Market Insurance Versus Self Insurance: The Tax-Differential Treatment and its Social Cost

The Journal of Risk and Insurance, Vol. 58, No. 4, pp. 657-669, December 1991

13 Pages Posted: 21 Feb 2008 Last revised: 21 Apr 2014

See all articles by M. Moshe Porat

M. Moshe Porat

Temple University - Risk Management & Insurance & Actuarial Science

Uriel Spiegel

Bar-Ilan University - Department of Management

Uzi Yaari

Rutgers University; School of Business-Camden

Uri Ben-Zion

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management; National Bureau of Economic Research (NBER)

Abstract

Considerable resources have been expended over the years debating the business tax treatment of market-purchased insurance versus self insurance. Following a long tradition, the U.S. Internal Revenue Service treats only the latter as acceptable evidence of risk shifting and therefore worthy of tax deductibility. We explore the background of this policy and the social cost attached to the implicit subsidy of market insurance as opposed to its substitutes, competing forms of pre-loss risk financing. The scope of economic inefficiency attached to this policy suggests a large potential social gain from equal tax treatment of all forms of business insurance.

Keywords: self insurance, premium tax deductibility, insurance tax policy, public policy

JEL Classification: G13, G18, G22, G28, H21, H25

Suggested Citation

Porat, M. Moshe and Spiegel, Uriel and Yaari, Uzi and Ben-Zion, Uri, Market Insurance Versus Self Insurance: The Tax-Differential Treatment and its Social Cost. The Journal of Risk and Insurance, Vol. 58, No. 4, pp. 657-669, December 1991. Available at SSRN: https://ssrn.com/abstract=1095297

M. Moshe Porat

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

Uriel Spiegel

Bar-Ilan University - Department of Management ( email )

Ramat-Gan, 52900
Israel
011-972-3-5318282 (Phone)
+972.3.535.3329 (Fax)

Uzi Yaari (Contact Author)

Rutgers University ( email )

School of Business
Camden, NJ 08102
United States
610-664-2086 (Phone)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

School of Business-Camden ( email )

Rutgers University
227 Penn Street
Camden, NJ 08102
United States
610-664-2086 (Phone)
610-664-2198 (Fax)

HOME PAGE: http://camden-sbc.rutgers.edu/FacultyStaff/Directory/yaari.htm

Uri Ben-Zion

Technion-Israel Institute of Technology - The William Davidson Faculty of Industrial Engineering & Management ( email )

Haifa 32000
Israel
(972-4) 829-4432 (Phone)
(972-4) 829-5688 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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