EMPIRICAL RESEARCH INTO THE SHIFTING OF THE CORPORATE INCOME TAX OF LIFE INSURANCE COMPANIES (INCOME TAX)

Scope and method of study. Using an "events study" methodology, this research analyzed the market's assessment of the economic incidence of the corporate income tax of stock life insurance companies. The event of interest was the Life Insurance Company Income Tax Act of 1959. First, a priori stock price reactions to the passage of the 1959 Act were estimated under various shifting and time-frame assumptions. These estimates were then compared to the actual stock price reaction which provides evidence as to the amount of the corporate tax burden remaining on the stockholder of the company. The stock price reaction to the legislative act was estimated using weekly return data and a modified multi-index version of the market model. The estimation of the parameters of the model were derived from a time-series ordinary-least-squares regression.; Findings and conclusions. No significant stock price reaction to the passage of The Life Insurance Company Income Tax Act of 1959 was detected. This suggests that in spite of a substantial increase in the tax liability of life insurance companies, the market expected after-tax cash flows to remain virtually unaffected. In terms of tax incidence, the market expected the economic burden of the tax to be shifted to consumers and/or labor through short-run adjustments in premium prices or commission rates.