Implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates, with implicit tax rates close to 100% using retail trades and above 70% for interdealer trades. These implied tax rates can be identified on the cross section of municipal bonds because a portion of secondary market municipal bond trades involve income taxes. After valuing the tax payments, market discount bonds, which carry income tax liabilities, trade at yields around 25 basis points higher than comparable municipal bonds not subject to any taxes. The high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions.
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Length: Date of creation: Nov 2008 Date of revision: Handle: RePEc:nbr:nberwo:14496
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Find related papers by JEL classification: G12 - Financial Economics - - General Financial Markets - - - Asset Pricing G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
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Bernheim, B. Douglas, 2002.
"Taxation and saving,"
Handbook of Public Economics,
in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 18, pages 1173-1249
Elsevier.
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