In 2002, The Century Foundation convened the Working Group on Tax Expenditures to examine and propose reforms to the tax code. The resulting report, Bad Breaks All Around, identifies twelve tax breaks with little or no economic justification. These “dirty dozen” are no less ripe for the chopping block a decade later, as Congress finally takes up the task of simplifying the tax code. Follow along at Blog of the Century and on the “Dirty Dozen” expenditures homepage as we reintroduce each of the “dirty dozen” and explain why it's long past time to eliminate these costly tax breaks.
Decades of lobbying by corporate interest groups has left the U.S. tax code riddled with dozens of arcane loopholes and deductions for specific industries. Yet given the opportunity to eliminate these expenditures, Congress has repeatedly attempted to balance market distortions of their own creation with additional tax breaks.
A unique deduction for life insurance companies is one result of this domino effect of increasing tax complexity: In an effort to reduce the negative tax-induced economic distortions created by Tax Reform Act of 1984—which put life insurance companies at a competitive disadvantage to comparable financial institutions—Congress amended the rules for small life insurance companies to allow them to deduct 60 percent of taxable income up to $1.8 million annually, with a phase-out mechanism between $3 million and $15 million in taxable income.
Both the U.S. Treasury and the Joint Committee on Taxation estimated the tax expenditure for small life insurance companies at $100 million in 2002, the year it made The Century Foundation's list of “Dirty Dozen” tax breaks. Although the Treasury's estimated annual revenue loss from this deduction has fallen to just $30 million in recent years, it remains particularly egregious for its lack of economic justification and its market-distorting effect favoring the sale of life insurance through small firms.
Learn more about the “Dirty Dozen” tax breaks here.