Working Paper: NBER ID: w1358
Authors: Joe Peek; James A. Wilcox
Abstract: This article demonstrates why the procedures used in previous studies do not permit inference about the relationship between interestrates and taxes. We present a model that leads to direct estimates of the degree to which interest rates respond to changes in tax rates. The empirical results imply that the adjustment of taxable interest rates has been large enough to render after-tax yields impervious to tax rate changes. Further, tax-exempt yields are unaffected by changes in taxrates. Thus, there is no evidence of fiscal illusion in interest rates.
Keywords: Fiscal Illusion; Interest Rates; Taxation
JEL Codes: E43; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Tax Rates (H29) | Nominal Interest Rates (E43) |
| Tax Rates (H29) | After-Tax Yields (H29) |
| Nominal Interest Rates (E43) | Tax Rates (H29) |
| Nominal Interest Rates (E43) | Fiscal Illusion Parameter (H31) |
| Fiscal Illusion Parameter (H31) | Tax Rates (H29) |
| Tax Changes (H26) | Nominal Interest Rates (E43) |