Optimal fringe benefit taxes: the implications of business use
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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.
KeywordsFringe benefits Taxes Distortions
JEL ClassificationH21 H24 H32
The authors would like to thank the editors and reviewers for their help. The views expressed are those of the authors and do not necessarily reflect the views of the State Services Commission.
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