Government Borrowing Costs Research Articles

Withholding Taxes and the Cost of Public Debt

Several industrialized countries impose withholding taxes on public interest accruing to nonresidents. This paper examines the international incidence of such withholding taxes by estimating to what extent these taxes raise the cost of government borrowing. It is found that the pretax interest rate is most sensitive to the tax withheld on Japanese investors. In particular, the gross-up is about half of this tax, which suggests that about half is returned to the investor in the form of foreign tax credits. The extent of the gross-up rises over the 1989-93 period, which indicates that in recent years foreign tax credits have been available to a lesser extent.

Real Interest Rates and the Savings and Loan Crisis: The Moral Hazard Premium

Real interest rates shifted upwards by four or five percentage points in approximately 1980. The question is why. In this paper we review some of the more popular explanations and point out that they are somewhat inconsistent with the facts. We then present a new explanation which may partially account for the dramatic increase. We suggest that the upward shift in rates may be directly connected with the decade-long crisis in the savings and loan industry and the federal government's handling of that crisis. Owners and managers of troubled thrifts responded to the incentives provided by underpriced deposit insurance by offering higher and higher rates in an attempt to attract new funds. Depositors, anticipating that the government would protect their investments, actively sought out higher yields in local and national markets. The end result was that the rates offered by Treasury securities rose to compete with these quasi-risk-free substitutes sold by savings and loans. This added (and, indeed, continues to add) significantly to the federal government's borrowing costs. We calculate this increased cost under various assumptions about the effect of the S&L crisis on real interest rates.

Taxation of Financial Assets in Developing Countries

In developing countries, most financial assets in formal markets are deposits at financial institutions. This potentially important tax base could be taxed at a low administrative cost. When revenues of financial taxes are significant, implicit taxes dwarf explicit taxes. The author focuses on the implicit taxation of financial assets through seigniorage, reserve requirements, lending targets, and interest ceilings combined with inflation. The last instrument has often been overlooked, but it has generated more than a third of implicit revenues in some cases by lowering the cost of government borrowing. Tax revenues are difficult to measure because of regulations that prevent the use of market prices for computation and distort the meaning of some definitions. For some countries, the standard method of seigniorage grossly underestimates the revenue from financial taxation. The author discusses various sources of distortion but ignores potential impacts on the level of saving and the growth rate. Although taxes on financial assets have a low administrative cost, the excess burden that stems from the misallocation of resources is probably a much higher fraction of revenues than that of other taxes.

Factors Accounting for the Sharply Increased Cost of State and Local Government Borrowing

Factors Accounting for the Sharply Increased Cost of State and Local Government Borrowing