Taxes and tax‐exempt bonds: A literature review

Abstract

This article reviews and synthesizes the academic literature on income tax exemptions for interest income derived from state and local (municipal) bonds. It explores a large body of work that evaluates the impact of federal and state tax exemptions on the borrowing costs of state and local governments. It also considers how the tax exemption influences municipal financing decisions, its distributional impacts, and potential for tax arbitrage schemes. It concludes with a discussion of the viability of eliminating the tax exemption entirely or transitioning the preference to a tax credit mirroring municipal bonds sold under the Build America Bond (BAB) program.

Firm Financial Indicators and Share Returns on Agricultural Firms Listed at Nairobi Securities Exchange, Kenya

“…For example, investors who are subject to higher tax rates may prefer to hold tax-exempt bonds, while investors who are taxed at lower rates may prefer to hold higher-risk, higher-return assets like stocks (Elert et al, 2019) Tax-Clientele Effect Theory implies that the tax status of investors in agricultural firms listed at NSE, Kenya may influence their investment decisions and, consequently, the share returns of these firms. For instance, if a large portion of investors in agricultural firms listed at NSE, Kenya are subject to high tax rates, they may prefer to invest in tax-exempt bonds rather than in stocks, which could lower demand for shares and lower share returns (Spreen & Gerrish, 2022). The Tax-Clientele Effect Theory indeed provides a valuable framework for understanding how tax considerations can influence the investment decisions of shareholders, which can, in turn, impact share returns.…”