Yahoo’s chief executive, Marissa Mayer, inspired much debate and rebuke when she recently abolished Yahoo’s work-at-home policy. In academia, “working from home†is a treasured euphemism for heading home after your morning class to have lunch, read the newspaper and take a nap. I hate to see anything that would endanger this hallowed tradition.
But encouraging working at in the office makes sense, especially for a company like Yahoo. While some studies suggest that working from home can increase worker productivity, a different line of research shows that in knowledge-based industries, casual interaction among employees enhances creativity and innovation.
Ms. Mayer is right to pursue this goal, although she might have better luck ith carrots than sticks. For one thing, the “carrots†of working at the office might actually give the employees a tax break.
Ms. Mayer came to Yahoo from Google, which is famous for its extravagant benefits, including free food and snacks, on-site gyms, subsidized massages, concierge services, on-site doctors, free on-site haircuts and so on. (Mashable illustrated some of the common workplace amenities in Silicon Valley.)
Some items, like free or subsidized dry-cleaning, are clearly taxable benefits for the employee. Other benefits, like an on-site gym, are permitted to be provided tax free by regulation. Still others, like free meals, are probably taxable, but may not always be reported as income, and are unlikely to become the target of an ! I.R.S. crackdown.
The legal test for meals is whether the meals are provided on-site “for the convenience of the employer.†There must be a substantial noncompensatory business purpose, like a need to have employees available for emergencies, or an absence of sufficient restaurants nearby.
From Google’s perspective, lavish benefits do more than keep employees happy. A pleasant environment keeps them at work, draws them into the office on weekends and makes it easier for them to be productive when they are on site. Free haircuts minimize time away from the office. Free food encourages employees to eat together, collaborating on projects and encouraging the cross-pollination of ideas. If eating meals on site is tantamount to a condition of employment, then perhaps the meals are properly excluded from income.
The tax policy challenge is that while many of these perks may help the employer, they also provide substantial untaxed ersonal benefits to the employee. Not every lunch conversation will be focused on work. Why is that a problem The logic of taxing fringe benefits is rooted in the concept of horizontal equity.
Suppose Abe works at Yahoo, makes $150,000 a year and is taxed at an effective 33 percent rate, thereby paying $50,000 in taxes. Bridget, by contrast, makes $120,000 and also enjoys $30,000 of untaxed fringe benefits.
Bridget’s tax liability is only $40,000 (33 percent of $120,000), meaning that she pays $10,000 (or 20 percent) less in taxes, yet received the same economic compensation as Abe. To the extent that Bridget’s benefits are really compensation, and not for the convenience of the employer, this is unfair.
Still, it seems churlish to ask the government to crack down on efforts to make the workplace a more pleasant environment. Given the importance of creativity and innovation to economic growth, a tax subsidy for benefits that foster casual interaction at work makes a lot of sen! se, even ! if some portion of the benefits might really be a form of compensation.
Rather than requiring the I.R.S. to ask whether fringe benefits are compensatory, the Treasury Department could write regulations directing the agency to exclude from income items and services â€" like meals, climbing walls or foosball â€" if those items are consumed in a work environment intended to increase collaboration. Services that merely substitute for otherwise nondeductible, everyday living expenses, like dry-cleaning, would remain taxable.
One concern is the distributional impact of such an approach: it mostly helps those who are already well-off. Fringe benefits are commonplace for computer programmers in Silicon Valley, but I haven’t heard of too many auto mechanics or janitors who get similar perks at work.
A common example of a fringe benefit that is technically income but goes untaxed is the employee retention of frequent flier miles earned during the course of business travel. For a discussion of thi and other customary deviations from the Internal Revenue Code, see Lawrence Zelenak, Custom and the Rule of Law in the Administration of the Income Tax, 62 Duke L.J. 829 (2013).
