Employers can provide numerous benefits to their employees and the employees are permitted to exclude the value of these benefits from gross income. What are the effects of the exclusions on:
a. The progressiveness of the tax system?
b. The complexity of the tax system?
a.
The benefit of an exclusion varies directly with the recipient's marginal tax rate. Thus, individuals with the highest marginal tax rate enjoy the greatest benefit from the exclusion and those taxpayers in the lowest marginal tax rate enjoy the least benefit. Also, generally, the exclusions are often available with the better paying jobs. This also causes the tax system to be less progressive than if the exclusions were not permitted.
b.
Any exclusion creates complexities in the system because tests must be established to determine whether the benefit is eligible (e.g., whether the benefit is provided on in a discriminatory manner) for the special treatment. Also, often limitations are often created, which requires even more testing.
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