TAXES, FRINGE BENEFITS AND FACULTY

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 1477 institutions of higher learning. The demand for benefits is very responsive to changes in real income and the tax price of benefits. These conclusions are robust with respect to varying definitions of the tax price, treating it as endogenous, and accounting for unmeasured individual effects on demand. Simulations suggest that the Tax Reform Act of 1986 sharply reduced the demand for benefits. Extrapolating the impact to the entire economy, the annual flow of compensation shifted away from benefits by at least $15 billion.