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Article: The relationship between government financial condition and expected tax rates reflected in municipal bond yields.
- Article from:
- National Tax Journal
- Article date:
- March 1, 1997
- Author:
CopyrightCOPYRIGHT 1997 National Tax Association. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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INTRODUCTION
Municipal bonds issued by state and local governments differ from other investment vehicles in that their interest income is exempt from federal taxation. This tax advantage is a major determinant of yields on these bonds relative to taxable bonds. While the tax advantage depends on the current tax rate for short-term investors, both current and future tax rates are relevant for long-term investors. Thus, yields on municipal bonds reflect an important piece of information--the long-term investor's expectation of future income tax rates --that may affect the investment decisions of households and businesses.(1)
This paper derives the ...