Do Tax-Exempt Bonds Really Subsidize Municipal Capital?
AbstractWe argue that the tax-exempt status of municipal bonds provides little or no subsidy to capital investment by communities. Instead, the tax exemption simply provides arbitrage opportunities to high and low tax bracket individuals while leaving individuals in intermediate tax brackets essentially unaffected. We also argue that the revenue cost of the tax exemption is much less than traditionally thought due to the portfolio rebalancing that would occur if the tax exemption were eliminated. Finally, we note that the only way to prevent all municipal arbitrage possibilities would be to pass through municipal interest income and payments to residents for tax purposes.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3835.
Date of creation: Sep 1991
Date of revision:
Publication status: published as National Tax Journal, Volume XLIV, No. 4, Part 1, December 1991. Cambridge: The MIT Press. Available through NBER.
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- 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.
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