Sharing Economy: A complement or a substitute?

Introduction

With technological revolution across the globe, there has been a growing emergence of various aggregators in industries like transportation, tourism, and hospitality industry who have transitioned economic activities from operating in silos to a more inclusive environment. These aggregators operate on various digital sharing platforms which enable individuals to share goods and services like cars, houses, household products, and services. Sundarajan (2017) describe the sharing economy based on the following characteristics:

1. Creates markets that enable the exchange of goods and services causing a high level of economic activity
2. Better utilization of assets and opportunities in the development of new skills
3. Labour and capital supply come from decentralized crowd networks
4. The blurring of lines between personal and professional services like ride-sharing activities
5. Combination of fully employed and casual labor or contractual workers

Thus, the sharing economy focuses on improving efficiency, sustainability, and collaborative consumption as a cost-effective option. The demand side of the sharing economy is not based on complete ownership of the asset rather on the use and re-use of the same asset. On the supply side, this economy has the potential to create more entrepreneurs than before bringing more workforce to the industry. Even with this innovation of sharing economy, there are concerns about the fiscal impact on the governments, especially in the short run. While the sharing economy is an attempt to formalize the economy to a large extent, there are latent tax leakages especially since much of the operations in a sharing economy remain beyond the supervision and ambit of the fiscal authorities (see Bloch and Demange, 2018). For example, the worker classification between independent and contractual workers remains an obscure area and both the parties are generally subject to differential tax regimes. Moreover, since most Governments encourage entrepreneurial activities, it remains a double-edged sword with the geographical boundaries of the platforms not properly defined and the Governments in a dilemma between regulations and sops. The

regulatory frameworks to distinguish between personal and professional services are also inadequate (Oei and Ring, 2016). Similarly, from the service provider’s point of view, the regulations on dynamic pricing lack clarity and inevitably would affect the tax collection too. Further, the influence of the sharing economy on the GDP is also ambiguous with difficulty in tracking its activities and reduction in various ancillary activities. 

For example, shared accommodation on the one hand allows a family to save on costs and free more income for more leisure activities. On the other hand, a formal hotel and the corresponding transportation costs might have boosted the GDP further with its linkage effects. The sharing economy can cause a reduction in GDP growth as it allows existing resources to be taken more advantage of without the creation of new resources, rise in unaccounted values, and reduction of new assets. Moreover, the convenience or welfare improvement for the individual hardly gets reflected in the GDP. Aslam, A., & Shah, A. (2017) in their working paper for the IMF provide a summary of the literature around the sharing economy or the peer-to-peer economy (P2P henceforth) stating that this market does formalize certain activities in some sectors at the cost of displacing some of the older brick and mortar shops. As a result, the Government tax revenues might take a hit due to preferential rates of taxes and under-reporting of income. Hira and Reilly (2017) discuss how the sharing economy raises regulatory challenges for the state, even though they reduce the transaction costs involved in connecting service providers with

users. It reduces information asymmetry and increases knowledge, particularly through customer review and details about products and services, and it reduces the costs of negotiating through reducing communications costs. However, they disrupt the brick-and-mortar model of companies and build new relationships between “workers” and “employers” and between “regulators” and “companies”.

Size and scope of the sharing economy

Since the exact definition of sharing economy is not precise, gauging the size of the sharing economy remains a debatable exercise. The 2016 Pricewaterhouse Coopers (PwC) study for the European Commission estimated that in 2015 alone, the collaborative platforms and their providers generated €4bn in revenue and facilitated €28bn worth of transactions in the European Union with the staggering growth rate of 100% year on year and the estimate potential economic gain for Europe of up to €572 billion in annual consumption. 

Table 1: Revenues and transaction values facilitated by collaborative economy platforms in Europe (€m, 2015)

Sector	Revenue	Value (2015)
P2p Accommodation	€ 1,150	€ 15,100
P2p Transportation	€ 1,650	€ 5,100
On-Demand Household Services	€ 450	€ 1,950
On-Demand Professional Services	€ 100	€ 750
Collaborative Finance	€ 250	€ 5,200
Total	€ 3,600	€ 28,100

Source: PwC UK 2016 analysis (Rounding off error and hence the totals don’t match)

The study concludes that the largest collaborative economy sector by revenue is the peer-to-peer transportation sector, which includes ride-sharing, car-sharing networks, and driveway sharing models. As far as the largest sector by total transaction value is concerned, the peer-to-peer accommodation sector like Airbnb dominates the rest. The study also points out that there has been an almost three times rise in the value of transactions in the sharing economy between 2013 and 2015 from 10.1 billion pounds to 28.1 billion pounds. Also, on average, over 85% of the value of transactions facilitated by collaborative economy platforms is received by the provider rather than the platform. In 2016, Uber had the largest market share of over 70% among the transportation network companies. Notwithstanding the minor errors in approximations in measuring the extent of the sharing economy, it is believed that a better regulatory structure can yield significantly to the tax basket.

Differentiating sharing and mainstream economy

Capacity utilization and the return of the classical theory of economics

One of the major pillars of the sharing economy is capacity maximization and utilization. The emergence of sharing economy platforms and the growing popularity of platforms such as Airbnb have revealed that there is an excess capacity in the hotel and hospitality industry around the world. While New York City and San Francisco might complain about the shortage of housing, there are other residents who have spare bedrooms and are willing to share this excess capacity with strangers (Ellen, 2015). With the Syrian refugee crisis in Europe, several families volunteered in 2015 and 2016 to host asylum seekers. To manage the crisis, mobile applications were developed to match hosting families with refugees. Thus, there is an attempt made to correct any sort of market imperfections between demand and supply by using the ‘spare’ economy as the ‘share’ economy.

The principles driving the sharing economy find resonance with the classical school of economics. The fundamental tenet of the classical theory is that the economy is self‐regulating. Classical economists posit that the economy shall gravitate towards the natural level of real GDP or output, which is the level of real GDP obtained when the economy’s resources are fully employed. Further, there is the least interference by the Government. The sharing economy seems to mimic part of this scenario with it being highly unregulated and yet being able to match the demand with the help of the digital platforms which act as the market mechanism. By matching surplus capacity in the economy with unmet demand, it has restated the fundamental point that the market overrules all forces. Thus, sharing economy fosters economic freedom and tries to impose that laws cannot be a barrier to innovation and modernization.

Role of trust in sharing economy

Trust is another important factor that distinguishes sharing economy from the rest. When a Netflix user shares his account details with his peers and hence shares the subscription burden, he is foregoing certain privacy. However, the entire sharing mechanism is governed by mutual trust. With the emergence of user-friendly digital platforms and the rising prices of mainstream components, trust has been mediated by technology and peer-review instruments and in some cases, it has become a lucrative business. Reputational mechanisms like online reviews also help to repose the faith, especially in an accommodation-related sharing economy like Airbnb. The guests infer the host’s trustworthiness from the sellers’ personal photos, attaching significant importance to their perception of these elements. Further, since most of the transactions happen on a virtual platform, both the buyer and seller are invisible to each other without any past knowledge of their habits.

However, based on customer reviews and some amount of blind trust, the customer proceeds with the transaction. Sharing economy intermediary platforms need to guarantee that the usual checks and balances are in places such as identity verification and secure payment processing. There are also less tangible trust assets which are more to do with how a user or potential user sees a company. Thus, trust is ensured by a third party or the digital platform which makes both the buyer and seller execute the transaction.

Impact on formalization

There are two-fold effects that sharing economy can have on the informal economy. It could minimize the extent of the informal economy as businesses would get identified by the Government and more activities could be brought under the tax net. Thus, the benefits would be reaped only after the gradual passage of time. However, in the short run, there is always a fear sharing economy could facilitate individuals and businesses to move from the formal sector to the informal sector, especially if all the activities and income are not reported. This could mean further loss of tax revenue to governments due to a shrinking tax base with possible losses on income tax, social security contributions from employers, and value-added taxes, resulting in the governments shouldering a greater burden on social protection, health, and education services. It would also lead to an expansion of the problems associated with the taxation of the informal economy and operational difficulties in enforcing tax compliance.

Moreover, the developing economies have a huge informal sector which could further augment the chances of tax leakages.

There has been a lot of debate over the costs and benefits of taxing the informal sector as it has both revenue and equity implications. While taxation of the informal economy appears to be a potentially important source of government revenue, (as the informal sector comprises a large, and in many countries growing, share of GDP (Schneider and Klinglmair 2004), the revenue gains from expanded taxation of the informal economy are likely to be comparatively modest over the short to medium term. Not only there is a lack of technology up-gradation in the tax collection mechanism but also there remains the difficulty of bringing such firms into the tax net incurring such a high administrative burden with huge monitoring costs. Moreover, taxation might seem a regressive exercise especially when the sharing economy encourages the evolution of new entrepreneurial ventures and innovations using technology and tax sops.  Also, they reduce the out-of-pocket expense for the end-user. The justification for expanding sharing sector taxation rests to a significant degree on the expansion of the tax net for the small informal sector firms. However, the failure of shared economy firms to pay taxes can be viewed as a source of unfairness by mainstream formal firms. This may lower general tax morale and discourage tax compliance among larger firms, hurting the government’s fiscal coffers (Terkper 2003). One way of avoiding this short-term loss of revenue could be Government initiatives to mimic the intermediary structure. If the Government can build on certain mobile

applications that could pull both the buyer and the seller into its fold, the regulatory concerns could be done away with. Since the Government is a non-profit entity, the buyers and sellers will have greater interests to be part of such platforms as they would have to forego a lesser amount to the intermediaries. This might entail a high fixed cost and cost of providing incentives to allure buyers and sellers. From the seller’s perspective, they could be waived some taxes or there could be a tax moratorium for a fixed number of years. This allows new ventures to grow and prosper especially at their teething stage. Once their initial years of instability and market stickiness, they could be imposed greater taxes. Thus, the entire objective is to first not to lose the existing tax base and then once they are regulated improve the tax collections.

Conclusion

The sharing economy is expected to impact the composition and constitution of new and established industries, the production of goods and services, the conditions of workers and the customers and users. While it is true this innovation has greatly reduced the transaction, costs involved in connecting service providers with users, it has created a huge disruption fueled by technological breakthroughs of the internet economy, including electronic payments and ubiquitous access to information and communication through mobiles. Much of what happens in a sharing economy initiative emerge in clusters, suggesting that organizations, both private and public, create ecologies that leverage each other’s work to support the combined culture and capacity for sharing (Hira (2017). While the lack of internet penetration in many developing nations would continue to thwart the progress of sharing economy, what remains to be seen is how the developed nations address the regulatory challenges. In the short run, sharing economy could add to the informality of the economy but since much of their operations would be digitally managed, their presence would be detected in the long run. Further, the fear of labor exploitation and greater concentration of capital ownership among a few individuals due to the trend of sharing could augment income inequality. However as long the benefits of consumption equality caused by greater choice and high-quality options at a lower price outweigh the expected income inequality, sharing economy would remain a prospect to ponder.