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The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds

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  • Landon, Stuart
Abstract
This paper provides estimates of the extent to which corporate and personal income taxes are capitalized in bond prices. The methodology yields estimates of the degree of tax capitalization, rather than an implied tax rate. This makes it straightforward to identify the marginal investor and test for changes in tax capitalization. The empirical approach also makes it unnecessary to jointly estimate the degree of tax capitalization and the entire yield curve. Corporate taxes are found to have been fully capitalized in pre-tax Government of Canada bond yields during the period 1986-1993. Since 1994, taxes have not been capitalized in yields. These results are consistent with the existence of a marginal investor, but the identity of the marginal investor changed from a financial sector firm to a non-taxed entity in the early 1990s.

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  • Landon, Stuart, 2009. "The capitalization of taxes in bond prices: Evidence from the market for Government of Canada bonds," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2175-2184, December.
    • Handle: RePEc:eee:jbfina:v:33:y:2009:i:12:p:2175-2184
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    2. Galvani, Valentina & Li, Lifang, 2018. "The Momentum Effect for Canadian Corporate Bonds," Working Papers 2018-16, University of Alberta, Department of Economics.

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    More about this item

    Keywords

    Tax capitalization Bond yields;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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