9 of fringe benefits and wages in Belarus. Whatever the historical origin of enterprise provision of nonmonetary benefits, their continued provision appears to owe much to their tax treatment.

32. Strategic objectives in all tax systems involve balancing goals of raising revenue, equitable treatment of individuals, efficiency in the allocation of resources and incentives for the supply of particular goods and services. With respect to equity, a fundamental principle underlying an income tax is that all income from whatever source should be taxed similarly.<sup>22</sup> Efficiency concerns dictate similar equality **in** treatment of different sources of income, so that resources are not wasted in avoidance activities to minimize tax liability or enforcement efforts to counter such avoidance.<sup>23</sup> It is not unusual, however, to find some types of fringe benefits receiving preferential tax treatment to encourage their provision. In the United States, for instance, employer-provided health insurance premiums are deductible business expenses in the calculation of corporate income taxes, are not taxable as personal income in the hands of the beneficiary and are not included in the wage tax base for the payroll tax.

33. There is, in fact, a close interaction between the sizes of tax rates on income and the extent to which nontaxable benefits are offered to employees. Recent econometric evidence suggests that lowering income tax rates substantially reduces the demand for nontaxable benefits in the US.24 34. Belarus is no exception to this relationship between tax rates and the extent to which nontaxable benefits are extended to employees. With one exception, all fringe benefits in Belarus are deductible before enterprise profit taxes are calculated.<sup>25</sup> All non-wage fringe benefits are excluded from the payroll tax base, however, and such taxes amount to 46 percent of payrolls. On the side of personal income taxation, moreover, the principal nonmonetary form of income, that from housing services which have been substantially provided by employers, is tax-free to the recipient-whether such housing is actually built by employers or acquired by means of monetary subsidies from employers. Other types of financial and nonfinancial benefits for workers receive less favorable but still advantageous tax treatment. They are theoretically subject to tax if they exceed 30 and 20 minimum monthly wages, respectively, or just under 3 and 2 months salary for the average worker.<sup>26</sup> Enforcement of the latter provision appears to be ineffective, however.27 In total, this tax treatment constitutes a powerful incentive to both employers and employees to substitute nontaxable benefits for wages.

35. Not unnaturally, both state-owned enterprises and firms in the newly emerging private sector respond to these incentives in the tax system to supply nontaxable benefits to employees. Newly emerging

- 22 The underlying principle is that of _horizontal equity,_ meaning that likes should be treated alike.

- 23 The significant costs of such anti-avoidance activity are illustrated by the estimate that as much as one-half of the US Tax Code before 1986 (the year of substantial tax reform) was devoted to limiting the extent to which taxpayers could take advantage of the lower tax rate applied to income in the form of long-term capital gains. See Charles E. McLure, Jr., cited in Economic Council Of Canada, _The Taxation of Savings and Investment,_ (Ottawa, Ont.: Minister of Supply and Services, 1987), p.<sup>9</sup> .

- 24 Stephen A. Woodbury and Daniel S. Hamermesh find that ."..wages and [nontaxable] benefits are highly substitutable and that the demand for benefits is price elastic. Changes in income taxes induce a change in the relative price of benefits and wages that in these samples generates substantial substitution between wages and nonwage compensation." Their estimates suggest that cuts in average marginal tax rates of 3-6% in the mid-1980's in the US reduced the share of nontaxable benefits in total compensation by one-half percentage point (from a hypothetical 19% to 18.5%). "Taxes, Fringe Benefits and Faculty," _The Review of Economics and Statistics,_ Vol. LXXIV, May 1992, No. 2, pp. 294-295.

- 25 The exception is that grants or loans to employees for housing are only exempt up to 10% of after-tax profit of enterprises.

- 26 In June 1996, the minimum monthly wage was equal to BYR 100,000. The average salary in March 1996 was BYR 1,066,600.

- 27 Khankevich, in "The Taxation System in the Republic of Belarus," (p.<sup>1</sup> 8) comments that "even though legislation says that income tax should be paid on any form of income, in this case it is possible to calculate the tax amount but not actually collect it."