Philippine Standard time

Tax Elasticity Study on the Insurance Industry, May - June 2010

The paper seeks to measure the tax elasticity of the country’s life insurance industry from 1978 to 2007 to determine if the foregoing taxes really serve as a disincentive in making a decision to buy life insurance products. Taxes imposed on life insurance premiums, such as the DST and premium tax, were found to be inelastic to the growth of the life insurance industry as the elasticity coefficient is less than unity. Because of these results, abolition of the DST and premium tax on life insurance is not recommended. Said taxes do not have a direct link to the performance of the life insurance industry. The study likewise emphasizes that there are also other determinants to life insurance demand like education, income, inflation and financial development which may have a greater impact on the life insurance industry as against the DST and premium tax. Beyond the measure of elasticity, the abolition of the DST and premium tax on life insurance is not supported due to the adverse effect it may create on government’s coffers. The abolition may also set a precedent for other similarly-situated industries (e.g. non-life insurance) to clamor for the same tax privilege. Moreover, the abolition would completely free the life insurance companies from the payment of taxes which other industries in the financial sector are required to pay resulting in inequitable taxation and undue advantage. It is therefore suggested that the premium tax and the DST on life insurance premiums remain imposed to level the playing field among the different financial investment products. This treatment will ensure a more balanced growth and development of the financial/capital market.


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