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Insurance Taxation and Insurance Fraud

M. Martin Boyer ()

Journal of Public Economic Theory, 2000, vol. 2, issue 1, 101-34

Abstract: It is common practice in the United States to impose a sales tax on insurance premiums. Insurance benefits are not taxed, and it is typically argued that they should not be taxed because they compensate for a loss. In this paper I present a case where the taxation of insurance benefits is preferable to the taxation of premiums. When insurance fraud is present--in the form of ex post moral hazard--a tax on insurance premiums increases the number of fraudulent claims in the economy, whereas a tax on insurance benefits may reduce fraud. More importantly, however, policyholders are made better off with a benefit tax than with a premium tax. Copyright 2000 by Blackwell Publishing Inc.

Date: 2000
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