ABSTRACT
This chapter considers the role of federal taxation in affecting the supply of municipal bonds. It reviews the various ways in which federal tax policy can affect the decision to issue tax-exempt debt at the state and local level. Two factors lead to increased levels of financial assets in a community, while a third factor leads to an increase in debt. With respect to this third factor, the chapter presents a model of debt finance from which debt supply equations can be derived. It then provides estimates of the parameters of the debt supply model from a panel data set of 185 cities and towns in the United States over an 11-year period from 1980 through 1988 and discusses the policy implications of these results. The chapter uses the NBER TAXSIM tax calculator to compute marginal tax rates for different spread variables.
