This dissertation investigates the impact of federal tax policy on the property-casualty (PC) insurance industry in particular and finds implications for bond markets and shareholders in general. Three topics are addressed and described below: (1) computation of the industry's adjusted effective tax rate and its effect on bond yield spreads, (2) an analysis of industry-specific accounting methods and tax laws, and (3) the short-run incidence of the corporate income tax measured by PCs' share price reactions to the Tax Reform Act of 1986 (TRA '86).; (1) Fair rate of return models used in PC insurer price regulation require an accurate estimate of the federal tax rate paid by PCs. Calculations of the adjusted effective tax rate, which includes implicit taxes on the industry's tax favored assets, reveals that, despite paying zero explicit taxes during 1962-1986, the industry paid an adjusted effective tax rate near the 28% corporate capital-gains tax rate. Further analysis suggests that the corporate capital-gains rate is the industry's marginal tax rate. Based on PCs' apparent role as marginal investor in the long-term tax-exempt bond market, this rate may explain the long-term bond yield spread.; (2) The PC industry's accounting methods and tax history are examined. Financial-reporting and tax aspects of Generally Accepted Accounting Principles and Statutory Accounting Practices are compared, followed by a detailed chronicle of the progress of insurer tax reform. The various tax reform proposals and provisions are explained along with examples, and tax cost estimates made by the I.R.S., this dissertation and other studies are critiqued.; (3) The short-run incidence of the corporate income tax is investigated using a market study of 59 PCs across 25 events affecting PC taxation during the legislative progress of TRA '86 beginning in 1982. PC stock prices declined 8%-25% across the events, revealing tax incidence on shareholders. Three additional findings were made: (1) two-thirds of share price declines occurred over two years prior to enactment of TRA '86, (2) bond returns are predictors of PC stock returns, and (3) PCs' share price reactions are related to levels of firm-specific tax-sensitive variables.
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