Operations of insurance corporations in the fire and casualty fields compared to Federal income taxes paid Source: Best's Fire and Casualty Aggregates and Averages. Mr. WEBB. The study shows that stock companies in both the fire and casualty fields generally pay greater taxes per dollar of earned premiums or of total investment and underwriting profits than the mutuals. However, during this abnormal period studied, stock fire companies experienced underwriting losses in 4 of 6 years and stock casualty companies overall experienced underwriting losses in 1 year, although many had a 2- or 3-year cycle of underwriting losses during this period. The mutual corporations showed over-all profits in each of the 6 years. The period was characterized by heavy inflationary claims and excessive withdrawals of surplus due to statutory requirements in setting up unearned premium reserves. These resulted in greatly curtailed earnings for both the stock and mutual companies. Therefore, tax payments of the stock companies were at their lowest, while tax payments of the mutual corporations through the operation of the tax on gross income, necessarily remained constant, and did not reflect the downturn in profit. Despite the abnormal years experienced by stock fire and casualty companies during the 7 years that the 1942 tax provisions have been operative, both stock fire and stock casualty companies paid more Federal income tax per earned premium dollar than did the mutual fire and casualty insurance corporations. While stock fire companies paid an annual average of 2.45 percent of their earned premiums in Federal income taxes, the mutual fire corporations paid an annual average of 1.31 percent of their earned premiums in Federal income taxes. Stock casualty companies, on the other hand, paid an average each year of 2.29 percent of their earned premiums in Federal income taxes compared to 0.98 of 1 percent paid by their mutual competitors. Comparison of what appear to be normal years reveals a more startling disparity. For instance, in 1949 stock fire companies paid 5.75 percent of their earned premiums in Federal income taxes while the mutual fire corporations paid only 1.24 percent. Although premiums earned may serve as a basis for comparison of underwriting results and for tax burdens based thereon, the fact remains that these items do not necessarily measure the tax advantage granted mutual insurance corporations under the Federal income tax laws. The Federal income tax is levied against a corporation's earning ability and not against its business volume. Mutual corporations normally enjoy a better earning capacity; therefore, their true ability to pay Federal income taxes is better reflected by a comparison of taxes paid by them in terms of their total underwriting and investment or banking profits. Although the tax measurement in terms of premiums earned establishes mutual insurance corporations as having a definite tax advantage, the use of net earnings as a test shows even greater disparities in their avoidance of income taxes. When income tax payments are related to the total of underwriting and investment profits or income, it becomes readily apparent that both stock fire companies and stock casualty companies pay far more income tax per dollar of earnings than do the mutual corporations. For the 7-year period surveyed, stock fire companies paid an average of 16.8 percent of their profits in Federal income taxes while their mutual competitors paid only 3.6 percent. The only year in the 7-year period studied in which the fire business was close to normal was the year 1949. In that year stock fire companies paid 19.8 percent of their profits in Federal income taxes while the mutual fire companies paid only 3 percent. Stock casualty companies paid 21.5 percent of their profits in Federal income taxes during the years 1943 to 1949, while their mutual competitors paid only 5.7 percent. During the years which might be classed as representative of normal operations, the stock casualty companies paid about 24 percent of their income in income taxes and the mutuals about 5 percent. Thus, on a comparison of taxes paid per dollar of profit, stock fire companies paid four times as much in Federal income taxes as did the mutual fire corporations. A similar ratio prevails for the stock and mutual casualty companies. This indicates that on the basis of 7 years' experience during which the stock companies suffered severe reverses, the present rates on mutual insurance corporations would have to be quadrupled to produce any degree of tax equality. As the insurance business reaches normality again, this ratio would become greater, especially in the case of fire companies. The figures previously given, showing the relation of net income and tax payments made by mutual corporations and stock insurance corporations, it has been assumed that the mutual's tax burden should be equivalent to that of the stock companies in terms of underwriting and investment profits. It has already been shown that mutual fire companies paid 3.6 percent of their total profits in Federal income taxes during the 7-year period 1943 to 1949, inclusive, whereas the stock fire companies paid 16.8 percent. On this basis tax equality would increase the mutual tax bill approximately 13.2 percent of investment and underwriting profit. Application of 13.2 percent figure to their total profits of $143,668,000 in 1949, would produce an additional tax of $18,964,000 at the 38 percent rate or about $25,000,000 at present rates. Mutual casualty corporations during the same 7 years paid 5.7 percent of their total underwriting and investment profits in Federal income taxes on the average, while their stock competitors paid 21.5 percent, a difference of 15.8 percent. The total profits of the mutual casualty corporations in 1949 totaled $162,688,000 indicating that an increased tax bill of $25,704,000 would be necessary to place them upon substantially the same basis at the 38 percent rate or about $35,000,000 at present rates. It appears therefore that equal taxation of mutual and stock insurance companies would bring a minimum of $60,000,000 annually into the Federal Treasury. During periods of normal underwriting results, however, the revenue gain to the Treasury would be much greater. The mutual corporations will continue to enjoy a substantial Federal income tax advantage over the stock companies so long as the present formula for taxing them under section 207 of the Internal Revenue Code remains unchanged. This tax disparity becomes most pronounced during periods of normal profitable operations, inasmuch as the stock tax is measured by net profit, whereas the mutual corporations pay on a gross basis at a 1 percent rate. The principle of taxation measured by net profits should apply to all corporate taxpayers, including mutuals. There should be no hybrid statutory scheme of taxation enabling a selected class of competing taxpayers to be unjustifiably favored over another class. Section 207 should be amended to conform to section 204 of the Internal Revenue Code with appropriate amendments thereto clearly stipulating that, as in the case of dividends paid to shareholders, dividends paid to policyholders are not deductible. Do this and you will help lighten the burden that must be borne by present taxpayers and you will greatly contribute to the revenues of the Treasury. We must tax all income before we increase the taxes of present taxpayers; otherwise, we may be faced with a complete break down in the incentives that have driven many to work longer hours even though the Federal Treasury is the principal recipient of their increased compensation. I want to remind you, that when you first proposed to tax the mutual corporations in 1942, they came before your committee and objected strenuously, saying that taxing them would be discriminatory and unfair and would ruin them in many instances. The passage of years has proven the fallacy of those statements. How can you give credence to their statements in view of the fact that none of their dire predictions have come true. Undoubtedly, they will come before your committee again to object to paying their fair share of taxes even though the perilous plight of our Government at the present time demands that everyone contribute his fair share. This is not the time to save the Nation with the other fellow's dollar. These people have ample ability to pay full income taxes and should be required to do so. (Mr. Webb supplied for the record the following list of associations of insurance agents represented by him:) List of associations of insurance agents represented by William E. Webb, Jr., before the Ways and Means Committee Alabama Association of Insurance Agents. Wisconsin Association of Insurance Agents... The CHAIRMAN. Are there any questions? Members 287 302 306 675 487 783 1, 112 641 525 448 519 795 510 537 1, 159 131 608 699 474 338 543 470 1, 399 Mr. KEAN. May I ask one question? How does it happen that the stock companies in both fire and casualty lost money in 2 or 3 years and the mutual companies did not? Are mutual companies more conservatively run? Mr. WEBB. Mr. Kean, as you probably are familiar, the rates which are charged by the insurance companies are regulated by the State insurance commissioners and regulatory bodies. We try to break down, in North Carolina, in 145 classes of business and make rates on each one of those classes and let the individual experience stand, and the rate is based on that experience. You always have to have a dividing line somewhere as to where you leave one rate and go to another rate. If you could select each one of your risks, you would select only the very best of those risks and leave the others at the higher end of the classes to somebody else. I think that is the reason, or the mutuals insist that is the reason, they are able to return such large policyholder savings in dividends because they do what they call select underwriting. Now, on the other hand, the stock insurance companies operate to a larger extent through insurance agents. We feel an obligation to the insured public and we take all types of insurance. They have consistently shown a greater margin of profit in the stock business for that reason. Mr. KEAN. Mutual companies do not operate through agents? Mr. WEBB. Most of the large mutual companies are what we call direct writers, do not operate through insurance agents. However, there are some mutual insurance companies that do operate through agents, one or two large ones. The CHAIRMAN. Mr. Holmes. Mr. HOLMES. The legal basis of a mutual organization is primarily formed, is it not, on a series of partnerships between the members of the mutual organization and the organization itself? Mr. WEBB. Theoretically that is true, sir. The individual so-called members form a corporation to share the risk expense. Mr. HOLMES. Would you advocate taxing a partnership as a legal entity and as a form of doing business? Mr. WEBB. No, sir. Mr. HOLMES. Thank you. Mr. WEBB. Mr. Holmes, these are not partnerships. The CHAIRMAN. We thank you very much. Mr. WEBB. Thank you, Mr. Chairman. The CHAIRMAN. The next witness is Allan B. Kline, president of The American Farm Bureau Federation. Is Mr. Kline present? Mr. Kline, please give your name and address and the capacity in which you appear to the stenographer for the benefit of the record. STATEMENT OF ALLAN B. KLINE, PRESIDENT, AMERICAN FARM BUREAU FEDERATION, CHICAGO, ILL. Mr. KLINE. Mr. Chairman, I am Allan B. Kline, president of the American Farm Bureau Federation. Our main office is at 221 North La Salle Street in Chicago. The CHAIRMAN. How much time, Mr. Kline, will you need for your statement? Mr. KLINE. It can be very largely up to the committee. This mimeographed presentation was furnished to members of the committee yesterday morning. I shall be happy to take 10 or 12 minutes and outline the major areas which we have presented and the reasons therefor and then be subject to questions if the committee desires. The CHAIRMAN. You may proceed. Mr. KLINE. As I say, Mr. Chairman, I represent the American Farm Bureau Federation. Certainly I am not a tax expert, but we are all taxpayers. A lot of the things which we here recommend, we do not ourselves like. We are convinced, however, that this tax matter is one of the most important before the American people, and that the work of this committee in this regard is second to no work anywhere as related to the question of how well we survive the present situation, how much 79120-51-pt. 2- -22 |