Taxable and Tax-Exempt Interest Rates: the Role of Personal and Corporate Tax Rates

33 Pages Posted: 5 Jul 2004 Last revised: 22 Sep 2022

See all articles by Joe Peek

Joe Peek

Federal Reserve Banks - Federal Reserve Bank of Boston

James A. Wilcox

University of California, Berkeley - Economic Analysis & Policy Group; National Bureau of Economic Research (NBER)

Date Written: 1985

Abstract

This paper investigates empirically the effects of personal and corporate taxes on taxable interest rates and on the spread between taxable and tax-exempt rates. Two main sets of results emerge. First, we establish that the effective marginal investors in the Treasury bill market are households, as opposed to tax-exempt institutions or corporations. We find no evidence of corporate tax rate effects on Treasury bill yields. The study is then extended to an examination of the tax-exempt market. The results there contradict the hypothesis that commercial bank arbitrage generally ensures that the taxable-tax-exempt interest rate spread is determined by the corporate tax rate. Our estimates decisively reject the corporate in favor of the personal income tax rate as being the relevant tax rate of the marginal investor in this market as well.

Suggested Citation

Peek, Joe and Wilcox, James A., Taxable and Tax-Exempt Interest Rates: the Role of Personal and Corporate Tax Rates (1985). NBER Working Paper No. w1544, Available at SSRN: https://ssrn.com/abstract=336299

Joe Peek

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

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Boston, MA 02210
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James A. Wilcox (Contact Author)

University of California, Berkeley - Economic Analysis & Policy Group ( email )

Berkeley, CA 94720
United States
510-642-2455 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

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