Question: 1. Assume a city gov't plans to sell $1000 in bonds and without any special tax treatment would have to pay 10%. Assume 2 bond buyers H (high-income) and L (low income).
Am't wants to invest MTR
H 800 33%
L 200 15%
a. Show that the exclusion of municipal bond interest from income taxation is equivalent to a government subsidy of state and local capital spending.
b. Explain why it costs the government (taxpayers) more to subsidize state and local capital spending through this exclusion than it would be to give the subsidy directly.
2.Explain what economists mean by the term "tax expenditure" and why the exclusion of municipal bond interest is an example of a tax expenditure.
3. Why is a floor on deductions considered preferable to a ceiling on deductions?