About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

46 IRET Congressional Advisory 1 (1995)

handle is hein.taxfoundation/iretcgadv0044 and id is 1 raw text is: IRETr June 14, 1995 No. 46 IMPACT OF THE FLAT TAX ON TAX EXEMPT BONDS There has been some concern expressed by traders of tax exempt securities, brokers, and bondholders over the potential impact of major tax restructuring proposals on the tax exempt bond market. In particular, there is concern over the effect of such proposal on the market value of existing tax exempt bonds and on the interest cost facing state and local governments in the future. We conclude that these concerns are unfounded, and that pro-saving tax reform would raise returns to all savers and strengthen state and local government finances. Most of the major tax restructuring proposals currently being circulated seek to correct the current income tax bias against income used for saving and investment. In the process, some of them would eliminate the difference in tax treatment between currently taxable and currently tax exempt securities. The flat tax (such as the Anney-Shelby proposal) would effectively extend current tax exempt bond treatment to currently taxable bonds, and to other types of saving instruments, in a modified income tax context. Replacement of the income tax with either a national sales tax (such as proposed by Senator Lugar and Representative Archer) or a VAT would also erase the tax distinction between taxable and tax exempt bonds. By contrast, the saving exempt income tax, as drafted by Senators Domenici and Nunn, would create a deduction for purchases of private sector securities to improve their treatment versus income used for consumption, but would preserve the tax treatment differential between private sector debt and state and local government debt by effectively doubling up on the tax deduction for state and local issues.1 Tax exempt bond dealers and financial writers have linked relative price weakness in the tax exempt bond market to prospects of enactment of the flat tax, and suggest that the flat tax would hurt the tax exempt bond market. For example, a recent column in Forbes magazine claims that tax exempt bonds would become less attractive.2 Has the prospect of the flat tax (or a national sales tax) depressed prices in the tax exempt bond market? Has this injured holders of existing tax exempt bonds? Would a federal flat tax system injure state, county, and local governments in the future? There may be other reasons for relative price weakness in the tax exempt bond market. Prospects for significant tax reform are better now than in many years. However, other tax and budget changes, and changing economic conditions, may also be affecting the tax exempt bond market. Taxes. The House passed tax bill provides significant reduction in capital gains taxes and the present value equivalent of first year write- off (expensing) of outlays on plant, equipment, and structures. These reforms may be watered down, but steps in this direction would boost returns on equities and divert saving from bonds to equities. Enhanced depreciation would also improve the ability of businesses to service debt, reducing risk premiums on taxable securities. It is difficult to calculate the net Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N.W., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 * Fax 202-463-6199 0 Internet www.iret.org

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most