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How Prevalent Is Tax Arbitrage? Evidence From the Market for Municipal Bonds

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  • Erickson, Merle
  • Goolsbee, Austan
  • Maydew, Edward

Abstract

This paper examines tax arbitrage in the market for municipal bonds. It poses a puzzle for the literature, however, in that we find little evidence of municipal bond tax arbitrage by non-financial corporations. Even among those firms engaged in arbitrage, many firms do less than a safe-harbor amount allowed by the tax authorities. Such a pattern is consistent with the presence of both fixed and marginal costs of arbitrage. The existence of such costs may help explain the municipal bond puzzle and, more broadly, why asset prices often only partially reflect the effects of tax differences.

Suggested Citation

  • Erickson, Merle & Goolsbee, Austan & Maydew, Edward, 2003. "How Prevalent Is Tax Arbitrage? Evidence From the Market for Municipal Bonds," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(1), pages 259-270, March.
    • Handle: RePEc:ntj:journl:v:56:y:2003:i:1:p:259-70
    DOI: 10.17310/ntj.2003.1S.07
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    1. Gentry, William M., 2002. "Debt, investment and endowment accumulation: the case of not-for-profit hospitals," Journal of Health Economics, Elsevier, vol. 21(5), pages 845-872, September.
    2. Guenther, David A., 1994. "The relation between tax rates and pre-tax returns direct evidence from the 1981 and 1986 tax rate reductions," Journal of Accounting and Economics, Elsevier, vol. 18(3), pages 379-393, November.
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    Cited by:

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    2. Andrea Mattozzi, 2010. "Policy Uncertainty, Electoral Securities, And Redistribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(1), pages 45-71, February.
    3. Gao, Pengjie & Lee, Chang & Murphy, Dermot, 2020. "Financing dies in darkness? The impact of newspaper closures on public finance," Journal of Financial Economics, Elsevier, vol. 135(2), pages 445-467.
    4. Thomas Luke Spreen & Ed Gerrish, 2022. "Taxes and tax‐exempt bonds: A literature review," Journal of Economic Surveys, Wiley Blackwell, vol. 36(4), pages 767-808, September.
    5. Yingkai Tang & Yao Liu & Jing Liu & Weiping Li, 2019. "Does More Managerial Power Impede or Promote Corporate Tax Avoidance? Evidence from Listed Chinese Companies," Sustainability, MDPI, vol. 11(7), pages 1-18, March.
    6. Jain, Archana & Jain, Pankaj K. & McInish, Thomas H. & McKenzie, Michael, 2013. "Worldwide reach of short selling regulations," Journal of Financial Economics, Elsevier, vol. 109(1), pages 177-197.
    7. Landon, Stuart, 2009. "The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2175-2184, December.
    8. Landon, Stuart & Smith, Constance, 2008. "Taxation and bond market investment strategies: Evidence from the market for Government of Canada bonds," MPRA Paper 9959, University Library of Munich, Germany.

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