Tax Reform

19th Century Myth Threatens 21st Century Technology

Two centuries ago, a group of English textile workers known as the Luddites feared that new technologies of the industrial revolution would destroy their livelihoods. The Luddites formed militias and began attacking newly industrialized towns and destroying their machinery. However, the jobs destroyed by new technology paved the way for new and more jobs. Subsequent economic revolutions in agriculture, telecommunications, the microchip and the internet have had the same effect— and yet the myth persists to this day.

Clothed in the language of compassion and security, neo-luddites of 2017 are using regulations and taxes to stifle the nascent sharing economy. Examples range from banning AirBnB to interfering with ride sharing contracts, but few are as blatant as Massachusetts’ rideshare tax. The state funnels 25 percent of the rideshare tax revenue to their competitor, the Boston taxi companies. In effect, hundreds of thousands of commuters forfeit a chunk of their weekly earnings to pad the pockets of a few Beacon Hill political cronies.

The rideshare tax violates the principles of sound taxation, creating outsized economic distortion relative to the revenue generated. In other words, broad based, flat sales or property taxes could generate the same amount of revenue with far less economic damage.

Of the principles violated, the economic discrimination of the rideshare tax is the most egregious. The purpose of a tax code is to generate revenue necessary for core functions of government. Micromanaging the economy and manipulating individual choices—in this case, nudging consumers toward taxis—is not the role of the state government, not to mention the tax code. The freedom to choose between competing goods and services in a private marketplace drives quality up and prices down.  Prosperity derives from this, not from politicians shielding their friends from healthy competition.

The erosion of market dominance from taxis to rideshare along with many more customers using rideshare for trips not likely to have been taken via taxi,  sends a market signal to the taxi industry that consumers demand greater value through either lowered costs or higher quality service. In just a few short years, the competition between rideshare and taxis has measurably improved  the quality and price of both. By increasing the price of rideshare through taxation and then subsidizing their taxicab competitors, lawmakers force consumers to pay more for rideshare or settle for a taxi. This dulls the incentive for taxis to offer improvements.

Legislators have attempted to dodge the likely negative public reaction to the rideshare tax by violating the principle of transparency. Rather than apply the tax directly to the driver or consumer, politicians levy a tax at the corporate level, betting that consumers will fail to perceive the source of the higher costs.The purported intent of the rideshare tax is to fund “new technologies and advanced service, safety and operational capabilities[1]” in the taxi industry. But rideshare companies accomplished this feat without subsidies. As Representative Peter Durant, who sits on the Joint Committee on Transportation, points out, “You set a precedent that you are now willing to subsidize one industry’s competitors with a tax on another industry. Where do you stop with that?” Indeed, slowing technological progress using state’s power to tax and regulate is the end result.  “Businesses and companies go out of business all the time. You never subsidize a company that innovation has pushed aside,” warns Representative Durant. What would have happened if the Luddites of the 19th century had succeeded in slowing, or even preventing, the adoption of simple machines? The explosive growth of prosperity for the working class could have been delayed or altogether failed to materialize.

This tax unfairly benefits taxi companies at the expense of rideshare companies, drivers and consumers. Irrational fear of change and political patronage are the roots of the rideshare tax and other discriminatory measures on the sharing economy as a whole. The American Legislative Exchange Council is opposed to the stifling of “creative destruction.” The past two centuries have offered more than sufficient evidence that economic liberty will lead to greater prosperity.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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