Shifting of the Life Insurance Company Income Tax

Abstract

While there have been many studies dealing with the Federal taxation of life insurance company income, none of them has considered the question of the incidence of this tax. In this study an attempt is made to measure statistically the impact of the Federal income tax upon the gross profit of a group of stock life insurance companies. A linear multiple regression model is applied to company data obtained from the New York Insurance Reports for the period 1952 through 1965. It is found that for the period under study, 150 percent of the burden had been shifted. This result is comparable to the finding of 136 percent shifting reported by Richard A. Musgrave and Marian Krzyzaniak in their research project which applied a similar model to a group of industrial companies. Both of these are at variance with other industrial studies which have found little or no corporate income tax shifting. The Federal Government has taxed life insurance companies on the basis of income since 1909. Due to the nature of the life insurance company, an income tax developed for the ordinary industrial corporation is quite unsuitable. Since 1921 the Federal Government has recognized the unique nature of the life insurance industry and has endeavored to find a taxing formula for the life insurance industry that would be equitable and fair. This task has not been easy. Many scholars have studied the question of the taxation of life insurance companies but none of them has considered the question of the incidence of an income tax on life insurance companies. As a guide for public policy, the question of the incidence of a tax is of the utmost importance. If a tax is shifted, then the impact of the tax may fall on a quite J. J. Launie, Ph.D., is Associate Professor of Finance in San Fernando Valley State College. He is President of the Western Association of Insurance Professors and was formerly staff consultant to the California Tax Advisory Commission. This paper was presented at the 1969 Annual Meeting of A.R.I.A. different group than the legislature intended. The question of the shifting of an income tax has been considered, but few empirical studies have been undertaken and these have all been studies of industrial corporations. In considering the incidence of a tax upon an individual, both the income sources and income uses must be considered. That is, the tax may change the prices the individual pays for products and it may also change the prices the individual receives from the sale of his services in the factor market. It can be seen that this concept of incidence deals with changes in the real income or wealth of the individual. The modern corporation income tax belongs to the general category of taxes upon net receipts or profits. The traditional theory of incidence holds that at least in the short run, and most likely in the long run also, a general net receipts or income tax has no effect on prices. Reference has been made in the traditional theory to the crucial role played by the marginal firm. The costs of the marginal