MUNICIPAL BOND YIELDS: WHOSE TAX RATES MATTER?

1 June 1988

journal article
research article
Published by University of Chicago Press in National Tax Journal

Vol. 41 (2) , 219-233
https://doi.org/10.1086/ntj41788723

Abstract

This paper examines the New View of yield spreads between taxable and tax-exempt bonds, which argues that personal income taxes are irrelevant to the relationship between interest rates on tax-exempt and taxable bonds. According to this view, associated with Fama and Miller, only corporate income taxes matter. Our results for the period 1976-85 indicate considerable variation in the implicit tax rate on municipal bonds. We also find evidence that the implicit tax rate, adjusted for quality differences, is related to statutory personal income tax rates. We believe that this paper casts considerable doubt on the validity of the New View and provides support for the Traditional View.

Keywords

This publication has 1 reference indexed in Scilit:

Dividends and Taxes: Some Empirical Evidence
Journal of Political Economy, 1982