8 ms·

Mitt Romney had such a low income tax because the majority of his earnings was through municipal bonds. (which are not taxed) I rolled my eyes when the media s

Mitt Romney had such a low income tax because the majority of his earnings was through municipal bonds. (which are not taxed) I rolled my eyes when the media said he was 'taking advantage of a loophole' and some people floated removing that 'loophole'. That would have been a blunder of blunders.

chii 8y ago
so the the question becomes 'why municiple bonds are not taxed?'
- jdhn 8y ago
  Because if they were taxed, municipalities would see their interest rates skyrocket. Having municipal bonds be free of taxation benefits the investor (they don't pay income tax), the municipality (more people will be interested in the bonds, hence lower interest rates), and the citizens of the municipality (their tax rates won't go up as quickly).
  - treis 8y ago
    Seems like a wealth transfer from municipalities that don't borrow heavily to those that do.
    - jdhn 8y ago
      I agree. However, I can't see the situation changing anytime soon.
    - lisper 8y ago
      That's true, but you seem to imply that this is a bad thing. It's not. A municipality that does not borrow must either tax its current citizens to raise the money to pay for capital expenditures, or stop investing in infrastructure. Neither option produces vibrant economies, particularly in a country where people are relatively free to move.
      - beguiledfoil 8y ago
        Or rely on transfers from the federal government.. As most already do.. Munis are a timebomb, imho.
        lisper 8y ago
        The entire economy of the world is a time bomb since it is predicated on exponential growth continuing indefinitely into the future. That cannot happen, so sooner or later we need to radically shift gears or we're in for a world of hurt. It's a question of when, not if. But since the current regime has been working for several millennia now, it is hard to make the case that The End is Near. It may or may not be.
        beguiledfoil 8y ago
        >The entire economy of the world is a time bomb since it is predicated on exponential growth continuing indefinitely into the future. Adding zeros is not that hard. Munis have actual tax bases and actual obligations and those seem out of step in some situations. That muni debt will be mispriced because of tax incentives seems obvious. Municipalities are in the same spot that Greece or Italy is in. They have debt in a currency they do not issue. They cannot devalue or inflate that debt away. Therefore they have to manage their debt as a corporation or state would, but they are much smaller and less flexible. Bad buy.
      - greedo 8y ago
        It's not like munis are a gift; they are repaid through taxes on the citizens of the city/county/state. TANSTAAFL.
        lisper 8y ago
        Right, but those citizens are paying less than they otherwise would if the lenders were taxes on the proceeds. That discount could be considered a "gift" from the federal government to both local governments and lenders, whose taxes are lower than they would be if muni income were taxed.
- eftychis 8y ago
  It is the simplest and only way to make them competitive for an investor. Anyone can buy them (that can invest in the U.S. anyways). If you tax them, nobody would buy them (risk versus earnings). To become a competitive and practical choice, and since it is an option for this investment, they make them tax free. Otherwise they would have to increase the interest to an unrealistic amount; at that point there would be no lending option practically. (Yes, investors only buy municipal bonds for the tax free trait to be honest. Not a loophole, just giving your money earlier to the government if you think about it from an opportunity cost perspective.) Think of it as a way to take money from state and federal taxes and to move them to municipalities etc. It's either that or the government above would have to pick up the slack.

chii 8y ago

so the the question becomes 'why municiple bonds are not taxed?'

jdhn 8y ago
Because if they were taxed, municipalities would see their interest rates skyrocket. Having municipal bonds be free of taxation benefits the investor (they don't pay income tax), the municipality (more people will be interested in the bonds, hence lower interest rates), and the citizens of the municipality (their tax rates won't go up as quickly).
- treis 8y ago
  Seems like a wealth transfer from municipalities that don't borrow heavily to those that do.
  - jdhn 8y ago
    I agree. However, I can't see the situation changing anytime soon.
  - lisper 8y ago
    That's true, but you seem to imply that this is a bad thing. It's not. A municipality that does not borrow must either tax its current citizens to raise the money to pay for capital expenditures, or stop investing in infrastructure. Neither option produces vibrant economies, particularly in a country where people are relatively free to move.
    - beguiledfoil 8y ago
      Or rely on transfers from the federal government.. As most already do.. Munis are a timebomb, imho.
      - lisper 8y ago
        The entire economy of the world is a time bomb since it is predicated on exponential growth continuing indefinitely into the future. That cannot happen, so sooner or later we need to radically shift gears or we're in for a world of hurt. It's a question of when, not if. But since the current regime has been working for several millennia now, it is hard to make the case that The End is Near. It may or may not be.
        beguiledfoil 8y ago
        >The entire economy of the world is a time bomb since it is predicated on exponential growth continuing indefinitely into the future. Adding zeros is not that hard. Munis have actual tax bases and actual obligations and those seem out of step in some situations. That muni debt will be mispriced because of tax incentives seems obvious. Municipalities are in the same spot that Greece or Italy is in. They have debt in a currency they do not issue. They cannot devalue or inflate that debt away. Therefore they have to manage their debt as a corporation or state would, but they are much smaller and less flexible. Bad buy.
    - greedo 8y ago
      It's not like munis are a gift; they are repaid through taxes on the citizens of the city/county/state. TANSTAAFL.
      - lisper 8y ago
        Right, but those citizens are paying less than they otherwise would if the lenders were taxes on the proceeds. That discount could be considered a "gift" from the federal government to both local governments and lenders, whose taxes are lower than they would be if muni income were taxed.
eftychis 8y ago
It is the simplest and only way to make them competitive for an investor. Anyone can buy them (that can invest in the U.S. anyways). If you tax them, nobody would buy them (risk versus earnings). To become a competitive and practical choice, and since it is an option for this investment, they make them tax free. Otherwise they would have to increase the interest to an unrealistic amount; at that point there would be no lending option practically. (Yes, investors only buy municipal bonds for the tax free trait to be honest. Not a loophole, just giving your money earlier to the government if you think about it from an opportunity cost perspective.) Think of it as a way to take money from state and federal taxes and to move them to municipalities etc. It's either that or the government above would have to pick up the slack.