An economic analysis of the taxation and regulation of life insurance in Australia

Abstract

In matters of taxation and regulation , it is widely considered that life insurance warrants special treatment . This view derives not so much from the desire to subsidize life insurance as from the belief that there is something inherently special about life insurance . This thesis sets out to challenge the notion that there is anything inherently special about the economics of life insurance . In particular, it disputes the belief that life insurance warrants special treatment in matters of taxation and regulation . Insurance is depicted as a process of trade in contingent claims and a theoretical model of life insurance is constructed on this basis . The model is an application of the Arrow-Debreu Complete Contingent Markets model . It extep-ds the work of Marshall (1974a, b) by incorporating transaction costs in the manner of Foley (1970) and develops the special case of life insurance using a result due to Malinvaud (1972, 1973). The conclusion emerges from the model that the economics of life insurance is fundamentally no different from the economics of any other productive activity. This conclusion provides the basis for a critical assessment of the current taxation and regulatory treatment of life insurance in Australia . Options for the reform of life insurance taxation are discussed as well as the recommendations of the recent (Campbell) Committee of Inquiry into the Australian Financial System in respect of the taxation and regulation of life insurance. Show more