Abstract

http://ssrn.com/abstract=1455909
 
 

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The Influence of Income Tax Rates on the Market for Tax-Exempt Debt


Marc Choate


Atkinson Graduate School of Management-Willamette University

Michael L. Hand


Willamette University - Atkinson Graduate School of Management

Fred Thompson


Willamette 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 series


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Date posted: August 17, 2009 ; Last revised: March 4, 2010

Suggested Citation

Choate, Marc and Hand, Michael L. and Thompson, Fred, The Influence of Income Tax Rates on the Market for Tax-Exempt Debt (August 16, 2009). Available at SSRN: http://ssrn.com/abstract=1455909 or http://dx.doi.org/10.2139/ssrn.1455909

Contact Information

George Marc Choate
Atkinson Graduate School of Management-Willamette University ( email )
900 State Street
Salem, OR 97301
United States
Michael L. Hand
Willamette University - Atkinson Graduate School of Management ( email )
900 State Street
Salem, OR 97301
United States
Fred Thompson (Contact Author)
Willamette University - Atkinson Graduate School of Management ( email )
900 State Street
Salem, OR 97301
United States
503-370-6228 (Phone)
503-370-3011 (Fax)
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