Tax-Exempt Bonds Really Do Subsidize Municipal Capital!

Peter Fortune

National Tax Journal, 1998, vol. 51, issue 1, 43-54

Abstract: A New View of tax exemp-tion rejects the Traditional View that tax exemption gives a capital cost subsidy measured by the difference between taxable and tax-exempt interest rates. This paper develops a decisive voter model in which the New View is a special case. It considers the effects of several financial assumptions underlying the New View. It is shown that when leverage-related costs affect private as well as municipal debt, when voters are liquidity constrained, and when voters face limits on their private debt capacity, the effect of tax exemption on the municipal cost of capital is very close to the effect predicted by the naive Traditional View.

Date: 1998
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Working Paper: Tax-exempt bonds really do subsidize municipal capital! (1996)
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Persistent link: https://EconPapers.repec.org/RePEc:ntj:journl:v:51:y:1998:i:1:p:43-54

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