Study lambasts Obama reinsurance tax plan

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  • Former Reagan economic adviser: Dr Arthur Laffer

    Former Reagan economic adviser: Dr Arthur Laffer

A new report finds that President Barack Obama’s proposal to increase taxes on non-US reinsurance companies would backfire on the US economy.

The report, entitled, “Do We Want Special Interest Trade Protectionism in the Tax Code?” was published by Arthur Laffer, a former member of President Ronald Reagan’s Economic Policy Advisory Board and describes the proposal as “bad tax policy”.

The report estimates that the proposal would produce a loss of $1.35 billion in US gross domestic product, along with estimated private-sector losses of $4.07 for every $1 in additional tax revenues collected by the US Treasury.

The proposals targeted by Dr Laffer seek to deny tax deductions for certain reinsurance premiums paid to foreign-based affiliates by domestic insurers. Such plans were put forward by President Obama in his 2016 budget proposal and previously introduced by US Sen Robert Menendez, US Representative Richard Neal and US Representative Bill Pascrell in the last several sessions of the US Congress.

Bermuda-based reinsurers with US affiliate insurers would be impacted.

Dr Laffer said the proposal also involved trade protectionism implemented through the tax system, “done at the behest of domestic insurers and reinsurers seeking protection from foreign competition”.

“The economic effect of the proposal would be to raise the cost of capital and force insurers into less efficient and more vulnerable capital structures, with less risk spreading and global risk diversification,” the report added.

“The result of that would be to raise the cost of insurance for consumers and business, particularly property and casualty insurance against such risks as hurricanes, earthquakes, and terrorism, as insurers seek to pass on the cost of the tax. The proximate result would be less essential insurance coverage against such risks.

This consequence particularly harms small businesses, which cannot grow or even enter a market, without essential, affordable, insurance coverage; in addition, inadequate insurance coverage could impair a small business’s ability to stay in business following a catastrophic event.”

The Coalition for Competitive Insurance Rates, of which the Association of Bermuda Insurers and Reinsurers is a member, welcomed the report’s findings.

Tom Feeney, the CEO of Associated Industries of Florida, said on behalf of CCIR: “Efforts to reform the tax code by imposing additional taxes on international affiliate insurers and reinsurers would force the industry as a whole to reduce the size and scope of their US offerings, making coverage during the next hard market less available or unaffordable for the companies and consumers that depend on it the most.

“And, when higher insurance rates are passed down to policyholders, economic growth is stalled, a glaring fact routinely overlooked by policymakers in Congress.

“The unintended consequences of a tax on foreign affiliate insurers and reinsurers far outweigh the benefits. The only potential winners are the select few firms that stand to profit from decreased market competition.

“A robust insurance market, open to as many competitors as possible, is essential to protecting consumers and allowing businesses to operate and grow.”

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Published May 18, 2015 at 8:00 am (Updated May 17, 2015 at 6:21 pm)

Study lambasts Obama reinsurance tax plan

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