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Was the Tax-Exempt Bond Market Inefficient or Were Future Expected Tax Rates Negative?

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  • Kochin, Levis A
  • Parks, Richard W

Abstract

This paper shows that the sharp narrowing with maturity of the spread between taxable and tax exempt yields leaves room for tax arbitrage. At times, tax exempt forward rates have exceeded taxable forward rat es. At such times, only expectations of higher taxes on Treasury than on municipal bonds would eliminate profit opportunities. The authors develop the idea of forward tax rates and compute forward tax rates for 1955-84. They outline tax arbitrage mechanisms involving private forward sale of long municipal bonds or the use of the municipal bond futures contract and show the potential profits. Copyright 1988 by American Finance Association.

Suggested Citation

  • Kochin, Levis A & Parks, Richard W, 1988. " Was the Tax-Exempt Bond Market Inefficient or Were Future Expected Tax Rates Negative?," Journal of Finance, American Finance Association, vol. 43(4), pages 913-931, September.
  • Handle: RePEc:bla:jfinan:v:43:y:1988:i:4:p:913-31
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    Cited by:

    1. Mackie-Mason, Jeffrey K & Gordon, Roger H, 1997. " How Much Do Taxes Discourage Incorporation?," Journal of Finance, American Finance Association, vol. 52(2), pages 477-505, June.
    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.
    3. Eric M. Leeper & Alexander W. Richter & Todd B. Walker, 2012. "Quantitative Effects of Fiscal Foresight," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 115-144, May.
    4. Poterba, James M., 1989. "Tax reform and the market for tax-exempt debt," Regional Science and Urban Economics, Elsevier, vol. 19(3), pages 537-562, August.
    5. H. Youn Kim & Junsoo Lee & Stephen E. Lile & James R. Ramsey, 2000. "Municipal Bonds and Tax Arbitrage: A Cointegration Analysis," Public Finance Review, , vol. 28(4), pages 372-389, July.
    6. Lorenz Kueng, 2014. "Tax News: The Response of Household Spending to Changes in Expected Taxes," NBER Working Papers 20437, National Bureau of Economic Research, Inc.
    7. N. Gregory Mankiw & James M. Poterba, 1996. "Stock Market Yields and the Pricing of Municipal Bonds," NBER Working Papers 5607, National Bureau of Economic Research, Inc.
    8. Park, Sangkyun, 1997. "The Relationship Between Government Financial Condition and Expected Tax Rates Reflected in Municipal Bond Yields," National Tax Journal, National Tax Association, vol. 50(1), pages 23-38, March.
    9. Park, Sangkyun, 1997. "The Relationship Between Government Financial Condition and Expected Tax Rates Reflected in Municipal Bond Yields," National Tax Journal, National Tax Association;National Tax Journal, vol. 50(1), pages 23-38, March.
    10. Petr Svoboda, 2016. "Usability of Methodology from the USA for Measuring Effect of Corporate Tax on Organizational Form in the Czech Republic," European Financial and Accounting Journal, University of Economics, Prague, vol. 2016(1), pages 65-75.

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