The Role of Federal Taxation in the Supply of Municipal Bonds: Evidence From Municipal Governments

Gilbert Metcalf

No 3891, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper considers ways in which federal tax policy affects municipal asset and debt holdings. The tax treatment of municipal bonds and income creates an arbitrage opportunity for communities to issue tax exempt debt and invest in financial assets. I present evidence that suggests the rules in effect prior to 1986 to prevent this activity were not effective. I then develop and estimate a model of municipal bond supply. I find a semi-elasticity of 1.23 of long term debt with respect to the spread between the after tax rate of return and the municipal borrowing rate.

Date: 1991-11
Note: PE
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Citations: View citations in EconPapers (12)

Published as National Tax Journal, Volume XLIV, No. 4, Part 1: December, 1991. Cambridge: The MIT Press. Available through NBER.

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Working Paper: The Role Of Federal Taxation In The Supply Of Municipal Bonds: Evidence From Municipal Governments (1991)
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