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Indirect and Direct Subsidies for the Cost of Government Capital: Comparing Tax-Exempt Bonds and Build America Bonds

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  • Gao Liu
  • Dwight V. Denison

Abstract

Using data from the California primary market, we fnd that on average Build America Bonds (BABs) have after-subsidy interest rates approximately 72 basis points lower than tax-exempt bonds, and the savings increase with bond maturity. The implied tax rate for the marginal municipal bond investor is 25 percent, which is also the neutral subsidy rate at which municipal bond issuers are indifferent between issuing tax-exempt bonds and BABs. Analysis of paired tax-exempt bonds and BABs issued by the same issuers on the same dates suggests a comparable implied tax rate and net after-subsidy savings of about 65 basis points.

Suggested Citation

  • Gao Liu & Dwight V. Denison, 2014. "Indirect and Direct Subsidies for the Cost of Government Capital: Comparing Tax-Exempt Bonds and Build America Bonds," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(3), pages 569-594, September.
    • Handle: RePEc:ntj:journl:v:67:y:2014:i:3:p:569-594
    DOI: 10.17310/ntj.2014.3.03
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    1. Cestau, Dario & Green, Richard C. & Schürhoff, Norman, 2013. "Tax-subsidized underpricing: The market for Build America Bonds," Journal of Monetary Economics, Elsevier, vol. 60(5), pages 593-608.
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    Cited by:

    1. Harvey Galper & Kim Rueben & Richard Auxier & Amanda Eng, 2014. "Municipal Debt: What Does It Buy and Who Benefits?," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(4), pages 901-924, December.
    2. Daniel Garrett & Andrey Ordin & James W Roberts & Juan Carlos Suárez Serrato, 2023. "Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(2), pages 815-851.
    3. Thomas Luke Spreen & Ed Gerrish, 2022. "Taxes and tax‐exempt bonds: A literature review," Journal of Economic Surveys, Wiley Blackwell, vol. 36(4), pages 767-808, September.
    4. Martin J. Luby & Peter Orr & Richard Ryffel, 2021. "Direct Versus Indirect Federal Bond Subsidies: New Evidence on Cost of Capital," Public Budgeting & Finance, Wiley Blackwell, vol. 41(1), pages 76-120, March.

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