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International Tax and Public Finance

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08-08-2017

Optimal fringe benefit taxes: the implications of business use

Authors: Callum Butler, Paul Calcott

Published in: International Tax and Public Finance | Issue 3/2018

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Abstract

Unless fringe benefits are taxed, remuneration may be distorted toward such benefits and away from wages and salaries. A principle for setting such taxes has been proposed in previous work. In particular, the value to workers of fringe benefits would be taxed at a rate equivalent to that on wages and salaries. The current paper reexamines this principle in a model where workers’ valuations are heterogeneous and unobservable to the tax authority. This model does have cases that are broadly consistent with the existing principle, but it also highlights cases in which taxes should be higher on fringe benefits that produce value for the firm.

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Turner (1987) argues that the impacts are modest, but Ashworth and Dilnot (1987) and Gutiérrez-i Puigarnau and van Ommeren (2007) present evidence of substantial losses in welfare and tax revenue. Voßmerbäumer (2013) argues that benefits consumed in the workplace are different because they reduce the disutility of work.

Katz and Mankiw, p. 42 report that in Pevsner v. Commissioner, the court “reasoned that allowing taxpayers to contest the subjective value of fringe benefits by reference to their personal situation would be administratively impracticable.”

Griffith (1993) proposes a related set of outcomes, although he does not distinguish the costs of purchase and operation. Given that \(R>(1+\tau )u\), equilibrium requires all workers to be employed. Moreover, a maximum of one vehicle will be purchased.

This is an amalgamation of the decision boundaries that separate outcomes in which private use of a company vehicle is allowed (III, IV and V) from those in which it is not (I and II).

In the most interesting case where \(\beta (B,T)<c+F\), \(\underline{B}<\overline{B}\).

When \(T>(c+F)\tau \) (so that there is a tax advantage to private purchase of vehicles that will be used privately), the decision between I and II remains undistorted, but the decision between outcome III and outcome V will be distorted at the margin.

Or alternatively the values of \(\overline{B}\) and \(\underline{B}\) when both \(\tau \) and T are equal to zero.

Ashworth, M., & Dilnot, A. (1987). Company cars taxation. Fiscal Studies, 8(4), 24–38.CrossRef

Clotfelter, C. T. (1983). Tax-induced distortions and the business-pleasure borderline: The case of travel and entertainment. The American Economic Review, 73(5), 1053–1065.

Collard, D., Godwin, M., & Hudson, J. (2005). The provision of company benefits in the UK. Journal of Business Finance & Accounting, 32(7–8), 1397–1421.CrossRef

Griffith, T. D. (1993). Efficient taxation of mixed personal and business expenses. UCLA Law Review, 41, 1769.

Gutiérrez-i Puigarnau, E., & van Ommeren, J. (2007). Welfare effects of distortionary company car taxation, Discussion Paper 07-060/3. Tinbergen Institute.

Gutiérrez-i Puigarnau, E., & van Ommeren, J. (2011). Welfare effects of distortionary fringe benefits taxation: The case of employer-provided cars. International Economic Review, 52(4), 1105–1122.CrossRef

Katz, A., & Mankiw, N. G. (1985). How should fringe benefits be taxed? National Tax Journal, 38(1), 37–46.

Naess-Schmidt, S., & Winiarczyk, M. (2010). Company car taxation. European Commission Taxation Papers 22, Copenhagen Economics.

Turner, R. W. (1987). Taxes and the number of fringe benefits received. Journal of Public Economics, 33(1), 41–57.CrossRef

Voßmerbäumer, J. (2013). Incentive effects and the income tax treatment of employer-provided workplace benefits. Review of Managerial Science, 7(1), 61–84.CrossRef

Zax, J. S. (1988). Fringe benefits, income tax exemptions, and implicit subsides. Journal of Public Economics, 37(2), 171–183.CrossRef

Title: Optimal fringe benefit taxes: the implications of business use
Authors: Callum Butler
Paul Calcott
Publication date: 08-08-2017
Publisher: Springer US
Published in: International Tax and Public Finance / Issue 3/2018
Print ISSN: 0927-5940
Electronic ISSN: 1573-6970
DOI: https://doi.org/10.1007/s10797-017-9469-9

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