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How Prevalent is Tax Arbitrage? Evidence from the Market for Municipal Bonds

22 Pages Posted: 8 Aug 2003  

Merle Erickson

University of Chicago - Booth School of Business

Austan Goolsbee

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Edward L. Maydew

University of North Carolina at Chapel Hill

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Date Written: August 2002

Abstract

Although tax arbitrage is central to the literatures on tax capitalization, implicit taxes, and even capital structure, there is little empirical evidence of the extent to which firms actually engage in tax arbitrage. This paper provides some evidence on the topic by focusing on a simple and observable corporate arbitrage strategy in the market for municipal bonds. It poses a puzzle for the literature, however, in that we find little evidence of municipal bond tax arbitrage by non-financial corporations. The overwhelming majority of firms are not engaging in the arbitrage at all and even among those engaged in arbitrage, many firms do less than a safe-harbor amount allowed by the tax authorities. Such a pattern is consistent with the presence of both fixed and marginal (i.e., that depend on size of the position) costs of arbitrage, though we cannot observe what those costs are.

Suggested Citation

Erickson, Merle and Goolsbee, Austan and Maydew, Edward L., How Prevalent is Tax Arbitrage? Evidence from the Market for Municipal Bonds (August 2002). NBER Working Paper No. w9105. Available at SSRN: https://ssrn.com/abstract=426400

Merle Erickson

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
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773-702-0458 (Fax)

Austan Goolsbee (Contact Author)

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-702-5869 (Phone)
773-702-0458 (Fax)

National Bureau of Economic Research (NBER)

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Edward L. Maydew

University of North Carolina at Chapel Hill ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-843-9356 (Phone)

HOME PAGE: http://www.kenan-flagler.unc.edu/faculty/directory/accounting/edward-maydew

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