Federal Personal Income Tax Rates Research Articles

Spread between the Moody’s Aaa-Rated Corporate Bond Yield and the Yield on Municipals: Co-integration Analysis

While the research linking interest rates to government deficits is extensive, the impact of other tax-related variables is uncommon. This study seeks to add to the literature on credit markets by exploring the impact of not only the budget deficit but also average effective personal income tax rates and personal income tax evasion as explanatory variables. To the best of our knowledge this study is the first study to recognize the joint importance of all of these fiscal variables. We utilize data covering the post-Bretton Woods period from 1971 through 2016 to analyze the impact of the three variables in order to shed light on the spread between the real interest rate yields on Moody’s Aaa-rated corporate bonds and high quality municipal bonds. Estimations reveal that the higher the average effective federal personal income tax rate, the greater the differential between the yields on corporate bonds and tax-free Municipals. Furthermore, it is found that the higher the adjusted gross income gap, the greater the real yield spread between Moody’s Aaa-rated corporate bonds and high quality municipal bonds. Finally, the greater the primary budget deficit, the greater the spread as well.

An Empirical Analysis of the Effects of Budget Deficits (Total and Primary) and Personal Income Tax Rates on the Ex Post Real Interest Rate Yield on Long-Term U.S. Treasury Bonds

This empirical study adopts an open-economy loanable funds model to investigate the impact of post-Bretton Woods U.S. federal government budget deficits and personal income tax rates on the ex post real interest rate yield on thirty-year Treasury bonds. In this study, the budget deficit is measured in two different ways, the total (“unified”) budget deficit and the primary deficit (the total/unified deficit minus net interest payments). Two different estimation techniques, autoregressive two stage least squares estimation and the ARCH (Autoregressive Conditional Heteroscedasticity) Method, for the 1973-2016 study period provide evidence that the ex post real interest rate yield on thirty-year Treasury bonds has been an increasing function of both federal budget deficit measures (expressed as a percent of GDP) and the maximum marginal federal personal income tax rate. The estimations all imply that elevating either the total/unified or primary federal budget deficit appears to raise the cost of borrowing in the U.S., whereas reducing the maximum marginal personal income tax rate appears to reduce the cost of borrowing. Given the potential effects of longer-term real interest rates on investment in new plant and equipment and overall economic growth, policy-makers should not overlook these findings.

The tax-rate induced bond substitution hypothesis and the traditional textbook treatment of the relationship between tax-free and taxable bond yields

ABSTRACTThis empirical study posits and tests the ‘tax-rate induced bond substitution hypothesis,’ wherein the propensity for bond buyers to substitute tax-exempt municipal bonds for taxable bonds in their portfolios is hypothesized to be an increasing function of the maximum federal personal income tax rate. This substitution acts to elevate the real interest rate yield on taxable bonds while diminishing it on tax-exempt bonds, ceteris paribus. Two measures of real interest rates are included in the present analysis, ex post real interest rate and ex ante real interest rate. Empirical estimations for the 1981–2018 period provide strong support for the hypothesis. They reveal that the real interest rate yield on high-grade tax-exempt municipal bonds is a decreasing function of the maximum marginal federal personal income tax, whereas the real interest rate yield on taxable ten-year Treasury notes is an increasing function of that same tax rate. We examine the implications of this study and the information underlying it for the traditional formulaic textbook treatment of the relationship between yields on bonds whose interest rate payments are taxable versus those whose interest rate payments are tax exempt and find it is not as dependable as the textbooks would have us believe.

An empirical analysis for the US of the impact of federal budget deficits and the average effective personal income tax rate on the ex post real interest rate yield on ten-year Treasuries

We investigate the impact of federal government budget deficits and federal personal income tax rates on the ex post real interest rate yield on ten-year US Treasury notes. Using autoregressive two-stage least squares estimations for the post-Bretton Woods era, we find that the yield on these Treasury issues has been an increasing function of the federal budget deficit as a percent of GDP, both in the form of the total/unified deficit and the primary deficit, and also an increasing function of the average effective federal personal income tax rate. The estimation reveals that growth in the M2 money supply (relative to GDP) acts to reduce the real interest rate yield on ten-year Treasuries. Consequently, while a growing money supply can help to keep real interest rates on Treasury notes (and hence federal debt service costs) down, policymakers should be sensitive to the fact that both budget deficit increases and tax rate increases can elevate the real interest rate. JEL codes : E43, E62, H62

Reflections on and Inquiry into Unfamiliar as well as Familar Factors that may Influence the Market for Municipal Bonds

This study investigates the impact of various factors on the ex-ante real interest rate yield on high grade municipal bonds. The AR/2SLS estimation implies that this ex ante real interest rate is an increasing function of the ex-ante real interest rate yield on thirty-year Treasury bonds while being a decreasing function of net capital flows. The yield in question also is found to have been negatively impacted by the Depository Institutions Deregulation and Monetary Control Act. Furthermore, the estimation finds that this interest rate measure is a decreasing function of the maximum marginal federal personal income tax rate. In addition, it is found that, in the presence of an interaction term, the ex-ante real interest rate yield on high-grade municipals is an increasing function not only of the budget deficit but also the aggregate tax gap. The policy implications of these results include the need to limit the extent of budget deficits and to also limit the extent of income tax evasion in the U.S., lest there will be significant limitations placed on the ability of towns, cities, counties, and states to create new infrastructure in response to changing demographic and economic circumstances and/or maintain existing infrastructure.

Impact of federal income tax rates and government borrowing on nominal interest rate yields on tax-free municipal bonds

PurposeThis study investigates the impact of federal income tax rates and budget deficits on the nominal interest rate yield on high-grade municipal tax-free bonds (municipals) in the US. The 58-year study period covers the years 1959 through 2016 and thus is very recent.Design/methodology/approachThe study develops a loanable funds model that allows for various financial market factors. Once developed, the model is estimated by autoregressive two-stage least squares, with a Newey-West heteroskedasticity correction.FindingsThe nominal interest rate yield on municipals is a decreasing function of the maximum marginal federal personal income tax rate and an increasing function of the federal budget deficit (expressed as a per cent of GDP). This yield is also an increasing function of nominal interest rate yields on three- and ten-year treasury notes and expected inflation.Research limitations/implicationsWhen introducing additional interest rates such as treasury bills as explanatory variables, multi-collinearity becomes a serious problem.Practical implicationsThis study indicates that lower maximum federal personal income tax rates and larger federal budget deficits, both act to raise borrowing costs for cities (of all sizes), counties and states across the country. Given the study period of 58 years, these relationships appear to be enduring ones that responsible policy-makers should not overlook.Social implicationsTax reform and debt management need to be conducted in a very circumspect fashion.Originality/valueNo recent study investigating the impact of the two key policy variables in this study has been published.

Determinants of aggregate income-tax-evasion behaviour: the case of US

The determinants of aggregate income-tax-evasion behaviour as reflected in the size of the underground economy in the US are analysed. These factors include the federal personal income tax rate, the social security tax rate, the federal corporation income tax rate, the public's dissatisfaction with the government, IRS audit rates and IRS penalty assessments on detected unreported income. The results show that the size of the underground economy is an increasing function of federal personal income tax rate, the social security tax rate and the public's dissatisfaction with the government. However, the size is a decreasing function of IRS penalty payments on unpaid taxes. JEL Codes: H26, E26 Keywords: Research, Underground economy, tax evasion, US economy

An Empirical Analysis of Determinants of Recent Federal Personal Income Tax Evasion in the U.S.

Unaccounted for currency in die U.S. has been argued to reflect die presence of widespread income tax evasion. In turn, income tax evasion is especially problematic in this era of large government budget deficits and growing national debts which have led to debt crises. This empirical study seeks to identify determinants of recent federal personal income tax evasion in the U.S. using the most recent tax evasion data available, data that run through 2008 and are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI (adjusted gross income) to reported AGI. The empirical estimates find that personal income tax evasion is an increasing function of the maximum marginal federal personal income tax rate, the interest rate yield on three year Treasury notes, per capita real income, and a dummy variable for the years in which the second war in Iraq was conducted, while being a decreasing function of the Tax Reform Act of 1986, the ratio of the tax free interest rate yield on high grade municipals to the taxable interest rate yield on ten year Treasury notes, the audit rate by IRS (Internal Revenue Service) personnel, and the average IRS penalty on detected unreported income. Thus, among other things, this study finds that more aggressive IRS policies are effective tools in the war against personal income tax evasion.

The Impact of Personal Income Taxation on Executive Compensation

This paper analyzes the effect of personal income taxation on the sensitivity of executive compensation to company performance and the use of stock option and restricted stock grants underlying this sensitivity. The theoretical model predicts that, if a single tax rate applies to the entire compensation package, an increase in the tax rate weakly diminishes the equilibrium level of managerial effort and the after-tax pay-to-performance sensitivity, with the effect on the pre-tax pay-to-performance sensitivity being ambiguous. When salary and option gains are taxed at a higher rate than stock gains, tax changes also induce shifting among the individual compensation instruments. Interestingly, this differential taxation leads to a positive amount of stocks in the compensation contract even in the absence of any desire to incentivize the manager. In addition, an increase in the tax rate applied to salary and option gains may increase the level of managerial effort in equilibrium. On the other hand, an increase in the tax rate applied to stock gains weakly decreases the equilibrium level of managerial effort and strictly decreases the amount of after-tax pay-to-performance sensitivity generated by stock grants. The second part of the paper exploits the variation in the U.S. federal personal income tax rate generated by the Omnibus Budget Reconciliation Act of 1993, as well as variation in the combined federal and state income tax rates during the period 1992-1996 to empirically evaluate the impact of personal income taxation on the pay-to-stock-price sensitivity generated by stock-option and restricted stock grants. The results show that an increase in the ordinary income tax rate decreases the pay-to-stock-price sensitivity generated by option grants when time series variation in the marginal tax rate is utilized in the identification, with the estimates retaining the same sign but being statistically insignificant when only the variation in the marginal tax rate originating from cross-sectional variation in the federal income tax rate and/or state tax rate changes is used in the estimation. On the other hand, stock grant sensitivity is found to be unresponsive to changes in the ordinary income tax rate.

Income Tax Evasion Revisited: The Impact of Interest Rate Yields on Tax-Free Municipal Bonds

1. IntroductionIncome tax evasion remains a timely issue, as evidenced by recently published studies (e.g., see Feige 1989, 1994; Alm, Jackson, and McKee 1992; Pestieau, Possen, and Slutsky 1994; Cebula 1997, 2001; Alm, McClelland, and Schulze 1999; Atkins 1999; Panteghini 2000; Ali, Cecil, and Knoblett 2001; Saltz 2001). In an effort to provide further insight into the determinants of tax evasion, this study hypothesizes that the tax-evasion decision may include an assessment of the tax-free interest rate yield on, say, high-grade municipal bonds relative to the taxable interest rate yield on alternative high-quality bond issues, such as 10-year Treasury notes. Presumably, the higher the interest rate yield on high-grade municipals (whose interest is legally exempt from federal income taxation) relative to the taxable interest rate yield on 10-year Treasury notes, the more attractive those municipals become, ceteris paribus. In effect, the interest paid on tax-free bonds, especially for households in higher tax brackets, may offer an attractive legal alternative (income tax avoidance) to illegal income tax evasion.1 Thus, it is hypothesized that the higher the tax-free interest rate yield on high-grade municipals relative to the taxable yield on 10-year Treasury notes (or equivalent taxable issues), the less the incentive for and, hence, the less the degree of income tax evasion.This study investigates empirically whether higher yields on tax-free municipals (relative to the taxable yields on 10-year Treasury notes) reduce the degree of aggregate federal personal income tax evasion. Section 2 provides the model, which includes a variety of variables already established in the literature to affect tax evasion. Section 3 describes the data. Sections 4 and 5 provide the empirical findings and concluding remarks.2. The ModelThe economy consists of agents who generate economic value that is reflected in the form of income and choose whether to report none, some, or all of their income to the Internal Revenue Service (IRS).The probability that the representative economic agent will not report taxable income, pnr, is treated as an increasing function of the expected gross benefits to the agent of not reporting income, eb, and a decreasing function of the expected gross costs to the agent of not reporting income, ec:(Formula Omitted. See article image.)The expected gross benefits from not reporting income to the IRS are hypothesized to be an increasing function of income tax rates. Unlike previous studies, this study focuses on both the average effective federal personal income tax rate (AEPT) and the maximum marginal federal personal income tax rate (MAX), such that(Formula Omitted. See article image.)Furthermore, as suggested by Feige (1994) and Cebula (2001), the higher the level of public dissatisfaction (DIS) with the perceived performance of government employees and elected government officials, the greater the subjective benefit taxpayers derive from tax evasion. Accordingly, becomes(Formula Omitted. See article image.)Finally, as explained in section 1, it is hypothesized in this study that the higher the tax-free interest rate yield on high-grade municipal bonds (TF) relative to the taxable interest rate yield on 10-year Treasury notes (TEN), the greater the incentive to engage in legal tax avoidance and the lower the incentive to engage in tax evasion. Thus, becomes(Formula Omitted. See article image.)The expected gross costs of not reporting income to the IRS are hypothesized to be an increasing function of the expected risks thereof. In this study, to the representative economic agent, the expected penalty from not reporting taxable income to the IRS, if said activity is detected by the IRS, is measured in part by the total pecuniary penalties (including both penalties per se and interest) previously assessed by the IRS on audited tax returns (PEN). …

Budget deficits and real interest rates: Updated empirical evidence on causality

Using error-correction model (ECM) estimation, the paper empirically examines the causality relationship between the federal government budget deficit and the ex ante real interest rate yield on high grade long term tax free municipal bonds in the U.S. To clarify this deficit or interest rate relationship, the budget deficit is measured by the primary budget deficit, which excludes net interest payments by the Treasury. In a model that includes federal personal income tax rates and net international capital flows, as well as money supply growth, the ECM estimates strongly suggest a bi-directional relationship between the primary budget deficit and the ex ante real interest rate yield. Budget deficits apparently do matter! William Simon's concerns were justified.

Impact of income-detection technology and other factors on aggregate income tax evasion:the case of the United States

This study empirically investigates the impact of improving income-detectiontechnology, as well as a variety of other factors, on aggregate income taxevasion. The study focuses on the U.S., using available data for the 1975-97 period. The empirical findings indicate that improving income-detection technology appears to have significantly reduced the degree of aggregate income-tax evasion in theU.S. over time. In addition, the estimates indicate that federal income tax evasionappears to be an increasing function not only of the federal personal income tax rate but also of the public's dissatisfaction with government. Furthermore, income taxevasion appears to be a decreasing function both of penalties imposed by the IRS on unpaid taxes and IRS audit rates. JEL Codes: H24, H26, H31 Keywords: Evasion, Income Tax Evasion, Income Tax, Tax Evasion, Tax

Federal Personal Income Tax Policy in the 1920s

During the 1920s, federal personal income tax rates, which had been dramatically increased during World War I, were sharply reduced. These tax rate cuts have often been cited as an example of a successful supply-side policy, but they have also been criticized as policies designed primarily to benefit the wealthy. We argue that a primary motive for the tax cuts of the 1920s was the desire to reduce the tax avoidance by wealthier individuals that occurred as a result of the previous tax rate increases and that the tax cuts enacted did reduce tax avoidance.

On the construction of marginal federal personal and social security tax rates in the U.S

In this article, I correct and extend my earlier series on marginal federal personal income tax rates. I also construct a measure of the marginal Social Security tax rate and add this to the income tax rate to obtain a measure of the effective marginal tax rate on income due to federal taxes. Finally, I compare my series on marginal income tax rates and its method of construction with those of Barro and Sahasakul.