relatively straightforward. We need rules that ensure that cabs are basically safe, that drivers are competent, and without a recent history as dangerous felons. We need to make sure that people with physical handicaps can count on getting taxi service in a timely manner and that we have a system in place so that people without credit cards have access to cab service.

We also need to make sure that both the drivers and passengers are insured in the event of an accident. This includes worker compensation for drivers. In addition, drivers should be able to bargain collectively if they choose, if not as a union covered by the National Labor Relations Act, then as some other entity that would serve the same purpose.

And minimum wage and overtime laws should apply to taxi services. This means that drivers should be assured of earning at least the minimum wage net of expenses and one and a half times the minimum if they work more than a 40-hour week. If it is too complicated for Uber to make such calculations then they will be replaced by firms with more numerate management.

Finally, it is reasonable to have an overall limit on the number of cabs in a city. When congestion and pollution are factored in, the optimal wait time for a cab is not zero. It is likely the case that many cities have set these limits too low in the past, but that does not mean that no limits are the best policy.

Uber deserves credit for ending the dominance of the taxi cartels and modernizing the industry. That’s worth a positive newspaper column. The idea that Uber should be able to operate by its own rules may be the dream of its top executives and holders of Uber stock, but it is not sound public policy.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

This article originally appeared in Cato Unbound.

 

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Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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