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The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds

Stuart Landon ()

No EERI_RP_2009_20, EERI Research Paper Series from Economics and Econometrics Research Institute (EERI), Brussels

Abstract: This paper provides estimates of the extent to which corporate and personal income taxes are capitalized in bond prices. The methodology yields estimates of the degree of tax capitalization, rather than an implied tax rate. This makes it straightforward to identify the marginal investor and test for changes in tax capitalization. The empirical approach also makes it unnecessary to jointly estimate the degree of tax capitalization and the entire yield curve. Corporate taxes are found to have been fully capitalized in pre-tax Government of Canada bond yields during the period 1986-1993. Since 1994, taxes have not been capitalized in yields. These results are consistent with the existence of a marginal investor, but the identity of the marginal investor changed from a financial sector firm to a non-taxed entity in the early 1990s.

Keywords: Tax capitalization; Bond yields. (search for similar items in EconPapers)
JEL-codes: G12 H2 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc
Date: 2009
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http://www.eeri.eu/documents/wp/EERI_RP_2009_20.pdf (application/pdf)

Related works:
Journal Article: The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds (2009) Downloads
Working Paper: The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds (2009) Downloads
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