Tax Compromise

After years of trial-and-error taxation, the nation's 1,272 life insurance companies moved a step closer toward accepting a permanent formula for totting up--and increasing--their federal tax bill. The companies (in which 109 million Americans have policies with a face value exceeding $458 billion) last year paid $292 million, based on a stopgap law that levied the regular 52% corporate income tax on up to 15% of their net investment income. Industry executives who jammed the committee room for hearings last week heard Rep. Wilbur D. Mills (D. Ark.), chairman of the House Ways and Means Subcommittee on Internal Revenue Taxation, indicate that the present tax is out of line with what other industries pay. Mills made it clear that a new deal must be worked out for Congress to act on.

Since 1921 both mutual and stock life insurance companies have been taxed on their investment income (the money they earn from investing policyholders' premiums in bonds and mortgages), not on their underwriting income (the money received from premium payments that does not go into reserves). The 1942 tax law still on the books follows the investment-income principle of taxation. It was suspended and stopgap taxes levied because it allowed such high reserve requirements out of investment income, at a time when interest rates were declining, that in some years the industry was paying no tax at all. Taxing only investment income also leaves many loopholes that many insurance men agree should be plugged. But reaching a solution is complicated by differences in the way stock and mutual companies get their incomes. The mutual companies, as a general rule, after paying dividends to policyholders, have relatively low underwriting incomes and high investment incomes. But stock companies usually receive a larger share from underwriting fees than from investments.

To resolve the quandary, Under Secretary of the Treasury Fred C. Scribner Jr. suggested 1) a tax on total life insurance income, 2) a stiffer tax on investment income only, 3) a compromise taxing part of investment income and part of underwriting income. The subcommittee is readying a bill, based on the compromise proposal, which will raise the life insurance companies' tax bill to between $400 and $500 million a year. At week's end it was apparent that most companies will go along with the new proposal.

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