Employee Benefits Gone Wild

An earlier version of this was posted at Forbes.

Say “employee benefits” and pensions and health care will jump to most people’s minds. Maybe life and disability insurance will pop up as well. But employers in Silicon Valley are going way beyond that. They’re providing housekeeping, cooking, babysitting and a host of other services as perks for their employees. According to The New York Times, here is what some California companies are doing:

  • At Evernote, a software company, 250 employees — every full-time worker, from receptionist to top executive — have their homes cleaned twice a month, free.
  • Stanford School of Medicine is piloting a project to provide doctors with housecleaning and in-home dinner delivery.
  • Genentech offers take-home dinners and helps employees find last-minute babysitters when a child is too sick to go to school.

To hear the employer representatives tell it, companies are providing their workers with services that make it easier to balance home and family life in an age when there are few stay-at-home spouses and work is stressful.

But a more likely explanation is economics. Can an employer manage housekeeping or home cooking services better than the employees themselves? Wouldn’t it make more sense for the employer to pay higher wages and let the employees decide how to spend the extra cash? It would if taxes didn’t get in the way.

Remember, these benefits aren’t really free. They are an alternative to paying higher wages. But even moderate income families in California can face marginal tax rates that approach 50%. When an employer tries to pay a worker one more dollar, the employee takes home slightly more than 50 cents. Most employee benefits, however, are tax free. That means that the benefit could be worth half its cost and still be a good deal for the employees.

Here are a few more examples of what California companies are doing:

  • At Deloitte, the consulting firm, employees can get a backup care worker if an aging parent or grandparent needs help. The company subsidizes personal trainers and nutritionists, and offers round-the-clock counseling service for help with issues like marital strife and infertility. Deloitte executives, and other experts, said they believe that such benefits were likely to spread.
  • At Google, the company has expanded its benefits beyond free meals, dry cleaning and other services on campus to offering $500 to new parents. The company has also arranged for fresh fish to be delivered to the office for employees to take home.
  • At Facebook, employees can take home a free dinner or, if working late, their families can come in to eat with them, leading to a regular sight of children in the campus cafeteria. The company also pays $3,000 per family in child care expenses, and offers adoption assistance of up to $5,000.

I’m not a tax specialist, but it looks as though almost all these benefits are being paid with pre-tax dollars. And in California the difference between pre-tax and after-tax is large.

Currently, the highest marginal tax rate for the federal income tax is 35%. Throw in a 2.9% Medicare tax and the highest rate for this year climbs to almost 38%. In California, with maximum 13.3% state income tax, the highest rate rises to 51.2%.

Even Californians of moderate means face very high marginal tax rates, since the 9.3% rate kicks in at less than $100,000 of income. Take someone in the 25% federal income tax bracket, facing a 15.3% (FICA) payroll tax and a 9.3% California income tax. The combined marginal tax rate is almost 50%. This means that the individual (and her employer) have an incentive to spend up to 49 cents in order to avoid a dollar of income. California employers are betting that their employees would rather have a dollar’s worth of (untaxed) goods and services in kind rather than 51 cents in cash.

All of this raises two questions: (1) is it good to have marginal tax rates so high? and (2) what tax free benefits would you be willing to forgo in order to lower them?

In the 1980s, leaders of both political parties endorsed the idea of tax reform. That meant getting rid of deductions, loopholes, credits and other tax preferences, and lowering the rates. The idea: we can collect the same amount of revenue without creating perverse economic incentives, including the incentive to avoid realizing taxable income. Everyone agreed that the economic effects would be positive. That agreement led to the tax reform act of 1986. Since then, the agreement has unraveled.

So it’s disturbing to learn that Sen. Chuck Schumer is now against any tax reform that lowers the rates. If tax reform is a Republican — rather than a bipartisan — idea, it is much less likely to get enacted. It is also disturbing to see leading economists reject the idea of fundamental tax reform. In the 1980s, the entire profession was generally favorable toward a move to some kind of flat tax.

A flat tax need not be regressive, by the way. Boston University economist Laurence Kotlikoff and I have proposed a “progressive flat tax,” under which the payroll tax and the income tax would be merged and everyone would face the same rate on all income that is not saved and invested. The only exceptions are refundable tax credits for health insurance and retirement savings. We found that the overall impact was progressive: low-income families come out better than they do under the current tax system.

Comments (18)

Trackback URL | Comments RSS Feed

  1. Vicki says:

    This is wild.

  2. Donna Rovito says:

    I’m currently reading the ObamaCare Survival Guide – which is a bit too “pro” for my taste, although I think its author was trying to be “unbiased.” I have your new book on my reading pile next, and have to tell you that I already know I’m going to like it MUCH better.

  3. Studebaker says:

    I remember the late 1990s when the so-called Tech Boom was in full swing. Any stupid idea that included a website ending in “.com” was raising piles of investor cash — even when the business model made no sense and would not turn a profit in the foreseeable future. It was a matter of pride that software engineers and coders employed at these companies worked 80 hour weeks in anticipation of stock options that would make them over-night millionaires. To make it easier, tech companies would deliver meals, groceries, baby sitters, cleaning services, etc.
    In some cases, these tech workers and the managers were earning large salaries and would take advantage of services few other people would ever dream were necessary. I remember driving to work in the late 1990s and seeing the same internet address on the side of a high-rise office building. Finally I was overcome by curiosity and looked up the address. It was a new service that would go and pick up “take-out” meals from 4-star restaurants, and deliver them to anywhere you wanted in the city for a huge price. Wow! What a stupid idea!!! (I wondered if the restaurants being patronized through this service actually approved of it; would a fine dining establishment charging $100+ a couple actually want their food presented in this way (cold, soggy from steam, sloshed around a polystyrene carrier)?

    In short, I think taxes rates are one reason why people in high income brackets accept these services in lieu of cash wages. But I also think the employers are trying to alleviate some of the obstacles workers face with impossible work schedules. (that said, I like the idea of the cleaning service! My cleaning guy probably gets nearly $5,000 per year from me.)

  4. Blake Ashby says:

    I’ve been in aspects of tech for years. I agree with the comments in the context of the tax codes, but this also talks to the difficulty of keeping good people in a market with not enough qualified candidates. We did things like letting developers work at home 3 days a week, regular lunches, etc., because any one of the team could walk down the street and get another job at the same or higher wages. The add ons created more employee stickiness, keeping the employees from leaving just for more money.

  5. Peter Ferrara says:

    The erosion of bipartisan support for classic tax reform reflects the fact that the Democrat Party has been taken over by Marxists and should be supported today only by people who agree with that philosophy.

  6. Buster says:

    Economists have long known that the tax advantages are what drives health care spending to the heights seen only in American. Increasingly, economists have suspected the tax advantage is partly to blame for mcmansions and excess spending on housing. Tax advantages are also driving America’s huge non-non-sector. Arguably the biggest opposition to reforming the death tax is from the organizations that gain by it. If you were to publish a survey in the Journal of Philanthropy about whether subscribers favor abolishing estate taxes, the results would be an astounding “no” since non-profit organizations believe estate taxes prompt estate bequests .

    I’ve also heard accountants and lawyers lobby to block fundamental changes. They too benefit from the complexity of preparing tax returns and trusts to avoid taxes.

  7. Al says:

    Maybe I misunderstood how your tax proposal in Forbes would work, but what I gleaned from the article was that only ‘working’ income would be taxed, but investment income would not. I suppose that investment income that has a profit and is then spent privately would be taxed at the ‘working’ income level while the rest is reinvested with no tax.

    That sounds like the very rich could end up with a very tiny tax burden and almost no taxes if they play their cards right.

  8. Chris says:

    The top federal rate is 35%?

    Not anymore.

  9. Angel says:

    I can see how the tax benefits provides incentive for these companies to provide these services and also a willingness for an employee to not get paid more but to receive these benefits which sound like very useful and even necessary for demanding jobs.

  10. Ron Bachman says:

    Look for these added benefits to show up in ObamaCare as mandates. National benefits are designed around what a single mom with two children who earns $20,000 per year needs. Of course, she needs: free meals, house cleaning, personal trainer, and nutritionist. Don’t forget day care and transportation to the doctor’s office. Don’t laugh. It’s coming ….

  11. Peterson says:

    “under which the payroll tax and the income tax would be merged and everyone would face the same rate on all income that is not saved and invested.”

    – Im huge fan of the flat tax, and really like the progressive fat tax spin.

  12. Gabriel Odom says:

    My last work was as a project manager for a software firm, and my benefits were outstanding. Subsidized lunches; subsidized dry cleaning; free coffee, juice, tea, milk, lemonade; dental, life, health, and disability insurance; discounts at half of the shop and stores within 10 miles of the office; discounted rental cars, plane tickets, and hotel rooms. It was great.

    I kinda miss it actually…

  13. Breck says:

    How are all these perks “pre-tax?” I’m no tax expert either, but it seems to me that if your employer provides you with goods and services those should be counted as ordinary income for tax purposes. Can anyone explain this?

  14. Frank Timmins says:

    The government can effectively “control” the actions of the public through tax policy. That is why Schumer and his ilk are loath to consider any kind of tax reform that would lessen government leverage on the Great Unwashed. Of course this kind of policy is a free market travesty that distorts the value of goods and services. That applies to personal trainers as well as healthcare.

  15. Dan Hill says:

    Australia had a similar problem in the mid-eighties with >50% marginal rates. Then they introduced something called the Fringe Benefits Tax. If the benefit wasn’t directly related to performing your job, the Tax Office said it was income and you had to pay income tax on it. With the added complication your employed hadn’t withheld, so you had to pony up with a check at the end of the year. Can’t see the IRS and state tax authorities letting this go on for much longer, not when most of them are looking down the back of the sofa for loose change.

    Solution? Lower marginal rates. Places like Singapore where you pay 20% on earnings over 250K basically have zero tax avoidance. Just isn’t worth the effort.

  16. Ron Bachman says:

    Any system that taxes “income” will include a definition of “income.” Hence, we will never get away from the special interests, until we have only a national sales tax (of course then we will differentiate what gets a sales tax and what doesn’t).

  17. John Kumar says:

    It is interesting to see if this trend promotes a family life. I know that modern societies, given stressful work obligation, have to postpone on family responsibilities. Maybe, the work-sphere providing additional support with family life will bring back a greater family culture.

  18. Patel says:

    I would really like to work for Evernote.