MUNICIPAL BOND YIELDS: WHOSE TAX RATES MATTER?

Peter Fortune

40 citations0/0 files storedNational Tax Journal

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Credit Risk and Financial Regulations Financial Markets and Investment Strategies Economic and Fiscal Studies

Abstract

This paper examines the New View of yield spreads between taxable and tax-exempt bonds, which argues that personal income taxes are irrelevant to the relationship between interest rates on tax-exempt and taxable bonds. According to this view, associated with Fama and Miller, only corporate income taxes matter. Our results for the period 1976-85 indicate considerable variation in the implicit tax rate on municipal bonds. We also find evidence that the implicit tax rate, adjusted for quality differences, is related to statutory personal income tax rates. We believe that this paper casts considerable doubt on the validity of the New View and provides support for the Traditional View.

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References

1977DEBT AND TAXES*1978Dividends and taxes 1982Dividends and Taxes: Some Empirical Evidence 2016Replication in Empirical Economics: The Journal of Money, Credit and Banking Project 1982The Pricing of Tax-Exempt Bonds and the Miller Hypothesis 1978The Impact of Relative Security Supplies: A Test with Data from a Regional Tax-Exempt Bond Market 1986Empirical determinants of the relative yields on taxable and tax-exempt securities 1986Financial characteristics of high-income families

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2002Taxation, Risk-Taking, and Household Portfolio Behavior**I am grateful to Alan Auerbach, Scott Weisbenner, and participants at the Burch Center Symposium for helpful comments, to Andrew Mitrusi for providing me with data from TAXSIM, and to the Hoover Institution and National Science Foundation for research support.1996Do Municipal Bond Yields Forecast Tax Policy 1996Stock Market Yields and the Pricing of Municipal Bonds

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