NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Degree of Fiscal Illusion in Interest Rates: Some Direct Estimates

Joe Peek, James A. Wilcox

NBER Working Paper No. 1358 (Also Reprint No. r0587)
Issued in May 1984
NBER Program(s):   ME

This article demonstrates why the procedures used in previous studies do not permit inference about the relationship between interestrates and taxes. We present a model that leads to direct estimates of the degree to which interest rates respond to changes in tax rates. The empirical results imply that the adjustment of taxable interest rates has been large enough to render after-tax yields impervious to tax rate changes. Further, tax-exempt yields are unaffected by changes in taxrates. Thus, there is no evidence of fiscal illusion in interest rates.

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Document Object Identifier (DOI): 10.3386/w1358

Published: Peek Joe and James A. Wilcox. "The Degree of Fiscal Illusion in Interest Rates: Some Direct Estimates." American Economic Review, Vol. 74, No. 5, ( December 1984), pp.1061 1066.

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