Monday, May 3, 2004

Calvin Johnson (Texas) has posted A Thermometer for the Tax System: The Overall Health of the Tax System as Measured by Implicit Tax on SSRN. Here is the abstract:

The implicit tax on tax-exempt municipal bonds is a thermometer that is now giving warning that the current tax system is not in good shape. The U.S. needs to stop using the tax system as a vehicle to delivering subsidies. In fact, the U.S. needs to give considerable attention to repairing the tax base through a tax overhaul at least as major as the Tax Reform Act of 1986. Tax exempt municipal bonds give an interest rate that is lower than that on comparable taxable bonds by the amount of what is called the implicit tax. In theory, high tax bracket investors should be willing to accept an implicit tax, just short of their statutory tax rate. The implicit tax is now very low, hovering not far above zero. The implicit tax is so low today because investors have too many easy alternative ways to avoid tax and are not willing to accept very low interest rates from tax exempt municipal bonds. The low implicit tax indicates that tax is an inefficient vehicle for delivering tax subsidies and that the tax system is not reaching its best sources.