compensation packages

In Microeconomics we learned about social loss because of taxes. My brother in law just started a healthcare program for his employees because it saved him money paid out in taxes. In manegerial Economics we are learning about making decisions for a business. My question is what are the pros and cons of employee benefit packages from a managers point of view and also what does the gov't do to still get a cut from benefits offered to employees by businesses. I know that this has limmited aplication to economics but I was just wondering if anyone knows.

1 comment:

Dr. Tufte said...

-1 for a spelling mistake in Mack's post.

I am not an expert in what sort of taxes Mack's brother faces in his business.

My guess is that he isn't saving (on net) by offering health care to his employees. He is forking out a lot of cash to offer that benefit. But, because of the way the tax system is set up, it is almost like he can buy that benefit on sale. The foremost reason is that if he kept the money he spends on benefits as profits, he would have to pay tax on those. A second reason is that when he offers a benefit to employees, rather than wages or salary, he doesn't have to pay FICA on that amount.

As to the government, they don't get anything from benefits payed to employees. Think about it: no one really wants "benefits", we'd all prefer cold hard cash. But employers offer us benefits because they can spread their dollars more thinly if the government isn't taking some off the top in taxes.

FYI: the main reason we have health benefits is because during World War II the government imposed a price ceiling on wages. Workers were in short supply (and therefore had bargaining power) so they got benefits instead of raises.