Women and Taxes

Studies | Taxes | Women In The Economy

No. 250
Thursday, February 28, 2002
by Edward J. McCaffery


Beyond the Fringe

Experts no longer refer to the various benefits received at the workplace as "fringe" ones; the more common term today is "noncash compensation." No wonder: such forms of remuneration now contribute nearly 40 cents for each dollar earned in cash compensation.26 Tax, again, is a big part of the story. The reason is simple: such forms of noncash compensation as employer-provided medical insurance27 and qualified pension programs28 can be received tax-free. So a worker in the 40 percent tax bracket, say, can get $10 in qualified pension or medical benefits in lieu of $6 in cash, because $10 paid in cash will generate $4 in taxes. It should surprise no one at this point to learn that, as tax rates remained high during the 1950s while the civilian workforce expanded, fringe benefits took off as a major part of the American compensation package.

Congress became worried that its encouragement of medical care and retirement savings through the Tax Code would lead to greater benefits for the rich, upper-income taxpayers in high tax rate brackets. Acting out of good intentions, the law put various anti-discrimination rules in place. In the context of the tax laws, "anti-discrimination" means being opposed to benefits for highly compensated employees. So today employees who go to work for employers with medical care or pension plan provisions in place are often compelled to accept such coverage. A large part of the flourishing "temp" or independent contractor hiring practices is designed to skirt these rules.

"When working women are essentially charged for benefits they do not use, they end up paying for nonworking wives' benefits."

Once again, so far, so good. For many Americans, their jobs provide a large portion of their medical insurance and retirement savings needs - though those unemployed or underemployed without health care coverage have legitimate concerns about a national health policy so heavily dependent on the Tax Code. The problem is once again with the working wife. Since Sally's husband Bill is highly likely to be providing medical insurance and retirement savings to the household on account of his work, Sally neither needs nor wants more such benefits. What she needs is help with child care or with the other work-related expenses of being a working mother. When working women are essentially charged for benefits that they do not use, the same situation as occurs under Social Security recurs: working wives end up paying for non-working wives. In the case of so-called fringe benefits, this happens because the already-covered second worker like Sally simply lowers the average costs of a group health care policy - costs that are driven up by workers in one-earner households.


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