Suppose that insurance policies were fully tax exempt but (a) policies pay less than the fully taxable bond return to cover the costs of the insurance company and (b) loans can be secured only at a higher rate than the fully taxable bond rate to cover the lenders’ costs. Can we use an insurance policy strategy to eliminate the tax on the $ 100,000 of taxable income? What is the implicit tax rate on this strategy? How does it arise and where does it go? Would every taxpayer want to use this strategy?
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