Taxable and Tax-Exempt Interest Rates: The Role of Personal and Corporate Tax Rates
AbstractThis paper investigates empirically the effects of personal and corporate taxes on taxable interest rates and on the spread between taxable and tax-exempt rates. Two main sets of results emerge. First, we establish that the effective marginal investors in the Treasury bill market are households, as opposed to tax-exempt institutions or corporations. We find no evidence of corporate tax rate effects on Treasury bill yields. The study is then extended to an examination of the tax-exempt market. The results there contradict the hypothesis that commercial bank arbitrage generally ensures that the taxable-tax-exempt interest rate spread is determined by the corporate tax rate. Our estimates decisively reject the corporate in favor of the personal income tax rate as being the relevant tax rate of the marginal investor in this market as well.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1544.
Date of creation: Jan 1985
Date of revision:
Publication status: published as Peek, Joe and James A. Wilcox. "Tax Rates and Interest Rates on Tax-Exempt Securities." New England Economic Review, (January/February 1986) pp. 29-41 .
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Other versions of this item:
- Joe Peek and James A. Wilcox., 1985. "Taxable and Tax-Exempt Interest Rates: The Role of Personal and Corporate Tax Rates," Research Program in Finance Working Papers, University of California at Berkeley 146, University of California at Berkeley.
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National Bureau of Economic Research, Inc.
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