Lars Powell and two other analysts at the think tank write about how a BAT might affect the U.S. life and annuity markets in a new commentary posted on the R Street website.
R Street promotes a free-market approach to financial services regulation.
Some policymakers in Washington, including officials in President Donald Trump’s administration, have talked about the possibility of using a new BAT system to raise money for building a wall between the United States and Mexico, and for other projects.
A BAT system would eliminate federal income taxes on the foreign income that U.S. companies earn. The system would also eliminate U.S. companies’ ability to deduct the cost of goods and services purchased from overseas from taxable revenue.
In theory, a successful BAT system could raise $1 trillion in extra revenue over 10 years, Powell and his colleagues write.
No one has formally proposed applying a BAT to reinsurance, but if Congress did that, it could cause serious problems for issuers of U.S. life and annuity products, because about 59% of U.S. life insurer capitalization is attributable to reinsurance, the R Street analysts write. They estimate that U.S. life insurers get about 51% of their reinsurance from entities outside the United States.
If a BAT system imposed what amounted to a 20% tax on use of non-U.S. life reinsurance, that would start out sucking $5.4 billion in capital from the U.S. life sector per year, the analysts predict.
The amount of capital flowing out of the sector each year would decrease over time, but it would produce about $59 billion in capital costs over a 20-year period, the analysts write.
The decrease in U.S. life sector capital would increase the cost of U.S. life insurance and annuities by about 3.3%, and, all other things being equal, that would cut U.S. life and annuity sales by about $25 billion over 20 years, the analysts predict.
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