Working Paper: CEPR ID: DP10971
Authors: Tania Babina; Chotibhak Jotikasthira; Christian Lundblad; Tarun Ramadorai
Abstract: Heterogeneity in the taxation of asset returns can create ownership clienteles. Using a simple model, we demonstrate that an important consequence of tax-induced ownership segmentation is to limit risk-sharing, creating regions of the aggregate demand curve for the asset that are "downward-sloping.'' As a result, the constraints of the ownership clientele impact the asset price response to variations in asset supply, and make the asset's price more sensitive to movements in idiosyncratic risk. We test these predictions on U.S. municipal bonds, where cross-state variation in state tax privilege results in different levels of in-state ownership. In states with high tax-induced ownership segmentation, we find greater susceptibility of municipal bond yields to supply variation and heightened sensitivity of muni yields to local political uncertainty.
Keywords: clientele effects; fire sales; government debt; municipal bonds; ownership segmentation; public finance; taxes
JEL Codes: F30; G12; G15; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| tax privilege (H20) | municipal bond yields (H74) |
| tax-induced ownership segmentation (H23) | municipal bond yields (H74) |
| high tax privilege (H29) | sensitivity of bond yields to supply variations (E43) |
| high tax privilege (H29) | sensitivity of bond yields to local political risk (H74) |