The impact of insurance premium taxation

In many countries insurance premiums are subject to an insurance premium tax that replaces the common value-added tax (VAT) used for most products and services. Insurance companies cannot deduct VAT payed on inputs from premium tax; also corporate buyers of insurance cannot deduct premium tax payments from VAT on their outputs. Such deductions would be allowed, if insurance premiums were subject to VAT instead of insurance tax. In the current paper, we investigate the impact of the premium tax on insurance companies, insurance holders and government revenues from multiple perspectives. We explicitly compare tax systems with premium tax and tax systems that allow deductions. We find that the competitiveness of corporate buyers of insurance, the ruin probabilities of insurance firms and their solvency capital are hardly affected by the tax system. In contrast, the tax system has a significant influence on the cost of insurance, insurance demand, government revenues and the profitability of insurance firms.