GAAP elasticities in the life insurance industry: The effect of tax law changes on the accounting behavior of mutual and stock life insurance companies.

Abstract

This research analyzes discretionary accounting decisions which affect the tax liability of the firm. The impact of tax policy changes on accounting behavior of firms in the life insurance industry is examined by documenting the magnitude and significance of the elasticity of selected accounting estimates with respect to changes in tax cost. The study maintains two objectives: (1) To verify the existence of accounting elasticities and (2) To observe whether differences in regulation of accounting practices within the industry alters the distribution of the tax burden across intra-industry segments A measure of tax price is derived and included in a model of accounting accruals which estimates the tax price elasticities of the accruals. The industry is subdivided into firms subject to regulation by the S.E.C. (stock companies) vs. those subject only to regulation by state insurance commissions (mutual firms). The mutual segment is further subdivided according to degree of statutory regulation by states. Preliminary results indicate significant differences in accounting elasticities across these industry segments. These findings suggest the need for caution in designing tax policy linking the firm's tax liability and accounting estimates which are subject to exogenous sources of regulation. Differing degrees of regulation impose restrictions on freedom of accounting choice that may cause unintentional redistribution of the tax burden toward segments of the population which are subject to higher degrees of regulation. The model developed is applicable to any accounting estimate used in the calculation of taxable income or financial statement income which is subject to discretion and a variance in tax costs.