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Which Households Own Municipal Bonds? Evidence from Tax Returns

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  • Feenberg, D.R.
  • Poterba, J.M.

Abstract

This paper uses data from 1988 federal income tax returns, which asked taxpayers to report their tax-exempt interest income as an information item, to analyze the distribution of tax-exempt asset holdings. More than three quarters of the tax-exempt debt held by households was held by those with marginal tax rates of 28% or more. The paper reports two measures of the average marginal tax rate on tax-exempt debt. The first measures the increase in taxes if a small fraction of each taxpayer's exempt interest income were converted to taxable interest. This weighted average of 'first-dollar" marginal tax rates was 25.8%. A second calculation finds that if all tax-exempt interest were reported as taxable interest, taxes would rise by 27.6% of the increase in taxable interest. Many taxpayers who have substantial tax-exempt interest receipts, but low first-dollar marginal tax rates, would be driven into higher tax brackets if the exemption were eliminated but their portfolios remained the same.

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Bibliographic Info

Paper provided by Massachusetts Institute of Technology (MIT), Department of Economics in its series Working papers with number 588.

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Length: 19 pages
Date of creation: 1991
Date of revision:
Handle: RePEc:mit:worpap:588

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Web page: http://econ-www.mit.edu/
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Postal: MASSACHUSETTS INSTITUTE OF TECHNOLOGY (MIT), DEPARTMENT OF ECONOMICS, 50 MEMORIAL DRIVE CAMBRIDGE MASSACHUSETTS 02142 USA
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Keywords: income ; tax policy ; municipal government;

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References

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  1. Alan J. Auerbach & Mervyn A. King, 1984. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," NBER Working Papers 0546, National Bureau of Economic Research, Inc.
  2. Poterba, J.M., 1989. "Tax Reform And The Market For Tax-Exempt Debt," Working papers 514, Massachusetts Institute of Technology (MIT), Department of Economics.
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Citations

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Cited by:
  1. Eijffinger, S.C.W. & Huizinga, H.P. & Lemmen, J.J.G., 1996. "Short-Term and Long-Term Government Debt and Nonresident Interest Withholding Taxes," Discussion Paper 1996-88, Tilburg University, Center for Economic Research.
  2. Poterba, James M. & Verdugo, Arturo Ramírez, 2011. "Portfolio Substitution And The Revenue Cost Of The Federal Income Tax Exemption For State And Local Government Bonds," National Tax Journal, National Tax Association, vol. 64(2), pages 591-613, June.
  3. Mattozzi, Andrea., 2005. "Policy uncertainty, electoral securities and redistribution," Working Papers 1229, California Institute of Technology, Division of the Humanities and Social Sciences.
  4. Poterba, James M. & Samwick, Andrew A., 2003. "Taxation and household portfolio composition: US evidence from the 1980s and 1990s," Journal of Public Economics, Elsevier, vol. 87(1), pages 5-38, January.
  5. Barber, Brad M. & Odean, Terrance, 2004. "Are individual investors tax savvy? Evidence from retail and discount brokerage accounts," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 419-442, January.
  6. Francis A. Longstaff, 2009. "Municipal Debt and Marginal Tax Rates: Is there a Tax Premium in Asset Prices?," NBER Working Papers 14687, National Bureau of Economic Research, Inc.
  7. James M. Poterba & Arturo Ramirez Verdugo, 2008. "Portfolio Substitution and the Revenue Cost of Exempting State and Local Government Interest Payments from Federal Income Tax," NBER Working Papers 14439, National Bureau of Economic Research, Inc.
  8. Brooks, Robert, 1999. "Municipal bonds: a contingent claims perspective," Financial Services Review, Elsevier, vol. 8(2), pages 71-85.
  9. James M. Poterba, 2001. "Taxation and Portfolio Structure: Issues and Implications," NBER Working Papers 8223, National Bureau of Economic Research, Inc.

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