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Benjamin Franklin once said, "Our Constitution is in actual operation; everything appears to promise that it will last; but in this world nothing is certain but death and taxes;' Recent tax policy suggests that Ben may have been only half right. Employers in the private sector contributed over $112 billion for employee pensions, profit-sharing, and group insurance in 1981. If federal income taxes had been collected on this amount, tax revenue would have increased by approximately $34 billion. Instead, Social Security tax revenues were lowered by an additional $14 billion (Long and Scott 1984, p. 191). Therefore, taxing fringes could have raised federal revenues by $48 billion, had no change in total employee compensation resulted from broadening the tax base. With these kinds of figures, it is no surprise that fringe benefits and their tax status have been under great scrutiny in recent years.

Favorable tax treatment of employee benefits is almost as old as the income tax itself (Munnell 1984, p. 46). These benefits came from contributions made by employers who could write them off as expenses. The benefits were also tax free to the employee because they were looked upon as gratuities more than wage compensation, but this also meant that they could be discontinued at the whim of the employer. However, the status of fringe benefits has greatly changed since the early part of this century. No longer considered gratuities but rather a necessity in labor contracts, fringe benefits have become a significant part of the labor scene, and their effects on government revenue have become significant as well.

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This issue is also considered v.3 of the initial publication series of Major Themes in Economics.


©1987 by the Board of Student Publications, University of Northern Iowa



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