Paul L. Caron

Monday, January 28, 2019

The Indefensibility Of U.S. Fringe Benefit Tax Laws

Mike Rappaport (San Diego), The Indefensibility of U.S. Fringe Benefit Tax Laws:

One indefensible policy involves superior tax treatment for employee fringe benefits, such as health insurance and retirement benefits, which operates to harm lower income people.

It is well known that our tax system treats people who have to purchase their own health insurance differently than it treats people who receive employer provided health insurance. If one’s employer provides health insurance, the employee need not pay tax on the value of the insurance, even though this is a valuable fringe benefit. By contrast, if one does not receive employer provided health insurance, then one has to take one’s wages, pay taxes on them, and then pay for the insurance from those wages. Thus, the employer provided health insurance is tax-free but the individually purchased health insurance is taxed. This is indefensible. It is both economically inefficient and treats people who work for small companies, which are much less likely to provide health insurance, worse than those who work for larger companies. Many of these people at the smaller companies earn less income.

While this pernicious subsidy for employer-provided health insurance is well known, it is hardly the only example of such a problem. Another example involves savings for retirement. If one works for an employer that has a 401k or 403b plan, then one is entitled to put aside from pretax dollars a significant amount of money each year. But if one’s employer does not have a retirement plan of this type (or one does not work) and one must use an IRA, the limit of how much one can save for retirement each year tax free is much lower. Again, there is no justification for this difference in treatment. And again it treats people who tend to earn less worse than those who earn more.

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Maybe indefensible isn't the right word. An employee may work for an employer that is willing to pay more. And an employer that keeps many employees employed gets a reward for providing more jobs for taxpayers than a smaller employer.

Posted by: A.M. | Jan 29, 2019 10:12:20 AM

You could fix this problem really easily be requiring employers to fund health insurance for all employees. For part time workers they could pay a proportional portion of the health insurance based on the hours under 40 that are worked. This would eliminate the preference for part time workers and employers would hire more full time employees and, if not, at least the part time employees would be justly compensated similar to full time employees.

Posted by: anon | Jan 30, 2019 3:31:17 AM