WHICH HOUSEHOLDS OWN MUNICIPAL BONDS? EVIDENCE FROM TAX RETURNS: ABSTRACT

This paper uses data from 1988 federal income tax returns, which asked taxpayers to report their tax-exempt interest income as an information item, to analyze the distribution of tax-exempt asset holdings. More than three quarters of the tax-exempt debt held by households was held by those with marginal tax rates of 28 percent or more. The paper reports two measures of the average marginal tax rate on tax-exempt debt. The first measures the increase in taxes if a small fraction of each taxpayer's exempt interest income were converted to taxable interest. This weighted average of "firstdollar" marginal tax rates was 25.8 percent. A second calculation finds that if all tax-exempt interest were reported as taxable interest, taxes would rise by 27.6 percent of the increase in tarable interest. Many taxpayers who have substantial taxexempt interest receipts, but low first-dollar marginal tax rates, would be driven into higher tax brackets if the exemption were eliminated but their portfolios remained the same.