Why Are Cab Fares So Expensive?

August 27, 2013

There are many reasons why cab fares seem ridiculously high in many metropolitan areas. Often there are local restrictions on supply, reducing competition and driving fares up. But a bevy of unfair federal tax policies also play a role, with a heavy bias against corporate investment in large durable goods.

Suppose I want to buy a Toyota Camry for myself to use. All I have to do is earn some income, pay taxes on that income, and then buy the car. From then on, I’m in the clear. The car is mine, and I pay no new federal taxes on it.

In contrast, suppose a taxi company is issuing new shares to raise capital, and I use my money to buy those shares instead. Then the taxi company uses the money to buy the same Toyota Camry. So far, the same taxes have been paid in both cases – just my own personal income.

But from then on, the taxi company will pay corporate income tax on profits the cab earns from fares, and I will pay dividend taxes whenever the company rewards me for helping them buy the car. This amounts to two substantial taxes on the car that wouldn’t exist if I bought it for myself.

Worse, the profits aren’t even correctly defined. When the company calculates the cost of doing business for tax purposes, it marks down the cost of the car over five years. This understates the cost of buying the car, because the business doesn’t pay for the car over five years; it pays the whole cost up front. Our background paper on this problem covers the issue in detail.

The federal tax regime is heavily biased against firms that invest in physical property, like taxicabs. This problem comes from poorly defining the tax base. Whenever money changes hands, IRS agents burst out of their burrows like a coterie of prairie dogs, eager to get their paws on anything that smells like “income.” In reality, some exchanges of money do not represent the production or consumption of a new good, and should remain untaxed.

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