Taxes, Fringe Benefits and Faculty

Abstract

The growth of employee benefits in academe has closely paralleled their economy-wide growth. This study estimates a complete system describing the demand for benefits and wages using panel data on nearly 1500 institutions of higher learning. The demand for benefits is quite responsive both to changes in real income and to variations in the tax price of benefits. These conclusions are robust with respect to varying definitions of the sample aid of the tax price. They are not altered by estimates that account for unmeasured individual effects on demand. Simulations using the estimates suggest that the Tax Reform Act of 1986 sharply reduced the demand for benefits. Extrapolating the impact to the entire economy suggests that the annual flow of compensation shifted away from benefits by at least $9 billion.