IDEAS home Printed from https://ideas.repec.org/a/ntj/journl/v64y2011i2p591-613.html
   My bibliography  Save this article

Portfolio Substitution and the Revenue Cost of the Federal Income Tax Exemption for State and Local Government Bonds

Author

Listed:
  • Poterba, James M.
  • Verdugo, Arturo Ramírez

Abstract

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income tax revenue that would be collected if the interest tax exemption for state and local government bonds were repealed or curtailed.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.

Suggested Citation

  • Poterba, James M. & Verdugo, Arturo Ramírez, 2011. "Portfolio Substitution and the Revenue Cost of the Federal Income Tax Exemption for State and Local Government Bonds," National Tax Journal, National Tax Association, vol. 64(2), pages 591-613, June.
  • Handle: RePEc:ntj:journl:v:64:y:2011:i:2:p:591-613
    as

    Download full text from publisher

    File URL: https://www.ntanet.org/NTJ/64/2/ntj-v64n02p591-613-portfolio-substitution-revenue-cost.pdf
    Download Restriction: no

    File URL: https://www.ntanet.org/NTJ/64/2/ntj-v64n02p591-613-portfolio-substitution-revenue-cost.html
    Download Restriction: no

    References listed on IDEAS

    as
    1. Benabou, Roland, 1992. "Inflation and markups : Theories and evidence from the retail trade sector," European Economic Review, Elsevier, pages 566-574.
    2. 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.
    3. Gordon, Roger H & Slemrod, Joel, 1983. " A General Equilibrium Simulation Study of Subsidies to Municipal Expenditures," Journal of Finance, American Finance Association, vol. 38(2), pages 585-594, May.
    4. 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.
    5. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    6. 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.
    7. Green, Richard C, 1993. "A Simple Model of the Taxable and Tax-Exempt Yield Curves," Review of Financial Studies, Society for Financial Studies, pages 233-264.
    8. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Harvey Galper & Kim Rueben & Richard Auxier & Amanda Eng, 2014. "Municipal Debt: What Does It Buy and Who Benefits?," National Tax Journal, National Tax Association, pages 901-924.
    2. Robert Novy-Marx & Joshua D. Rauh, 2012. "Fiscal Imbalances and Borrowing Costs: Evidence from State Investment Losses," American Economic Journal: Economic Policy, American Economic Association, pages 182-213.
    3. Gao Liu & Dwight V. Denison, 2014. "Indirect and Direct Subsidies for the Cost of Government Capital: Comparing Tax-Exempt Bonds and Build America Bonds," National Tax Journal, National Tax Association, pages 569-594.
    4. Robert Novy-Marx & Joshua D. Rauh, 2013. "Funding Soft Liabilities," NBER Chapters,in: State and Local Health Plans for Active and Retired Public Employees National Bureau of Economic Research, Inc.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ntj:journl:v:64:y:2011:i:2:p:591-613. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ann Crampton). General contact details of provider: http://edirc.repec.org/data/ntaaaea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.