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An Empirical Examination of Municipal Financial Policy

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Author Info
Roger H. Gordon
Joel Slemrod

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Abstract

Current U.S. tax law creates a variety of incentives affecting municipal financial policy. Under current law,municipalities can borrow at a tax-exempt interest rate yet can earn the full market rate of return on any assets held. Residents, in contrast, if they borrow or lend as individuals,pay or earn the market rate of return but after personal income taxes. These differences in rates of return create a variety of arbitrage opportunities, allowing communities/residents to borrow at low rates and invest at higher rates.The purpose of this paper is to examine empirically the financial policy of municipalities in four states (Connecticut, Maine, Massachusetts and Rhode Island) to see to what degree these municipalities attempt to take advantage of each of the available opportunities to engage in tax arbitrage. Our datacomes from the 1980 U.S. Census of Population and Housing, and the 1977 U.S.Census of Governments. We find clear evidence that communities do actively engage in such tax arbitrage.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1599.

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Date of creation: Apr 1985
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Handle: RePEc:nbr:nberwo:1599

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Gordon, Roger H & Slemrod, Joel, 1983. " A General Equilibrium Simulation Study of Subsidies to Municipal Expenditures," Journal of Finance, American Finance Association, vol. 38(2), pages 585-94, May. [Downloadable!] (restricted)
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  3. Tepper, Irwin, 1981. "Taxation and Corporate Pension Policy," Journal of Finance, American Finance Association, vol. 36(1), pages 1-13, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gilbert Metcalf, 1993. "Federal Taxation and the Supply of State Debt," NBER Working Papers 3255, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. 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. [Downloadable!] (restricted)
  3. Gilbert E. Metcalf, 1991. "Arbitrage and the Savings Behavior of State Governments," NBER Working Papers 3017, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Charles R. Hulten & Robert M. Schwab, 1987. "Income Originating in the State and Local Sector," NBER Working Papers 2314, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Robert P. Inman, 1985. "Does Deductibility Influence Local Taxation?," NBER Working Papers 1714, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. James M. Poterba, 1990. "Tax Reform and the Market For Tax-Exempt Debt," NBER Working Papers 2900, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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