IDEAS home Printed from https://ideas.repec.org/a/sae/pubfin/v49y2021i1p71-105.html

Solving the Muni Puzzle: Who Benefits from Tax Exemption of Government Debt?

Author

Listed:
  • Konul Amrahova Riegel

Abstract

I provide a new approach to measuring interest savings associated with issuing tax-exempt municipal bonds (munis) and present empirical evidence offering a solution to the long-standing “muni puzzle.†I show that the tax policy is effective and consistent with theory once I account for idiosyncratic issuer risk and investor preferences. I match tax-exempt munis to near-identical taxable munis issued by the same government at the same time with the same security characteristics to identify the slope of and the trend in implied marginal tax rates. Results of the random coefficients model, which mitigates issuer- and issuance-level unobserved effects, predict the slope of the marginal tax rate to be consistent with asset pricing theory and the tax profile of the typical muni investor. Findings also imply cyclicality over time and heterogeneity in implied marginal tax rates across issuers due to variations in idiosyncratic risk.

Suggested Citation

  • Konul Amrahova Riegel, 2021. "Solving the Muni Puzzle: Who Benefits from Tax Exemption of Government Debt?," Public Finance Review, , vol. 49(1), pages 71-105, January.
    • Handle: RePEc:sae:pubfin:v:49:y:2021:i:1:p:71-105
    DOI: 10.1177/1091142120960372
    as

    Download full text from publisher

    File URL: https://journals.sagepub.com/doi/10.1177/1091142120960372
    Download Restriction: no
    File URL: https://libkey.io/10.1177/1091142120960372?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Francis A. Longstaff, 2011. "Municipal Debt and Marginal Tax Rates: Is There a Tax Premium in Asset Prices?," Journal of Finance, American Finance Association, vol. 66(3), pages 721-751, June.
    2. Facundo Alvaredo & Lucas Chancel & Thomas Piketty & Gabriel Zucman, 2018. "Distributional National Accounts," Post-Print halshs-03342488, HAL.
    3. Thomas Piketty & Emmanuel Saez & Gabriel Zucman, 2018. "Distributional National Accounts: Methods and Estimates for the United States," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(2), pages 553-609.
    4. Chalmers, John M R, 1998. "Default Risk Cannot Explain the Muni Puzzle: Evidence from Municipal Bonds That Are Secured by U.S. Treasury Obligations," The Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 281-308.
    5. Tania Babina & Chotibhak Jotikasthira & Christian Lundblad & Tarun Ramadorai & Andrew Karolyi, 0. "Heterogeneous Taxes and Limited Risk Sharing: Evidence from Municipal Bonds," Review of Economic Studies, Oxford University Press, vol. 34(1), pages 509-568.
    6. Daniel Bergstresser & Randolph Cohen, 2015. "Changing Patterns in Household Ownership of Municipal Debt: Evidence from the 1989-2013 Surveys of Consumer Finances," Working Papers 87, Brandeis University, Department of Economics and International Business School.
    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. Thomas Luke Spreen & Ed Gerrish, 2022. "Taxes and tax‐exempt bonds: A literature review," Journal of Economic Surveys, Wiley Blackwell, vol. 36(4), pages 767-808, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dario Cestau & Burton Hollifield & Dan Li & Norman Schürhoff, 2019. "Municipal Bond Markets," Annual Review of Financial Economics, Annual Reviews, vol. 11(1), pages 65-84, December.
    2. Matthew Fisher-Post, 2020. "Factor Shares in the long run," World Inequality Lab Working Papers hal-02876978, HAL.
    3. Arun Advani, 2022. "Who does and doesn't pay taxes?," Fiscal Studies, John Wiley & Sons, vol. 43(1), pages 5-22, March.
    4. Bertrand Garbinti & Jonathan Goupille-Lebret & Thomas Piketty, 2017. "Income Inequality in France, 1900-2014: Evidence from Distributional National Accounts," Working Papers 201704, World Inequality Lab.
    5. Bartels, Charlotte, 2019. "Top Incomes in Germany, 1871–2014," The Journal of Economic History, Cambridge University Press, vol. 79(3), pages 669-707, September.
    6. Vincent Geloso & Peter Lindert, 2020. "Relative costs of living, for richer and poorer, 1688–1914," Cliometrica, Springer;Cliometric Society (Association Francaise de Cliométrie), vol. 14(3), pages 417-442, September.
    7. Stéphane Auray & Aurélien Eyquem & Bertrand Garbinti & Jonathan Goupille-Lebret, 2022. "Markups, Taxes, And Rising Inequality," Working Papers halshs-03832267, HAL.
    8. Aaberge, Rolf & Atkinson, Anthony B. & Modalsli, Jørgen, 2020. "Estimating long-run income inequality from mixed tabular data: Empirical evidence from Norway, 1875–2017," Journal of Public Economics, Elsevier, vol. 187(C).
    9. John Komlos, 2021. "Macroeconomic Inequality from Reagan to Trump. Market Power, Wage Repression, Asset Price Inflation, and Industrial Decline," The Economic Record, The Economic Society of Australia, vol. 97(318), pages 450-453, September.
    10. Filip Novokmet & Thomas Piketty & Gabriel Zucman, 2018. "From Soviets to oligarchs: inequality and property in Russia 1905-2016," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 16(2), pages 189-223, June.
    11. Albert Lee Chun & Ethan Namvar & Xiaoxia Ye & Fan Yu, 2019. "Modeling Municipal Yields With (and Without) Bond Insurance," Management Science, INFORMS, vol. 65(8), pages 3694-3713, August.
    12. Anna Aizer & Shari Eli & Adriana Lleras-Muney & Keyoung Lee, 2020. "Do Youth Employment Programs Work? Evidence from the New Deal," NBER Working Papers 27103, National Bureau of Economic Research, Inc.
    13. Ji-Won Park & Chae Un Kim, 2021. "Getting to a feasible income equality," PLOS ONE, Public Library of Science, vol. 16(3), pages 1-16, March.
    14. Petach, Luke & Tavani, Daniele, 2022. "Aggregate demand externalities, income distribution, and wealth inequality," Structural Change and Economic Dynamics, Elsevier, vol. 60(C), pages 433-446.
    15. Björklund, Anders & Waldenström, Daniel, 2021. "Facts and Myths in the Popular Debate about Inequality in Sweden," Working Paper Series 1392, Research Institute of Industrial Economics.
    16. Joachim Hubmer & Per Krusell & Anthony A. Smith., 2021. "Sources of US Wealth Inequality: Past, Present, and Future," NBER Macroeconomics Annual, University of Chicago Press, vol. 35(1), pages 391-455.
    17. Aaberge, Rolf & Eika, Lasse & Langørgen, Audun & Mogstad, Magne, 2019. "Local governments, in-kind transfers, and economic inequality," Journal of Public Economics, Elsevier, vol. 180(C).
    18. Advani, Arun, 2021. "The taxation of capital gains : principles, practice, and directions for reform," The Warwick Economics Research Paper Series (TWERPS) 1379, University of Warwick, Department of Economics.
    19. Macnamara, Patrick & Pidkuyko, Myroslav & Rossi, Raffaele, 2024. "Marginal tax rates and income in the long run: Evidence from a structural estimation," Journal of Monetary Economics, Elsevier, vol. 142(C).
    20. Arabela ICHIM & Mihaela NECULITA & Daniela Ancuta SARPE, 2018. "Income inequality. Literature review," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 252-259.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    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:sae:pubfin:v:49:y:2021:i:1:p:71-105. See general information about how to correct material in RePEc.

    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 bibliographic 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.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: SAGE Publications (email available below). General contact details of provider: .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.