An Employer-Level Proxy Tax on Fringe Benefits

A. Overview When nontaxable substitutes for cash are available, an employer and employee working in concert will inevitably shift compensation away from cash to the untaxed form. Goods and services are usually less convenient and less valuable to the employee than cash. Still, as long as the value lost is less than the tax avoided, the employer and employee will continue the shift. Taxing the cash substitute as well as…