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DriftingDudeSC
Joined: 13 Jul 2008
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jeffyscott
Joined: 27 Feb 2007
Posts: 2351
Location: Wisconsin
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 Posted: Sat Nov 07, 2009 7:35 am Post subject: |
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The net impact to the Federal government seems no different than the conventional muni bonds.Tax exempt munis are bought by those in high tax brackets, eg. 35%. Because of this they pay a lower interest rate, perhaps around 35% lower. If they were not tax exempt they would have to pay higher interest and the federal government would collect taxes on the interest.
I think the build america method of a direct subsidy makes more sense as it opens up a much larger market for the bonds, rather than restricting them to being sold to only those in the highest tax brackets. It probably does not need to be a 35% subsidy, though.
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Jeffy
press on, regardless - John C. Bogle |
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duhmel1
Joined: 10 Jul 2007
Posts: 287
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| Posted: Sat Nov 07, 2009 11:46 am Post subject: Re: The Build America Boondoggle |
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Net effect is another tax on the 'rich' |
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Jack
Joined: 27 Feb 2007
Posts: 1077
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| Posted: Sat Nov 07, 2009 8:19 pm Post subject: Re: The Build America Boondoggle |
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| duhmel1 wrote: | | Net effect is another tax on the 'rich' |
Actually you have it exactly backwards. Regular muni bonds have been a subsidy to the rich. Because the tax deduction of regular munis benefit the rich you have a market inefficiency (a liquidity premium or auction premium) in which munis provide a higher after tax return than taxables. This higher yield is paid for by the issuing municipalities and the local tax payers through regressive sales taxes for example. That is a net transfer of wealth from the poor to the rich.
There are two types of Build America bonds. One pays the subsidy directly to the bond holder and the other pays the subsidy to the bond issuer. For the U.S. government the net cost is approximately the same.
These two types of Build America bonds turn out to be a perfect test of the inefficiency of traditional muni bonds because it gives municipalities a choice. Most municipalities have chosen to take the subsidy themselves and pay higher interest rates through taxable bonds. The reason they have chosen this is that the market for taxable bonds is much more efficient because it includes non-tax paying institutions like pension funds and foreigners. A more competitive auction lowers the cost of borrowing. The net effect is that taxable bonds are lower cost to municipalities than bonds in which the bondholder gets a tax deduction.
This isn't a government boondoggle. It saves municipalities and local taxpayers money. If all muni bonds were replaced by Build America bonds, all taxpayers in aggregate would pay lower taxes. The only complaint is that rich people must now compete in a much larger market at auction which decreases their yield. |
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nisiprius
Joined: 26 Jul 2007
Posts: 6999
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Sat Nov 07, 2009 8:32 pm Post subject: |
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The article mentions the O-word pretty soon--as the second word in the article, following the word "the." It seems to be an opinion piece. It doesn't seem to have a lot to say about these bonds as an investment, and mostly is a criticism of the government for doing something that, the writer feels sure, "the bond market – now that it's healthy again – could well handle on its own."
Do I want these in my portfolio? Do I not want them? Are they already in the Total Bond Market fund? From the investor's point of view are they different from ordinary municipal bonds?
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