Are TIPS Really Tax Disadvantaged? Rethinking the Tax Treatment of U.S. Treasury Inflation Indexed Securities

FRB of Atlanta Working Paper No. 2003-9

23 Pages Posted: 20 Dec 2003  

Scott E. Hein

Texas Tech University - Area of Finance

Jeffrey M. Mercer

Texas Tech University - Department of Finance

Date Written: July 2003

Abstract

In 1997 the U.S. Treasury introduced Inflation Indexed (or Protected) Securities with substantial promotional fanfare. Yet, due in part to what some in the finance profession have described as a "tax disadvantage" placed upon TIPS, many are questioning whether they should appeal to a wide audience. Some, in fact, advise holding TIPS only in tax-deferred accounts. In this paper, the authors develop a framework that allows us to demonstrate that the tax treatment of TIPS is trivially different from that of conventional Treasury securities. Utilizing an after-tax valuation approach, they further show that under relatively conservative projections for inflation, TIPS generally have after-tax yields comparable to, if not exceeding, conventional fixed-rate Treasury securities.

Keywords: Treasury securities, inflation protection, income taxes, interest rates

JEL Classification: G0, G1, H2, H6

Suggested Citation

Hein, Scott E. and Mercer, Jeffrey M., Are TIPS Really Tax Disadvantaged? Rethinking the Tax Treatment of U.S. Treasury Inflation Indexed Securities (July 2003). FRB of Atlanta Working Paper No. 2003-9. Available at SSRN: https://ssrn.com/abstract=457380 or http://dx.doi.org/10.2139/ssrn.457380

Scott E. Hein (Contact Author)

Texas Tech University - Area of Finance ( email )

PO Box 42101
Lubbock, TX TX 79409
United States
806-8342-3433 (Phone)
806-742-2099 (Fax)

HOME PAGE: http://www.depts.ttu.edu/rawlsbusiness/people/faculty/finance/scott-e-hein/index.php

Jeffrey M. Mercer

Texas Tech University - Department of Finance ( email )

Rawls College of Business Administration
Lubbock, TX 79409
United States
806-742-3365 (Phone)
806-742-3197 (Fax)

HOME PAGE: http://jmercer.ba.ttu.edu/

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