Impact of Alternative Forms of Life Insurance Company Income Tax Legislation

Abstract

Efforts to formulate legislation designed to tax the income of various types of life insurance companies have encountered difficult and complex problems. This article enumerates several of these problems and describes four alternative forms of life insurance company income tax legislation: U.S. Treasury's 1958 proposal for a total income tax base, Lent's proposal for a total income plus reserve interest tax base, the 1959 Act and a revised version of the 1959 Act. potential impact of each alternative tax law is systematically analyzed by means of a computer simulation technique. results suggest that certain laws would create inter-company inequities as well as industry financial chaos. history of life insurance company income tax legislation reveals the complex problems involved in designing a tax law which will simultaneously generate adequate amounts of revenue while treating all life insurance companies equitably. Early attempts2 to apply a total income Andrew F. Whitman, Ph.D., is Assistant Professor of Insurance in the University of Minnesota. He has served as part-time instructor in Pennsylvania State University, as Technical Assistant in the Wisconsin State Insurance Department, as a State Farm Fellow and Teaching Assistant in the University of Wisconsin, and as a Traveler's Research Fellow. earlier article by Dr. Whitman on taxation of insurance companies appeared in this Journal. Howard E. Thompson, Ph.D., is Associate Professor of Business in the Graduate School of Business of the University of Wisconsin. From 1957 to 1961, Dr. Thompson served as Mathematician and Operations Research Analyst at the A. 0. Smith Corporation. His earlier articles have been published in Management Science, the Journal of the Academy of Management, and this Journal. This paper was presented at the 1967 Annual Meeting of A.R.I.A. 1 research for this study was sponsored in part by Ford Foundation, National Science Foundation through the Graduate School of the University of Wisconsin, and the Research Department of Travelers Insurance Company. or corporate income tax approach to life insurance companies were abandoned3 in 2 From 1909 to 1921 the method of determining the income tax base for life insurance companies was substantially the same as that imposed on companies not in the insurance business. Between 1913 and 1921, premium income, investment income, and capital gains were included in gross taxable income. deductions from gross income included the following items: tax-exempt interest, dividends on policies for which premiums were currently paid, operating expenses, current payments on policies, and net additions to policy reserves. Corporation Enactment of 1909 was reenacted in the Revenue Acts of 1913, 1916, 1917, and 1918. For life insurance companies, Tax rates started at 1 per cent in 1909 and gradually increased to 12 per cent in 1918; Allen L. Mayerson, The Life Insurance Company Income Act of 1959, CLU Journal, XIV, No. 2 (Spring, 1960) p. 172. 3 For statements of the reasons for abandoning the corporate or total income tax base which taxes both life insurance company investment income and underwriting gain, see House Report No. 350, 67th Congress, 1st Sess., p. 20; T. S. Adams, Advisor to the Treasury, Senate Committee on Finance, Hearings on H. R. 8245, 67th Congress, 1st Sess. (Washington U.S. Gover ment Printing Office, 1921); Robert T. Collins, The Federal Taxation of Insurance Companies (unpublished Ph.D. dissertation, University of Southern California, 1954) pp. 142-66; Barnie E. Abelle, An Evaluation of the Life Insurance Company Income Act of 1959, (unpub-