Are Treasury Inflation Protected Securities Really Tax Disadvantaged?

Abstract

In 1997, the U.S. Treasury introduced Inflation Protected Securities, commonly known as TIPS. Several in the finance field have since described these securities as "tax disadvantaged" relative to conventional securities, leading to serious questions regarding their appropriateness outside of tax-deferred accounts. In this article, we develop a framework that demonstrates that at least in a real sense the tax treatment of TIPS is trivially different from that of conventional Treasury securities. Moreover, empirically we find evidence that TIPS generally have after-tax yields comparable to, if not exceeding, conventional fixed-rate Treasury securities. We also show that TIPS have generally outperformed matched-maturity conventional Treasury securities in terms of after-tax rates of return.

Keywords: Treasury Inflation Protected Securities, Treasury Inflation Indexed Securities, income taxes, IRS

JEL Classification: E4, E6, G1, G2, H2