Tax Policy and Administration:

Taxation of the U.S. Life Insurance Industry

Published: May 10, 1983. Publicly Released: May 10, 1983.

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Testimony was given on the taxation of the life insurance industry. The Tax Equity and Fiscal Responsibility Act changed some facets of the tax treatment of the industry, but many of the provisions included in this legislation will expire at the end of the year. GAO provided information to aid the congressional task of arriving at suitable permanent tax legislation for the industry. The act provided stopgap provisions which repealed legislation that had allowed the use of modified coinsurance arrangements. GAO has found that higher taxes were paid under the new provisions than would have been paid if modified coinsurance had been allowed to continue. However, tax revenues under these provisions were much lower than they would have been before the widespread use of modified coinsurance. GAO found that, in 1978 and 1979, about 75 percent of investment income escaped taxation. Had the stopgap provisions been in effect at that time, GAO estimated that over 80 percent of investment income would have been taxed. GAO also estimated that additional taxes would result from taxation methods other than those contained in the stopgap provisions. The taxes under the assumed interest rate basis would have been almost double those under the stopgap. GAO analysis has led it to believe that special deductions for group life and accident and health lines of business should be reconsidered, because the losses incurred by these lines of business have not supported the special risks anticipated. With the recent proliferation of graded premium policies, GAO now thinks that legislation which provides for approximate revaluation should be repealed and that only exact revaluation is appropriate. GAO also believes that the deferral of one-half of underwriting gains currently allowed should be phased out. GAO also questioned how dividends to policyholders can be separated into the true excess interest portion and the underwriting gain portion.

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