Tax Reform and the Market For Tax-Exempt Debt
AbstractThis paper provides clear evidence that the yield spread between long-term taxable and tax-exempt bonds responds to changes in expected individual tax rates, a finding that refutes theories of municipal bond pricing that focus exclusively on commercial banks or other financial intermediaries. The results support the conclusion that in the two decades prior to 1986, the municipal bond market was segmented, with different investor clienteles at short and long maturities. The Tax Reform Act of 1986 is likely to affect this market, however, since it has restricted tax benefits from tax-exempt bond investment by commercial banks. Individual investors are increasingly important suppliers of capital to states and localities, and their tax rates are likely to be the primary determinant of the yield spread between taxable and tax-exempt interest rates in the future.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2900.
Date of creation: Mar 1989
Date of revision:
Publication status: published as Regional Science and Urban Economics, Vol. 19, No. 3, pp. 537-562, (August 1989).
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Other versions of this item:
- Poterba, J.M., 1989. "Tax Reform And The Market For Tax-Exempt Debt," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 514, Massachusetts Institute of Technology (MIT), Department of Economics.
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