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Did Steve Forbes Scare the Municipal Bond Market?

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  • Joel Slemrod
  • Timothy Greimel

Abstract

Evidence from daily market data is consistent with the view that the implicit tax rate on 5-year municipal bonds was affected by the chance of a flat tax becoming law, as proxied by the price of Steve Forbes' shares on the Iowa Electronic Market for political candidates; the spread was also affected by the likelihood of a Republican president and the impact of deficit reduction. No similar evidence for the impact of the flat tax could be found for the 30-year municipal market, although that spread does seem to be affected by the probability of a Republican winning the White House, and the lower taxes on capital income that presumably implies. These findings are consistent with market participants taking the flat tax seriously as a short-run possibility, but believing that over a three-decade period the taxation of capital is more likely to be influenced by the party in power than the tax reform fad of the moment. Alternatively it may reflect the fact that, due to several features of 30-year bonds, the changing likelihood of a flat tax is not clearly reflected in that market.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6583.

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Date of creation: May 1998
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Publication status: published as Journal of Public Health Economics, Vol. 74, no. 1 (October 1999): 81-96.
Handle: RePEc:nbr:nberwo:6583

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  1. Skelton, Jeffrey L., 1983. "Banks, firms and the relative pricing of tax-exempt and taxable bonds," Journal of Financial Economics, Elsevier, vol. 12(3), pages 343-355, November.
  2. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  3. N. Gregory Mankiw & James Poterba, 1996. "Stock-Market Yields and the Pricing of Municipal Bonds," Harvard Institute of Economic Research Working Papers 1761, Harvard - Institute of Economic Research.
  4. James M. Poterba, 1986. "Explaining the Yield Spread between Taxable and Tax-exempt Bonds : The Role of Expected Tax Policy," NBER Chapters, in: Studies in State and Local Public Finance, pages 5-52 National Bureau of Economic Research, Inc.
  5. Buser, Stephen A. & Hess, Patrick J., 1986. "Empirical determinants of the relative yields on taxable and tax-exempt securities," Journal of Financial Economics, Elsevier, vol. 17(2), pages 335-355, December.
  6. Peter Fortune, 1996. "Do municipal bond yields forecast tax policy?," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 29-48.
  7. Fortune, Peter, 1988. "Municipal Bond Yields: Whose Tax Rates Matter?," National Tax Journal, National Tax Association, vol. 41(2), pages 219-33, June.
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Cited by:
  1. Wolfers, Justin & Zitzewitz, Eric, 2004. "Prediction Markets," Research Papers 1854, Stanford University, Graduate School of Business.
  2. Merle Erickson & Austan Goolsbee & Edward Maydew, 2002. "How Prevalent is Tax Arbitrage? Evidence from the Market for Municipal Bonds," NBER Working Papers 9105, National Bureau of Economic Research, Inc.

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