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Tax reform and financial markets

  • Patric H. Hendershott

Four tax reform proposals have been advanced in recent years: Bradley-Gephardt, Kemp-Kasten, Treasury-Department and the Administration plan. These plans could have significant impacts on financial markets. Reductions ininvestment incentives and marginal tax rates would tend to lower before-tax interest rates, and lower taxes on existing corporate capital would tend to increase stock prices. The pattern of security issues would be altered by resulting changes in the composition of investment between real estate and nonreal estate assets and in desired loan-to-value ratios. The paper compares and contrasts the likely impacts of each of the four reform proposals on interest rate (taxable and tax-exempt), security flows, and stock prices.

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File URL: http://www.bostonfed.org/economic/conf/conf29/conf29e.pdf
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Article provided by Federal Reserve Bank of Boston in its journal Conference Series ; [Proceedings].

Volume (Year): 29 (1985)
Issue (Month): ()
Pages: 153-186

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Handle: RePEc:fip:fedbcp:y:1985:p:153-186:n:29
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  1. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
  2. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
  3. Martin Feldstein & Lawrence H. Summers, 1979. "Inflation, Tax Rules, and the Long Term Interest Rates," NBER Working Papers 0232, National Bureau of Economic Research, Inc.
  4. Alan J. Auerbach & Laurence J. Kotlikoff, 1982. "Investment versus Savings Incentives: The Size of the Bang for the Buck and the Potential for Self-Financing Business Tax Cuts," NBER Working Papers 1027, National Bureau of Economic Research, Inc.
  5. Joe Peek & James A. Wilcox, 1984. "The Degree of Fiscal Illusion in Interest Rates: Some Direct Estimates," NBER Working Papers 1358, National Bureau of Economic Research, Inc.
  6. Patric H. Hendershott, 1985. "Tax Reform, Interest Rates and Capital Allocation," NBER Working Papers 1708, National Bureau of Economic Research, Inc.
  7. Brainard, William C. & Shoven, John B., 1980. "The financial valuation of the return to capital," Proceedings, Federal Reserve Bank of San Francisco, issue 4, pages 43-104.
  8. William C. Brainard & John B. Shoven & Laurence Weiss, 1980. "The Financial Valuation of the Return to Capital," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 11(2), pages 453-512.
  9. Feldstein, M., 1980. "Inflation, tax rules, and the prices of land and gold," Journal of Public Economics, Elsevier, vol. 14(3), pages 309-317, December.
  10. Constantinides, George M. & Ingersoll, Jonathan Jr., 1984. "Optimal bond trading with personal taxes," Journal of Financial Economics, Elsevier, vol. 13(3), pages 299-335, September.
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