Indirect and Direct Subsidies for the Cost of Government Capital: Comparing Tax-Exempt Bonds and Build America Bonds

Gao Liu and Dwight V. Denison

National Tax Journal, 2014, vol. 67, issue 3, 569-594

Abstract: Using data from the California primary market, we fnd that on average Build America Bonds (BABs) have after-subsidy interest rates approximately 72 basis points lower than tax-exempt bonds, and the savings increase with bond maturity. The implied tax rate for the marginal municipal bond investor is 25 percent, which is also the neutral subsidy rate at which municipal bond issuers are indifferent between issuing tax-exempt bonds and BABs. Analysis of paired tax-exempt bonds and BABs issued by the same issuers on the same dates suggests a comparable implied tax rate and net after-subsidy savings of about 65 basis points.

Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:ntj:journl:v:67:y:2014:i:3:p:569-594

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