Tax Reform And The Market For Tax-Exempt Debt
This paper provides clear evidence that the yield spread between long-term taxable and tax-exempt bonds responds to changes in expected individual tax rates, a finding that refutes theories of municipal bond pricing that focus exclusively on commercial banks or other financial intermediaries. The results support the conclusion that in the two decades prior to 1986, the municipal bond market was segmented, with different investor clienteles at short and long maturities. The Tax Reform Act of 1986 is likely to affect this market, however, since it has restricted tax benefits from tax-exempt bond investment by commercial banks. Individual investors are increasingly important suppliers of capital to states and localities, and their tax rates are likely to be the primary determinant of the yield spread between taxable and tax-exempt interest rates in the future.
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- Metcalf, G.E., 1988. "Arbitrage And The Savings Behavior Of The State And Local Governments," Papers 30, Princeton, Woodrow Wilson School - Discussion Paper.
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- Roger H. Gordon & Joel B. Slemrod, 1986. "An Empirical Examination of Municipal Financial Policy," NBER Chapters,in: Studies in State and Local Public Finance, pages 53-82 National Bureau of Economic Research, Inc.
- Roger H. Gordon & Joel Slemrod, 1985. "An Empirical Examination of Municipal Financial Policy," NBER Working Papers 1599, National Bureau of Economic Research, Inc.
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