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The Influence of Income Tax Rates on the Market for Tax-Exempt DebtMarc ChoateAtkinson Graduate School of Management-Willamette University Michael L. HandWillamette University - Atkinson Graduate School of Management Fred ThompsonWillamette University - Atkinson Graduate School of Management August 16, 2009 Abstract: Based on the indirect arbitrage opportunities afforded citizens by tax-exempt debt issue, this article presents a model establishing equilibrium in the market for tax-exempt debt. The model yields two predictions. Increases in Federal income tax rates increase the spread between taxable and tax-exempt interest rates, but have no effect on the equilibrium quantity demanded and supplied of tax-exempt debt. The latter prediction contrasts with a conventional point of view that increases in tax rates increase demand and supply of tax-exempt debt. The model’s predictions are supported by empirical evidence.
Number of Pages in PDF File: 36 Keywords: tax-exempt debt, indirect arbitrage, state and local government, Wyden-Gregg Tax Act JEL Classification: H71, H72 working papers seriesDate posted: August 17, 2009 ; Last revised: March 4, 2010Suggested CitationContact Information
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