Double Taxation (Basic Version)
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Calculate the margin required on policyholder premium to offset the effect of double taxation.
An investor can directly purchase an investment with a yield of y. The investor can alternately place his money in an insurance company and the insurance company will purchase an investment also with a yield of y. This would be an indirect investment. (This indirect investment would be subject to double-taxation as explained in Feldblum's surplus paper.)
Assume there are no restrictions on the risk level of the insurer's investments.
Assume the premiums are paid at the beginning of the year and tax is not due until the middle of the year.
| yield |
y |
2000 |
| tax - personal |
TP |
3000 |
| tax - corporate |
TC |
4000 |
| ratio of invested capital to policyholder premium |
5 |
Formula
margin
= (capital / premium) x y ⋅ TC / (1 - TC) x (1 + y)-(1/2)
Note
The investor's personal tax rate is not relevant to the margin calculation because the personal rate is the same for both the direct and indirect investment options.
