Silicon Valley Employers Go Wild With Lavish Employee Benefits

Source: Forbes

Say “employee benefits” and pensions and health care will jump to most people’s minds. Maybe life and disability insurance will pop up as well. But employers in Silicon Valley are going way beyond that. They’re providing housekeeping, cooking, babysitting and a host of other services as perks for their employees. According to The New York Times, here is what some California companies are doing:

  • At Evernote, a software company, 250 employees — every full-time worker, from receptionist to top executive — have their homes cleaned twice a month, free.
  • Stanford School of Medicine is piloting a project to provide doctors with housecleaning and in-home dinner delivery.
  • Genentech offers take-home dinners and helps employees find last-minute babysitters when a child is too sick to go to school.

To hear the employer representatives tell it, companies are providing their workers with services that make it easier to balance home and family life in an age when there are few stay-at-home spouses and work is stressful.

But a more likely explanation is economics. Can an employer manage housekeeping or home cooking services better than the employees themselves? Wouldn’t it make more sense for the employer to pay higher wages and let the employees decide how to spend the extra cash? It would if taxes didn’t get in the way.

Remember, these benefits aren’t really free. They are an alternative to paying higher wages. But even moderate income families in California can face marginal tax rates that approach 50%. When an employer tries to pay a worker one more dollar, the employee takes home slightly more than 50 cents. Most employee benefits, however, are tax free. That means that the benefit could be worth half its cost and still be a good deal for the employees.

Here are a few more examples of what California companies are doing.

  • At Deloitte, the consulting firm, employees can get a backup care worker if an aging parent or grandparent needs help. The company subsidizes personal trainers and nutritionists, and offers round-the-clock counseling service for help with issues like marital strife and infertility. Deloitte executives, and other experts, said they believe that      such benefits were likely to spread.
  • At Google, the company has expanded its benefits beyond free meals, dry cleaning and other services on campus to offering $500 to new parents. The company has also       arranged for fresh fish to be delivered to the office for employees to take home.
  • At Facebook, employees can take home a free dinner or, if working late, their families can come in to eat with them, leading to a regular sight of children in the campus cafeteria. The company also pays $3,000 per family in child care expenses, and offers adoption assistance of up to $5,000.

I’m not a tax specialist, but it looks as though almost all these benefits are being paid with pre-tax dollars. And in California the difference between pre-tax and after-tax is large.

Currently, the highest marginal tax rate for the federal income tax is 35%. Throw in a 2.9% Medicare tax and the highest rate for this year climbs to almost 38%. In California, with maximum 9.3% state income tax, the highest rate rises to 47.2%.

Even Californians of moderate means face very high marginal tax rates, since the 9.3% rate kicks in at less than $100,000 of income. Take someone in the 25% federal income tax bracket, facing a 15.3% (FICA) payroll tax and a 9.3% California income tax. The combined marginal tax rate is almost 50%. This means that the individual (and her employer) have an incentive to spend up to 49 cents in order to avoid a dollar of income. California employers are betting that their employees would rather have a dollar’s worth of (untaxed) goods and services in kind rather than 51 cents in cash.

All of this raises two questions: (1) is it good to have marginal tax rates so high? and (2) what tax free benefits would you be willing to forgo in order to lower them?

The first question is being asked of Mitt Romney and Paul Ryan, since they are advocating a 20% reduction in federal income tax rates — to be paid for by eliminating loopholes and deceptions. But a similar question could also be asked of Barack Obama, who has endorsed broadening the base and lowering the rates for corporations.

In the 1980s, leaders of both political parties endorsed the idea of tax reform. That meant getting rid of deductions, loopholes, credits and other tax preferences, and lowering the rates. The idea: we can collect the same amount of revenue without creating perverse economic incentives, including the incentive to avoid realizing taxable income. Everyone agreed that the economic effects would be positive. That agreement led to the tax reform act of 1986. Since then, the agreement has unraveled.

So it’s disturbing to learn that Sen. Chuck Schumer is now against any tax reform that lowers the rates. If tax reform is a Republican — rather than a bipartisan — idea, it is much less likely to get enacted. It is also disturbing to see leading economists reject the idea of fundamental tax reform. In the 1980s, the entire profession was generally favorable toward a move to some kind of flat tax.

A flat tax need not be regressive, by the way. Boston University economist Laurence Kotlikoff and I have proposed a “progressive flat tax,” under which the payroll tax and the income tax would be merged and everyone would face the same rate on all income that is not saved and invested. The only exceptions are refundable tax credits for health insurance and retirement savings. We found that the overall impact was progressive: low-income families come out better than they do under the current tax system.

John C. Goodman is President of the National Center for Policy Analysis, a Research Fellow with The Independent Institute and author of Priceless: Curing the Healthcare Crisis.