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Portfolio Substitution And The Revenue Cost Of The Federal Income Tax Exemption For State And Local Government Bonds

  • Poterba, James M.
  • Verdugo, Arturo Ramírez
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    This paper illustrates how different assumptions about household portfolio behavior influence estimates of the amount of individual income tax revenue that would be collected if the interest tax exemption for state and local government bonds were repealed or curtailed. Using data from the 2004 Survey of Consumer Finances, we estimate that federal income tax revenues would rise by $14.0 billion if current bondholders purchased taxable bonds, $8.9 billion if corporate stock replaced tax-exempt bonds in household portfolios, and $8.2 billion if they distributed their tax-exempt bond holdings across their other portfolio assets in proportion to their current portfolio shares.

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    File URL: http://www.ntanet.org/NTJ/64/2/ntj-v64n02p591-613-portfolio-substitution-revenue-cost.html
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    Article provided by National Tax Association in its journal National Tax Journal.

    Volume (Year): 64 (2011)
    Issue (Month): 2 (June)
    Pages: 591-613

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    Handle: RePEc:ntj:journl:v:64:y:2011:i:2:p:591-613
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    1. Feenberg, D.R. & Poterba, J.M., 1991. "Which Households Own Municipal Bonds? Evidence from Tax Returns," Working papers 588, Massachusetts Institute of Technology (MIT), Department of Economics.
    2. Roger H. Gordon & Joel Slemrod, 1983. "A General Equilibrium Simulation Study of Subsidies to Municipal Expenditures," NBER Working Papers 1080, National Bureau of Economic Research, Inc.
    3. Jon Bakija, 2000. "The Effect of Taxes on Portfolio Choice: Evidence from Panel Data Spanning the Tax Reform Act of 1986," Department of Economics Working Papers 2000-05, Department of Economics, Williams College.
    4. Green, Richard C, 1993. "A Simple Model of the Taxable and Tax-Exempt Yield Curves," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 233-64.
    5. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
    6. Gentry, William M., 2002. "Debt, investment and endowment accumulation: the case of not-for-profit hospitals," Journal of Health Economics, Elsevier, vol. 21(5), pages 845-872, September.
    7. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-75, May.
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