If Governments understood the true economic cost of taxing insurance, I doubt they would continue to use this unfair method of tax collection which, as has been shown elsewhere on the NoTaxOnInsurance site, is unfair as it taxes the prudent and risk averse and leads to under-insurance and non-insurance which in turn hurts the constituents who they are elected to protect and the very economy.

A recent study by KPMG Econtech found that the economic cost of insurance taxes is high in other areas, particularly in comparison to other taxes. This is reflected in the ‘excess burdens’ reported in the chart below, that measures the economic cost (or loss in living standards) per dollar of revenue raised when a tax is increased by a small amount. As the chart shows, the cost of insurance taxes per dollar of revenue is higher than for other major taxes, such as personal income tax on wages and corporate income tax.

Marginal Excess Burden of Major Australian Taxes

KPMG explain that there are a number of reasons for the high economic cost of insurance taxes. First, insurance taxes are applied to a narrow tax base, ie. insurance premiums. In general, the narrower the revenue base of a tax, the higher its economic cost. If taxes are applied to only one product (as insurance taxes are), then there is more opportunity for households and businesses to substitute away from consuming that product, leading to a greater loss in living standards.

Second, insurance taxes have a high effective rate. While the statutory tax base is typically the value of insurance premiums, the true cost of insurance services to policyholders is the value of premiums less the benefits that are paid to them. This is a much smaller tax base than the statutory base. This means that the effective rates of tax are far higher than the statutory rates.

Hopefully this study will add further pressure on the Governments of New South Wales and Tasmania to remove the Fire Service Levy in their States and for other States to consider removing Stamp Duty on general insurance, which continue to make the insurance sector in Australia one of the highest taxed in the world.