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Tax Exemption and Resource Allocation: Implications for Prices, Production, and Factor Choice

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  • Peter Fortune

    (Tufts University)

Abstract

The exemption of coupon payments by state and local governments from federal income taxes in the United States is examined from the vantage point of its effects on resource allocation—that is, its impact on the consumer's choice between goods produced privately and goods produced by the local government sector, on the choice between capital and labor in each sector, and on the relative prices of both goods and factors of production. The results raise questions about the value of tax exemption as a method of subsidizing local government provision of services.

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  • Peter Fortune, 1984. "Tax Exemption and Resource Allocation: Implications for Prices, Production, and Factor Choice," Public Finance Review, , vol. 12(3), pages 347-364, July.
    • Handle: RePEc:sae:pubfin:v:12:y:1984:i:3:p:347-364
    DOI: 10.1177/109114218401200304
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    References listed on IDEAS

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    1. Trzcinka, Charles A, 1982. "The Pricing of Tax-Exempt Bonds and the Miller Hypothesis," Journal of Finance, American Finance Association, vol. 37(4), pages 907-923, September.
    2. Borcherding, Thomas E & Deacon, Robert T, 1972. "The Demand for the Services of Non-Federal Governments," American Economic Review, American Economic Association, vol. 62(5), pages 891-901, December.
    3. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70(3), pages 215-215.
    4. Elton, Edwin J & Gruber, Martin J, 1970. "Marginal Stockholder Tax Rates and the Clientele Effect," The Review of Economics and Statistics, MIT Press, vol. 52(1), pages 68-74, February.
    5. Beckmann, Martin J & Sato, Ryuzo, 1969. "Aggregate Production Functions and Types of Technical Progress: A Statistical Analysis," American Economic Review, American Economic Association, vol. 59(1), pages 88-101, March.
    6. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
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    Cited by:

    1. Fortune, Peter, 1998. "Tax-exempt Bonds Really Do Subsidize Municipal Capital!," National Tax Journal, National Tax Association, vol. 51(n. 1), pages 43-54, March.
    2. Fortune, Peter, 1998. "Tax-Exempt Bonds Really Do Subsidize Municipal Capital!," National Tax Journal, National Tax Association;National Tax Journal, vol. 51(1), pages 43-54, March.
    3. Peter Fortune, 1995. "Debt capacity, tax exemption, and the municipal cost of capital: a reassessment of the new view," Working Papers 95-8, Federal Reserve Bank of Boston.

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