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The impact of federal income tax rate cuts on the municipal bond market in the U.S.: A brief exploratory empirical note

Davis College of Business, Jacksonville University, 2800 University Blvd. N., Jacksonville, FL 32211, USA

Special Issues: Computational Finance and Insurance

Using annualized data for the 1974–2015 period, this study adopts a loanable funds approach to investigate empirically the impact of U.S. federal government fiscal policy of income tax rate cuts on the ex ante real interest rate yield on high grade municipal bonds. Empirical appears to show that the ex ante real interest rate yield on high grade tax free municipal bonds is a decreasing function of the maximum marginal federal personal income tax. Based upon this very preliminary, exploratory study, it follows that reducing federal income tax rates may act to raise the cost of borrowing to cities, counties, and states across the U.S.
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