The Role of Federal Taxation in the Supply of Municipal Bonds: Evidence from Municipal Governments

31 Pages Posted: 8 Jan 2008 Last revised: 23 Aug 2010

See all articles by Gilbert E. Metcalf

Gilbert E. Metcalf

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

Date Written: November 1991

Abstract

This paper considers ways in which federal tax policy affects municipal asset and debt holdings. The tax treatment of municipal bonds and income creates an arbitrage opportunity for communities to issue tax exempt debt and invest in financial assets. I present evidence that suggests the rules in effect prior to 1986 to prevent this activity were not effective. I then develop and estimate a model of municipal bond supply. I find a semi-elasticity of 1.23 of long term debt with respect to the spread between the after tax rate of return and the municipal borrowing rate.

Suggested Citation

Metcalf, Gilbert E., The Role of Federal Taxation in the Supply of Municipal Bonds: Evidence from Municipal Governments (November 1991). NBER Working Paper No. w3891. Available at SSRN: https://ssrn.com/abstract=474002

Gilbert E. Metcalf (Contact Author)

Tufts University - Department of Economics ( email )

Medford, MA 02155
United States
617-627-3685 (Phone)
617-627-3917 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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