Border Tax Bad for Insurance Companies and Consumers

Border Tax Bad for Insurance Companies and Consumers

A border-adjustment tax would raise the lifetime costs of life insurance and annuity policies by $59 billion

and lead to a $24.6 billion drop in sales over the next two decades, according to a recently released study from the R Street Institute.

This is bad news not only for the life insurance industry but for the broader economy as well. U.S. life insurers invest about 75 percent of premiums in fixed-income securities. They are often the only buyer for some kinds of bonds, particularly long-term debt. One economist estimates that for every $6.7 billion in lower life insurance premiums, U.S. gross domestic product would fall by about $1 billion.

The border-adjustment tax is a system that taxes imports, but not exports, generally by allowing U.S. companies to deduct the cost of goods and services they buy from domestic suppliers, but not those they buy from abroad.

This is particularly bad news for reinsurance, best understood as insurance for insurance companies. By its nature, reinsurance is an international business. It is important that reinsurers be able to take on different kinds of uncorrelated risks from all over the world so that they aren’t too exposed to any one kind of peril.

Making reinsurance costlier for U.S. life insurers will hurt their access to capital and their ability to provide affordable products. Life insurance and annuities help consumers save money, plan for an untimely demise and protect themselves from out living their money.

If fewer Americans buy life insurance and annuities, more would be forced to rely on state and federal welfare program, such as Medicaid, nutrition assistance, public housing, and family support. State and federal tax revenues would also decline. In 2016, life insurers paid $10.8 billion in taxes and fees to state and local governments.

Other tax reform ideas that involve raising the cost of reinsurance — like imposing a reciprocal tax, a territorial tax or a discriminatory tax on insurance affiliates — similarly would harm U.S. life insurance consumers. If Congress does impose a border-adjustment tax as part of its tax-reform package, it should exempt financial services companies as do the 160 countries that have value added taxes (a similar concept).

For more information, please read:
A border tax is bad news for the insurance industry and consumers | The Hill

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