An International Study of Tax Effects on Government Bonds




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    • Stanford University, and the World Bank, respectively. We gratefully acknowledge the support of the staff of the Investment Department at the World Bank and the encouragement of its director, Hugo Schielke. The views expressed are those of the authors and not necessarily those of the World Bank.


It is shown that coupon bonds alone are not sufficient to span time-dated claims on ordinary income, capital gains, and non-taxable wealth. In an incomplete bond market where the pure dated claims are not spanned by existing bonds, marginal rates of substitution between present consumption and pure dated claims on ordinary income, capital gains income, and non-taxable wealth, respectively, can differ across bondholders. However, the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major (non-tax-exempt) holders of government debt.