By Richard C Green, Carnegie Mellon University and Bernt Arne Oedegaard, Norwegian School of Management
Published in Journal of Finance, vol 52, pages 609-633, June 1997.
We investigate the impact of the Tax Reform Act of 1986 on the relative pricing of U.S. Treasury bonds. We obtain positive, statistically and economically significant estimates for the implicit tax rates of a ``representative'' investor in the late 1970's and early 1980's. After the 1986 Tax Reform the point estimates for the tax rate are close to zero. Tests for a regime shift associated with the 1986 Tax Reform support the hypothesis that this event largely eliminated tax effects from the term structure. We discuss both institutional and statutory explanations for this change.
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