Do Tax-Exempt Bonds Really Subsidize Municipal Capital?

17 Pages Posted: 6 Jan 2007 Last revised: 27 Jun 2010

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)

Gilbert E. Metcalf

Tufts University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 1991

Abstract

We argue that the tax-exempt status of municipal bonds provides little or no subsidy to capital investment by communities. Instead, the tax exemption simply provides arbitrage opportunities to high and low tax bracket individuals while leaving individuals in intermediate tax brackets essentially unaffected. We also argue that the revenue cost of the tax exemption is much less than traditionally thought due to the portfolio rebalancing that would occur if the tax exemption were eliminated. Finally, we note that the only way to prevent all municipal arbitrage possibilities would be to pass through municipal interest income and payments to residents for tax purposes.

Suggested Citation

Gordon, Roger H. and Metcalf, Gilbert E., Do Tax-Exempt Bonds Really Subsidize Municipal Capital? (September 1991). NBER Working Paper No. w3835. Available at SSRN: https://ssrn.com/abstract=473972

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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National Bureau of Economic Research (NBER)

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Gilbert E. Metcalf

Tufts University - Department of Economics ( email )

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United States
617-627-3685 (Phone)
617-627-3917 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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