schuyler74 wrote: Similarly, high-tax investors will raise the price for a Municipal Bond higher than a low-tax investor should be willing to pay for it since its slightly lower returns (vis-à-vis a standard taxable Bond) offer the latter no benefit.
I don't think you can conclude that.
Yes, high-tax investors will be willing to pay more and so the price will rise for low-tax investors. This is surely true.
Still, I don't think it's possible to conclude that the price is higher than what the low-tax investor should be willing to pay. I just don't see this conclusion as warranted.
The reason is we haven't looked at pricing close enough. Consider that foreigners investor who (as of 2011) own 47% of the debt held by the public and 32% of the total US debt aren't in the market for munis. So while a low-tax investor has to contend with high-tax investors pushing up the price, they also don't have to contend with foreign demand.
Thus even if a municipal bond is relatively expensive to a low-tax investor, it may be comparable or cheaper than a non-muni alternative.
I personally do hold munis but am not a high-tax investor because the return is higher than anything else available to me. Am I getting substandard returns? What alternative do I have?
The real risk to me is not paying too much because of high-tax investors upping the price. The real risk is that the muni market will collapse because of something economic or legal.
Actually, I honestly don't see anyone else as getting a higher net than me. How is my net and a high-tax investor's net different? Neither of us are paying taxes on it right? Our net is exactly the same. Exactly.
It's true I have other options comparably favorable to a high-tax investor (because they would have to pay a higher tax rate on it), but given that the muni is the best alternative for both the high-tax investor and I, and we are receiving the exact same after tax return on the investment, how can it be said that I am underperforming the market? OK call me crazy or argumentative but your analysis is not helpful for me to think about what I should do.
Sorry I just don't get it.