Municipal Debt and Marginal Tax Rates: Is There a Tax Premium in Asset Prices?
Article first published online: 23 MAY 2011
© 2011 The American Finance Association
The Journal of Finance
Volume 66, Issue 3, pages 721–751, June 2011
How to Cite
LONGSTAFF, F. A. (2011), Municipal Debt and Marginal Tax Rates: Is There a Tax Premium in Asset Prices?. The Journal of Finance, 66: 721–751. doi: 10.1111/j.1540-6261.2011.01650.x
- Issue published online: 23 MAY 2011
- Article first published online: 23 MAY 2011
We study the marginal tax rate incorporated into short-term municipal rates using municipal swap market data. Using an affine model, we identify the marginal tax rate and the credit/liquidity spread in 1-week tax-exempt rates, as well as their associated risk premia. The marginal tax rate averages 38.0% and is related to stock, bond, and commodity returns. The tax risk premium is negative, consistent with the strong countercyclical nature of after-tax fixed-income cash flows. These results demonstrate that tax risk is a systematic asset pricing factor and help resolve the muni-bond puzzle.