Taxes on Tax-Exempt Bonds

Andrew Ang, Vineer Bhansali and Yuhang Xing

No 14496, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates, with implicit tax rates close to 100% using retail trades and above 70% for interdealer trades. These implied tax rates can be identified on the cross section of municipal bonds because a portion of secondary market municipal bond trades involve income taxes. After valuing the tax payments, market discount bonds, which carry income tax liabilities, trade at yields around 25 basis points higher than comparable municipal bonds not subject to any taxes. The high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions.

JEL-codes: G12 G28 H20 H24 (search for similar items in EconPapers)
Date: 2008-11
New Economics Papers: this item is included in nep-pbe
Note: AP PE
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Published as Andrew Ang & Vineer Bhansali & Yuhang Xing, 2010. "Taxes on Tax-Exempt Bonds," Journal of Finance, American Finance Association, vol. 65(2), pages 565-601, 04.

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Journal Article: Taxes on Tax‐Exempt Bonds (2010)
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