Examining the effects of a border-adjustment tax on life insurance and annuities
WASHINGTON (June 22, 2017) – As Congress prepares to consider comprehensive tax reform for the first time in more than three decades, a new report from the R Street Institute finds imposition of a border-adjustment tax, or BAT, to internationally sourced reinsurance would raise the cost of life insurance and annuity products by $59 billion over the next 20 years and reduce the amount of life insurance and annuities sold by $24.6 billion over the same period.
The report—authored by R Street Senior Fellows Lars Powell, Ian Adams and R.J. Lehmann—notes the effects also would be felt in slower general economic growth, given that the U.S. life insurance industry currently invests 75 percent of every new premium dollar in fixed-income debt markets. Building on a model developed by economist Marco Arena, the report finds that, for every $6.7 billion in decreased life insurance premiums, gross domestic product would fall by about $1 billion.
“Given the global nature of reinsurance markets, a BAT would have significant effects on life insurance markets, primarily by shrinking the supply of capital available to U.S. life insurers,” the authors write. “This is particularly significant, because life reinsurance contracts remain in effect as long as the life insurance policies they support. Therefore, existing life reinsurance contracts would create significant new costs to support policies already in force. Some of this cost would be passed on to consumers, while the rest would result in reduced capital to support new policies.”
These new affordability barriers would lead to an increase in the amount of public assistance needed to sustain the living standards of those who become unable to purchase private life and annuity products, which in turn, the authors report, will lead to an expansion in various federal welfare programs and even to the obligations secured by the federal Pension Benefit Guaranty Corp.
“Life insurance and annuities prevent financial devastation for a large number of people each year. By keeping family incomes above the poverty threshold following a premature death, disability or retirement, government outlays for means-tested safety net benefits are reduced,” the authors write.
The authors conclude that if Congress moves forward with a BAT as part of its tax-reform package, it should note that developed nations that employ the conceptually similar value-added tax (VAT) system almost universally exempt financial services like reinsurance from the tax.
