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The Degree of Fiscal Illusion in Interest Rates: Some Direct Estimates

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  • Joe Peek
  • James A. Wilcox
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Abstract

This article demonstrates why the procedures used in previous studies do not permit inference about the relationship between interestrates and taxes. We present a model that leads to direct estimates of the degree to which interest rates respond to changes in tax rates. The empirical results imply that the adjustment of taxable interest rates has been large enough to render after-tax yields impervious to tax rate changes. Further, tax-exempt yields are unaffected by changes in taxrates. Thus, there is no evidence of fiscal illusion in interest rates.

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File URL: http://www.nber.org/papers/w1358.pdf
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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1358.

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Date of creation: May 1984
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Publication status: published as Peek Joe and James A. Wilcox. "The Degree of Fiscal Illusion in Interest Rates: Some Direct Estimates." American Economic Review, Vol. 74, No. 5, ( December 1984), pp.1061 1066.
Handle: RePEc:nbr:nberwo:1358

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Cited by:
  1. Sterman, John., 1986. "Expectation formation in behavioral simulation models," Working papers 1826-86., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Patric H. Hendershott & Joe Peek, 1991. "Treasury bill rates in the 1970s and 1980s," Working Papers 91-6, Federal Reserve Bank of Boston.
  3. Douglas Dacy & Fuad Hasanov, 2005. "The Rate of Interest or the Rate of Return: Estimating Intertemporal Elasticity of Substitution," Macroeconomics 0510012, EconWPA.
  4. de Bartolome, Charles A. M., 1995. "Which tax rate do people use: Average or marginal?," Journal of Public Economics, Elsevier, vol. 56(1), pages 79-96, January.
  5. Patric H. Hendershott, 1985. "Tax Reform and Financial Markets," NBER Working Papers 1707, National Bureau of Economic Research, Inc.
  6. Tamim Bayoumi & Joseph Gagnon, 1992. "Taxation and inflation: a new explanation for current account imbalances," International Finance Discussion Papers 420, Board of Governors of the Federal Reserve System (U.S.).
  7. Bayoumi, Tamim & Gagnon, Joseph, 1996. "Taxation and inflation: A new explanation for capital flows," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 303-330, October.

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