Which Households Own Municipal Bonds? Evidence from Tax Returns

24 Pages Posted: 8 Jan 2008 Last revised: 30 Aug 2010

See all articles by Daniel R. Feenberg

Daniel R. Feenberg

National Bureau of Economic Research (NBER)

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: November 1991

Abstract

This paper uses data from 1988 federal income tax returns, which asked taxpayers to report their tax-exempt interest income as an information item, to analyze the distribution of tax-exempt asset holdings. More than three quarters of the tax-exempt debt held by households was held by those with marginal tax rates of 28% or more. The paper reports two measures of the average marginal tax rate on tax-exempt debt. The first measures the increase in taxes if a small fraction of each taxpayer's exempt interest income were converted to taxable interest. This weighted average of 'first-dollar" marginal tax rates was 25.8%. A second calculation finds that if all tax-exempt interest were reported as taxable interest, taxes would rise by 27.6% of the increase in taxable interest. Many taxpayers who have substantial tax-exempt interest receipts, but low first-dollar marginal tax rates, would be driven into higher tax brackets if the exemption were eliminated but their portfolios remained the same.

Suggested Citation

Feenberg, Daniel R. and Poterba, James M., Which Households Own Municipal Bonds? Evidence from Tax Returns (November 1991). NBER Working Paper No. w3900. Available at SSRN: https://ssrn.com/abstract=474006

Daniel R. Feenberg (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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James M. Poterba

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
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Cambridge, MA 02142
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617-253-1330 (Fax)

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