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Which Households Own Municipal Bonds? Evidence From Tax Returns

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Author Info
Daniel R. Feenberg
James M. Poterba

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Abstract

This paper uses data from 1988 federal income tax returns, which asked taxpayers to report their tax-exempt interest income as an information item, to analyze the distribution of tax-exempt asset holdings. More than three quarters of the tax-exempt debt held by households was held by those with marginal tax rates of 28% or more. The paper reports two measures of the average marginal tax rate on tax-exempt debt. The first measures the increase in taxes if a small fraction of each taxpayer's exempt interest income were converted to taxable interest. This weighted average of 'first-dollar" marginal tax rates was 25.8%. A second calculation finds that if all tax-exempt interest were reported as taxable interest, taxes would rise by 27.6% of the increase in taxable interest. Many taxpayers who have substantial tax-exempt interest receipts, but low first-dollar marginal tax rates, would be driven into higher tax brackets if the exemption were eliminated but their portfolios remained the same.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3900.

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Date of creation: Jul 1992
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Handle: RePEc:nbr:nberwo:3900

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  1. Auerbach, Alan J & King, Mervyn A, 1983. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," The Quarterly Journal of Economics, MIT Press, vol. 98(4), pages 587-609, November. [Downloadable!] (restricted)
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  1. Eijffinger, S.C.W. & Huizinga, H.P. & Lemmen, J.J.G., 1996. "Short-term and long-term government debt and nonresident interest witholding taxes," Discussion Paper 88, Tilburg University, Center for Economic Research. [Downloadable!]
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  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. Edward V. Regan, . "A New Approach to Tax-Exempt Bonds, Infrastructure Financing with the AGIS Bond," Economics Public Policy Brief Archive 58, Levy Economics Institute, The. [Downloadable!]
  4. James M. Poterba & Andrew Samwick, 1999. "Taxation and Household Portfolio Composition: U.S. Evidence from the 1980s and 1990s," NBER Working Papers 7392, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Andrea Mattozzi, 2003. "Policy Uncertainty, Electoral Securities and Redistribution," Levine's Working Paper Archive 666156000000000260, David K. Levine. [Downloadable!]
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  6. James M. Poterba, 2001. "Taxation and Portfolio Structure: Issues and Implications," NBER Working Papers 8223, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Francis A. Longstaff, 2009. "Municipal Debt and Marginal Tax Rates: Is there a Tax Premium in Asset Prices?," NBER Working Papers 14687, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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