These estimates assume the formation of implicit taxes exerts no upward pressure on prices when taxes are increased. To estimate implicit tax effects, let A be the after-tax return all insurer-states face, let P be the pre-tax return for insurer-state i, and j be the tax rate in insurer-state i. In all insurer-states, A = Pi (1-Ji) and *P / = P / (1-j). Evaluating P at the mean value for PRICE (1.61) and j at the mean value for ETR (0.015), the derivative is 1.63. Thus, a one standard deviation increase in ETR (0.005) would be expected to increase PRICE by 0.008 (1.63*0.005).
Subtracting the 0.008 implicit tax-induced price increase from the earlier estimate of the reduction in the premium-loss ratio following a one standard deviation drop in ETR (-0.027), yields a total price reduction of -0.035. Dividing this sum by mean PRICE suggests insurers would understate the insurance prices they report to state regulators and tax officials by 2.2 percent (-0.035 / 1.61) if ETR were decreased by a standard deviation. In summary, including an estimate of implicit taxes increases the estimated tax-avoidance price response by 29% [(2.2-1.7)/1.7]. internet payday loans
The estimated regression coefficient for INCDUM implies that insurer-states facing an income tax report 5.4 percent (-0.087 / 1.61) lower insurance prices than insurer-states facing a premium tax. INCDUM’s negative coefficient is consistent with insurer-states that face income taxes engaging in more price understatement than other insurers.