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4. Business Meal and Entertainment Expenses

Present Law

Meal and entertainment expenses incurred for business or investment reasons are deductible if certain legal and substantiation requirements are met. The amount of the deduction generally is limited to 80 percent of the expense that meets these requirements.

Possible Proposal

The percentage of otherwise allowable meal and entertainment expenses that is deductible could be reduced, for example, from 80 percent to 75 percent or 50 percent.

Arguments for the proposal

Pros and Cons

1. Meal and entertainment expenses have a personal consumption element even when they serve a legitimate business purpose and are not excessive. This personal consumption element justifies disallowing more than 20 percent of the deduction.

2. Deductions for meal and entertainment expenses involve many abuses, such as excessive expenditures and deductions for expenditures that were not truly business-motivated. In view of the difficulty, from an administrative and enforcement standpoint, of preventing these abuses, overall deductions should be restricted further.

Arguments against the proposal

1. In many circumstances, meal and entertainment deductions represent legitimate business expenses that should not be limited further.

2. Taxpayers who claim legitimate deductions should not be penalized because of abuses by other taxpayers.

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5. Employee Benefits; Pensions; ESOPS

a. Employee benefits

(1) Limit the exclusion of employer-provided health coverage

Present Law

In general, employer-provided health coverage is excludable from an employee's income. The exclusion is conditioned, however, on the coverage being provided under a plan meeting certain nondiscrimination and qualification requirements.

Employer-provided health coverage is unconditionally excludable from wages for purposes of the FICĂ and FUTA taxes.

Possible Proposals

1. In the Treasury Department Report to the President issued in November of 1984, Treasury proposed that employer contributions to a health plan be included in an employee's income to the extent that they exceed $70 per month ($840 per year) for individual coverage of an employee, or $175 per month ($2,100 per year) for family coverage (i.e., coverage that includes, in addition to the employee, the spouse or a dependent of the employee). The dollar limits were to be adjusted annually to reflect changes in the Consumer Price Index.

These limits, which could be set at higher amounts, would apply for FICA and FUTA purposes as well as income tax purposes.

2. The President's tax reform proposal of May 1985 proposed requiring employer contributions to a health plan to be included in an employee's income up to $10 per month for individual coverage or $25 per month for family coverage.

3. The cap on excludable health benefits could be applied only for FICA and FUTA purposes.

4. The exclusion of employer-provided health coverage from wages for FICA and FUTA purposes could be repealed.

Pros and Cons

Arguments for the proposals

1. The exclusion from income and wages of employer-provided health coverage can result in taxpayers with the same economic income paying different amounts of tax because of the form in which their compensation is received. The exclusion from income and wages also narrows the tax base, either causing higher tax rates or reducing needed revenues.

2. The exclusion from income favors taxpayers in a higher tax bracket over taxpayers in a lower tax bracket, because the higher the bracket, the more valuable the exclusion. Moreover, the rules

establishing the exclusion are structured to permit larger exclusions for highly compensated employees, increasing the bias in favor of high-bracket taxpayers.

3. The exclusion from income and wages has encouraged unnecessarily generous health coverage that leads to overutilization of health services and higher costs for such services.

4. The policy objective of encouraging the provision of health coverage to low- and middle-income employees justifies the exclusion from income and wages only up to a point. A cap on the exclusion for health benefits is justified because, when the employer-provided coverage is too expensive, the costs and inequities described above of excluding the excessive portion of the benefit outweigh the marginal benefit of encouraging the provision of the corresponding amount of supplementary health coverage.

5. Inclusion of all or excess employer-provided health coverage in wages for FICA purposes would allow low- and middle-income employees to earn credit toward social security benefits by virtue of compensation received in the form of health coverage. As a result, lower income employees would not be forced (in the case of a contributory health plan that is voluntary) to choose between current health insurance coverage and future social security benefits. Arguments against the proposals

1. The full exclusion from income and wages of employer-provided health coverage, to the extent conditioned on effective nondiscrimination rules prohibiting the plan from favoring highly compensated employees, is justified, as a matter of social policy, by the fact that such exclusion encourages the provision of needed health coverage to low- and middle-income employees who otherwise might not purchase such coverage.

2. If any of the proposals were enacted, employers would be less likely to provide adequate health coverage to low- and middleincome employees. In addition, many of such employees would not purchase adequate health coverage on their own. Accordingly, such employees may in some cases need public assistance. The cost of providing this assistance may well exceed the cost of retaining the present-law exclusion of employer-provided health coverage from income and wages.

3. If a limitation is based on a flat dollar amount of employer contributions (rather than, for example, on a value concept based solely on the health coverage features), it would discriminate against employers (and their employees) that have higher per employee costs for the same health coverage. Examples of such employers are (1) small employers, (2) employers in high cost regions, and (3) employers with older workforces.

4. The determinations of whether the limits on health coverage have been exceeded will be administratively burdensome for employers and the IRS.

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(2) Repeal the exclusion of employer-provided group-term life insur

ance

Present Law

In general, employer-provided group-term life insurance is excludable from an employee's income. The exclusion is conditioned, however, on the insurance being provided under a plan meeting certain nondiscrimination and qualification requirements. In addition, the exclusion does not apply to coverage in excess of $50,000. Employer-provided group-term life insurance is unconditionally excludable from wages for purpose of the FICA and FUTA taxes.

Possible Proposals

1. In the Treasury Department Report to the President issued in November of 1984, Treasury proposed that the exclusion from income of employer-provided group-term life insurance be repealed. The repeal also could apply to the exclusion of employer-provided group-term life insurance from wages for FICA and FUTA purposes.

2. The exclusion from wages for FICA and FUTA purposes of employer-provided group-term life insurance could be repealed.

Pros and Cons

Arguments for the proposals

1. The exclusion of employer-provided group-term life insurance from income and wages can result in taxpayers with the same economic income paying different amounts of tax because of the form in which their compensation is received. In addition, the exclusion from income and wages also narrows the tax base, thereby requiring higher tax rates to produce a given amount of revenues.

2. The exclusion from income favors taxpayers in a higher tax bracket over taxpayers in a lower tax bracket, because the higher the bracket, the more valuable the exclusion. Moreover, the rules establishing the exclusion are structured to permit larger exclusions for highly compensated employees, increasing the bias in favor of high-bracket taxpayers.

3. The costs and inequities of the exclusion, described above, outweigh the marginal beneficial effect of the exclusion.

4. The proposal would allow low- and middle-income employees to earn credit toward social security benefits by virtue of compensation received in the form of group-term life insurance.

5. Because death benefits (as well as the value of up to $50,000 coverage) from group-term life insurance are tax free while benefits in excess of $5,000 from self-insured arrangements are taxable, present law favors the provision of death benefits through life in

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