The issue of how taxes affect the prices of assets is an important issue in finance, accounting, and economics. In theoretical models examining the effect of taxes on different assets and different agents (for example, Auerbach and King, 1983; Dybvig and Ross, 1986; Dammon and Green, 1987), taxes induce clientele effects in the asset holdings of agents and the existence of different tax rates affects relative asset prices. In reality, estimating implicit tax rates on assets is more difficult than theoretical models suggest because of the myriad ways the tax code can be distorted, large investor heterogeneity, and the many different degrees of market frictions faced by different investors. These real-world issues are especially true for investigating if the tax rates faced by individual investors, as opposed to the tax rates faced by corporations, affect asset prices because financial markets are often dominated by financial institutions and dealers. For example, studies using equities find little evidence of implicit tax effects (see, among many others, Boyd and Jagannathan, 1994; Fama and French, 1998; Erickson and Maydew, 1998). In Treasury markets, Green and Ødegaard (1993) find that after the 1986 tax reform, the marginal investor in Treasury bonds has a marginal tax rate of zero.
In contrast to government bonds and equities, the municipal bond market is well suited to evaluate how individual tax rates affect asset prices. First, the municipal bond market is large; the Flow of Funds data from the Federal Reserve show that at the end of the first quarter of 2007, there were $2.5 trillion outstanding municipal securities compared to $4.8 trillion Treasuries. Second, municipal bonds are attractive to high net worth individuals. Not surprisingly, individual holdings of municipal bonds dominate the holdings of other corporate entities. At the end of the first quarter of 2007, individuals held 70% of all outstanding municipal bonds. Individuals directly held 36% of all municipal securities outstanding and held 34% through mutual funds, closed-end funds, and other taxable pass-through intermediaries.
On March 4, 2011, the New York Times described a settlement (“settlement”) proposed by a consortium of state attorneys general (AGs) to large mortgage servicers. The claims to be settled reportedly relate to failures to follow existing procedural rules relating to the foreclosure process. The settlement would make dramatic changes in those rules, and reportedly require a mortgage loan principal reduction program of $20 to 25 billion. The purpose of this study is to review how such a settlement would affect the housing market and the larger economy.
The period 2005 through mid-2007 saw an explosion of leveraged buyout (LBO) activity that eclipsed even the LBO boom of the 1980s. In 2006 alone, approximately three percent of the U.S. stock market (by market capitalization) was taken private in LBOs (Kaplan and Stromberg (2009)). This form of acquisition dramatically transforms the acquired company’s structure, leaving it with more concentrated ownership, greater financial leverage, few financial reporting requirements, and no
