Which Households Own Municipal Bonds? Evidence from Tax Returns
This paper uses data from 1988 federal income tax returns, which asked taxpayers to report their tax-exempt interest income as an information item, to analyze the distribution of tax-exempt asset holdings. More than three quarters of the tax-exempt debt held by households was held by those with marginal tax rates of 28% or more. The paper reports two measures of the average marginal tax rate on tax-exempt debt. The first measures the increase in taxes if a small fraction of each taxpayer's exempt interest income were converted to taxable interest. This weighted average of 'first-dollar" marginal tax rates was 25.8%. A second calculation finds that if all tax-exempt interest were reported as taxable interest, taxes would rise by 27.6% of the increase in taxable interest. Many taxpayers who have substantial tax-exempt interest receipts, but low first-dollar marginal tax rates, would be driven into higher tax brackets if the exemption were eliminated but their portfolios remained the same.
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- Poterba, J.M., 1989.
"Tax Reform And The Market For Tax-Exempt Debt,"
514, Massachusetts Institute of Technology (MIT), Department of Economics.
- Auerbach, Alan J & King, Mervyn A, 1983.
"Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model,"
The Quarterly Journal of Economics,
MIT Press, vol. 98(4), pages 587-609, November.
- Alan J. Auerbach & Mervyn A. King, 1984. "Taxation, Portfolio Choice, and Debt-Equity Ratios: A General Equilibrium Model," NBER Working Papers 0546, National Bureau of Economic Research, Inc.
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