MAJOR TRENDS IN THE MARKET FOR TAX‐EXEMPT SECURITIES*, 1

Abstract

FEDERAL TAX EXEMPTION of income from government securities has long characterized the federal tax system. Such exemption has been granted not only to income from state and local securities since 1913 but has also been provided for federal securities at various times and even to obligations of quasi-private businesses such as farm-loan banks. I propose to discuss briefly, with particular reference to state and local securities, the effect of the exemption on the investment policies of individuals and investment institutions since the beginning of the federal income tax in 1913. I should like to review first the major sources of supply of taxexempt investments since 1913. Until 1940 the federal government provided tax exemption for its own obligations. This policy dated back to the Civil War but was of little significance until the First Liberty Loan was issued during World War I. Amounting to about $1.8 billion, this was the federal wholly tax-exempt issue of major consequence during the war, although additional short-term tax-free notes were issued shortly thereafter. Most of the wartime borrowing was accomplished by partially tax-exempt issues; these were exempt only from normal tax except for the first $5,000 principal amounts upon which interest was wholly exempt.2 In 1928 the Treasury recommended authorization of securities which would be free of surtax as well as normal tax on the plea that full tax exemption would equalize the market advantages en-