The Hidden Entitlements

2. Fringe benefits

Tax subsidies are available for a wide range of employee compensation that is paid not in cash, but in fringe benefits. Tax policy analysts have long complained about the disparity between cash wages and benefits. Many wonder,for example, why a person who pays cash for insurance should be taxed more heavily than another person who gets insurance as a fringe benefit (and accepts lower cash wages). Others point out that tax subsidies for certain kinds of spending may encourage it at the expense of otherwise more satisfying outlays. Yet despite these fairness and economic issues, there rarely is any political interest in changing the tax treatment of fringe benefits,in large part because the benefits are so broadly dispersed among the public.The major fringe benefit tax breaks listed in the tax expenditure budget include:

Employer-paid medical insurance & expenses. Employee compensation,in the form of employer payments for health insurance premiums and other medical expenses, is deducted as a business expense by employers, but isn't included in employees' gross income.
Many health analysts have worried that this very large government subsidy for health insurance causes people to use more health care than they otherwise would, thus helping drive up the cost of health care. In fact, the designers of the "managed competition" approach to health care reform treated limits on tax exemptions for employer-provided health insurance as the centerpiece of their proposal. But there is surprisingly little evidence that tax-induced overuse of health care really occurs. Other nations, for example, subsidize health care to a far greater extent than does ours, but their health care costs are a far lower share of their economies.

Fortunately, the exclusion for health insurance benefits does not have much of the "upside down" subsidy effect that is typical of tax deductions.The tax break reduces both income and social security payroll taxes, and marginal tax rates on wages, including social security taxes, run at about 30% for the vast majority of working families (although the best off one percent of taxpayers are in a 40%-plus bracket). Moreover, because health insurance premiums are basically a flat amount per family, regardless of income level, the size of the health insurance tax subsidy actually declines as a share of income as income rises.

To be sure, the health insurance tax subsidy does not benefit the uninsured,who tend to be lower-income workers. No doubt, a more rational and inclusive system of government assistance for health insurance could be devised. But the last effort to do so foundered in Congress.

Tax breaks for non-health fringe benefits (excluding pensions, discussed earlier) are estimated to cost about $107 billion over the next seven years.These are:

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