Taxable and Tax-Exempt Interest Rates: The Role of Personal and Corporate Tax Rates
This paper investigates empirically the effects of personal and corporate taxes on taxable interest rates and on the spread between taxable and tax-exempt rates. Two main sets of results emerge. First, we establish that the effective marginal investors in the Treasury bill market are households, as opposed to tax-exempt institutions or corporations. We find no evidence of corporate tax rate effects on Treasury bill yields. The study is then extended to an examination of the tax-exempt market. The results there contradict the hypothesis that commercial bank arbitrage generally ensures that the taxable-tax-exempt interest rate spread is determined by the corporate tax rate. Our estimates decisively reject the corporate in favor of the personal income tax rate as being the relevant tax rate of the marginal investor in this market as well.
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|Date of creation:||01 Jan 1985|
|Contact details of provider:|| Postal: University of California at Berkeley, Berkeley, CA USA|
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peek, Joe, 1982. "Interest Rates, Income Taxes, and Anticipated Inflation," American Economic Review, American Economic Association, vol. 72(5), pages 980-991, December.
- Hendershott, Patric H & Koch, Timothy W, 1980. " The Demand for Tax-Exempt Securities by Financial Institutions," Journal of Finance, American Finance Association, vol. 35(3), pages 717-727, June.
- James M. Poterba, 1984.
"Expected Future Tax Policy and Tax-Exempt Bond Yields,"
NBER Working Papers
1469, National Bureau of Economic Research, Inc.
- James M. Poterba, 1984. "Expected Future Tax Policy and Tax Exempt Bond Yields," Working papers 350, Massachusetts Institute of Technology (MIT), Department of Economics.
- Skelton, Jeffrey L., 1983. "Banks, firms and the relative pricing of tax-exempt and taxable bonds," Journal of Financial Economics, Elsevier, vol. 12(3), pages 343-355, November.
- Martin Feldstein, 1983. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," NBER Chapters,in: Inflation, Tax Rules, and Capital Formation, pages 28-43 National Bureau of Economic Research, Inc.
- Feldstein, Martin S, 1976. "Inflation, Income Taxes, and the Rate of Interest: A Theoretical Analysis," American Economic Review, American Economic Association, vol. 66(5), pages 809-820, December.
- Hamada, Robert S, 1979. "Financial Theory and Taxation in an Inflationary World: Some Public Policy Issues," Journal of Finance, American Finance Association, vol. 34(2), pages 347-369, May.
- Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
- Tanzi, Vito, 1980. "Inflationary Expectations, Economic Activity, Taxes, and Interest Rates," American Economic Review, American Economic Association, vol. 70(1), pages 12-21, March. Full references (including those not matched with items on IDEAS)
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