Reinsurance tax proposal could cost US economy $1.4bn

President Obama’s 2015 budget includes a tax proposal, which would eliminate the deduction for reinsurance premiums paid to foreign subsidiaries, and could potentially cost the US economy $1.4 billion.

This is according to the nonpartisan Tax Foundation, which said that eliminating these types of deductions could ultimately create more problems than they solve.

The report argued that this provision redefines the corporate tax base to effectively ignore legitimate business transactions. It added that the provision is poor for growth because it increases the cost of capital and it doubles down on a dubious corporate tax system in need of broader reforms.

“Reinsurance transactions are already under heavy oversight by the IRS, and require appropriate pricing for premiums,” said the Tax Foundation.

It explained that dynamic modelling of the tax provision shows that it increases the cost of capital and reduces GDP by $1.35 billion while only increasing revenues by $440 million annually.

“In total, for every additional dollar collected by the government over the long term, the private sector as a whole would lose $4.07. This is an inefficient growth tradeoff; far better revenue raisers are possible,” said the report.

The foundation concluded that Congress should not reform the corporate tax code on an industry-by-industry basis but should make the corporate tax code more neutral and more competitive.

“The US corporate tax code has problems. For instance, its statutory rate is the third highest in the world and it is one of six remaining OECD countries under the outdated worldwide system of corporate taxation. The problems with the corporate tax code are broad, and it is in need of a broad solution,” said Tax Foundation economist Alan Cole.

“In contrast, the proposal discussed in this report is part of a worrying trend of increasingly-elaborate, industry-specific, arbitrary ways of determining the corporate tax base. Simply put piecemeal revisions to the corporate code to not the address underlying issues.”