Luke Presents Taxation of Risk-Based Returns Inside Variable Insurance Products Today at Florida State

Charlene D. Luke (Florida State) presents A Proposal for the (Non?) Taxation of Risk-Based Returns Inside Variable Insurance Products today at Florida State as part of its Faculty Enrichment Speaker Series.  Here is the part of the Introduction:

This Article explores a method (briefly raised in a prior article) to end wraparound insurance tax shelters while maintaining the subsidy for inside buildup — the removal of tax deferral for the risk-based returns generated inside variable insurance contracts but continuance of deferral for a “riskless” return portion, to be determined formulaically. This Article outlines the basic technical contours of this proposal and discusses its effectiveness in ending the wraparound insurance shelter, relying primarily on the more common assumption that an income tax does and should tax risk-based returns. The Article also, however, considers the value of the proposal in light of the more controversial taxation-and-risk literature, which suggests that an income tax — in its “pure” form and under idealized circumstances — does not tax risk-based returns in any case. I do not intend to take a position as to whether the taxation-and-risk literature is correct (at least not in this Article), but rather to explore what a subsidy might look like assuming that literature is correct. If that literature is correct, then the segregation of risk-based returns from riskless returns allows for the implementation of the only true type of subsidy available — a deferral for riskless returns.