An Empirical Examination of Municipal Financial Policy

44 Pages Posted: 15 Mar 2004

See all articles by Roger H. Gordon

Roger H. Gordon

University of California, San Diego (UCSD) - Department of Economics; Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Date Written: April 1985

Abstract

Current U.S. tax law creates a variety of incentives affecting municipal financial policy. Under current law,municipalities can borrow at a tax-exempt interest rate yet can earn the full market rate of return on any assets held. Residents, in contrast, if they borrow or lend as individuals,pay or earn the market rate of return but after personal income taxes. These differences in rates of return create a variety of arbitrage opportunities, allowing communities/residents to borrow at low rates and invest at higher rates.The purpose of this paper is to examine empirically the financial policy of municipalities in four states (Connecticut, Maine, Massachusetts and Rhode Island) to see to what degree these municipalities attempt to take advantage of each of the available opportunities to engage in tax arbitrage. Our datacomes from the 1980 U.S. Census of Population and Housing, and the 1977 U.S.Census of Governments. We find clear evidence that communities do actively engage in such tax arbitrage.

Suggested Citation

Gordon, Roger H. and Slemrod, Joel B., An Empirical Examination of Municipal Financial Policy (April 1985). NBER Working Paper No. w1599. Available at SSRN: https://ssrn.com/abstract=336335

Roger H. Gordon (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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Harvard University - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business ( email )

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