Taxes on Tax-Exempt Bonds

48 Pages Posted: 25 Nov 2008  

Andrew Ang

BlackRock, Inc

Vineer Bhansali

Pacific Investment Management Company (PIMCO)

Yuhang Xing

Rice University

Multiple version iconThere are 4 versions of this paper

Date Written: November 2008

Abstract

Implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates, with implicit tax rates close to 100% using retail trades and above 70% for interdealer trades. These implied tax rates can be identified on the cross section of municipal bonds because a portion of secondary market municipal bond trades involve income taxes. After valuing the tax payments, market discount bonds, which carry income tax liabilities, trade at yields around 25 basis points higher than comparable municipal bonds not subject to any taxes. The high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions.

Suggested Citation

Ang, Andrew and Bhansali, Vineer and Xing, Yuhang, Taxes on Tax-Exempt Bonds (November 2008). NBER Working Paper No. w14496. Available at SSRN: https://ssrn.com/abstract=1305506

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Vineer Bhansali

Pacific Investment Management Company (PIMCO) ( email )

840 Newport Center Drive
Suite 100
Newport Beach, CA 92660
United States
949-718-2604 (Phone)
949-718-2604 (Fax)

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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