Individual Preferences as Supply Determinants in the Municipal and Federal Bond Markets

Abstract

This paper adds to the small stock of existing literature on the determinants of individual preferences regarding tax postponement via government borrowing. It is shown that because of the treatment of personal interest receipts and payments under the progressive U.S. individual income tax, there is reason for low-income persons to prefer bond-financed tax postponement, while higher-income persons have reason to oppose government borrowing. Since the income level separating the groups with opposing preferences depends on both interest rate ratios and the income tax rate structure, it is possible to predict the effect of tax reforms, inflation, and political reforms upon the quantity of government borrowing and the interest rates which apply to it.