Top Economic, Industry Experts Agree: Protecting Consumers from Punitive Reinsurance Tax Makes Sense
Leading economists and industry experts convened on Capitol Hill Thursday for a panel discussion on corporate tax reform, specifically as it relates to how Congress should approach international affiliate reinsurance purchases.
The panel, led by Dr. Arthur Laffer, a former economic advisor to President Ronald Reagan and the current chairman of Laffer Associates, unanimously agreed that US consumers and businesses would shoulder the burden of added costs associated with proposals that seek to deny tax deductions for reinsurance premiums paid to foreign-based insurers by US affiliates. Other panelists included Tom Feeney, a former US Representative and the current president and CEO of Associated Industries of Florida; Alan Cole, an economist at the Tax Foundation; and Timothy Keeler, a trade specialist and partner at Mayer Brown. R Street, a non-profit, non-partisan, public policy research organization, organized and moderated the panel.
“What you’re going to take is a little, tiny tax base and put a 35 percent tax rate on it, so you have a very high tax rate on a very small tax base, which violates every principle of economics you want,” said Dr. Laffer, who recently published an authoritative report that examined the implications of eliminating deductions for foreign reinsurers. “You always want the lowest possible tax rate on the broadest possible tax base.”
“The dream really here is to get a corporate tax structure that collects your revenues in the least damaging fashion and provides for the expenditures in the most beneficial fashion,” added Laffer. “It’s not Republican, it’s not Democrat, it’s not liberal, it’s not conservative – it’s economics.”
The timely dialogue comes on the heels of increased debate over reforming the corporate tax code. Proposals by President Obama in his FY2016 budget and previous legislation introduced by US Sen. Robert Menendez (D-NJ) and US Reps. Richard Neal (D-MA) and Bill Pascrell (D-NJ) attempt to deny a tax deduction for offshore affiliate reinsurance purchases. The panelists urged Ways and Means Committee Chairman Paul Ryan (R-WI) to avoid special interest provisions that deny the standard business cost deduction to U.S.-based, foreign-owned companies for reinsurance premiums they pay to foreign reinsurance affiliates.
“You try to do the best thing you can in terms of a policy and legislative perspective, and it’s almost always the unforeseen, adverse consequences that are much more dramatic than maybe some unforeseen benefits,” said Feeney, in reference to the proposals. “So it’s important that we recognize this would effectively be a $13 billion increase on the cost to consumers, depending on how exactly a proposal like this is structured.”
Panelist Timothy Keeler similarly warned against the implications of the plans. “It’s not about protecting the US tax base, it’s not about tax evasion, it’s pure and simple protectionism; it’s about throwing up a barrier at the border for domestic providers,” said Keeler, adding that “the biggest problem, from my perspective, with these proposals is that they violate US World Trade Organization obligations.”
Panelist Alan Cole, who recently published a study concluding that the tax provisions would considerably lower GDP by $1.35 billion while marginally raising revenue, cited the role of reinsurers and the importance of protecting consumers from a punitive reinsurance tax.
“The purpose of insurance, generally, as an industry, is to spread risk around among a diverse group of people,” he noted. “Diversity is its strength, not its weakness. Therefore, having some risks from the United States spread to places other than the United States is, in fact, a feature – not a bug – of the industry as it exists now.”
Dr. Arthur Laffer
From left to right: Tom Feeney, Alan Cole and Timothy Keeler