Question

The American Taxpayer Relief Act of 2012 increased taxes on the top 1% to 2% of income earners from 35% to 39.6%. Supply and demand analysis predicts the impact of this change was a ________ interest rate on municipal bonds and a ________ interest rate on Treasury bonds.

would it be lower for interest rates on municipal bonds and lower on interest rates on Treasury bonds as well?

Answer 1

The American Taxpayer Relief Act of 2012 increased taxes on the top 1% to 2% of income earners from 35% to 39.6%. Supply and demand analysis predicts the impact of this change was a lower interest rate on municipal bonds and a higher interest rate on Treasury bonds.

Explanation:

Interest rates on Treasury bonds will rise due to various reasons. First, the benefits of the increased taxes can be passed on to the treasury bond holders. Treasury bonds and income taxes are under the Federal Government. Second, the government will have to issue fewer bonds - since they have higher revenues from taxes. Demand for such bonds will still be high, and this will raise their interest rates. Third, these bonds also may offer income tax deductions, raising their demand.

The substitute product, municipal bonds, are not funded by the income taxes. However, as demand for treasury bonds will rise, people will shift away from municipal bonds. This will lower their interest rates.