More on Affluent Bond-holders.

Jim Glass, commenting on the recent New York Times story on affluent non-taxpayers, reminds us that bond-holders implicitly pay taxes on exempt interest in the form of lower interest.

As of this writing the yield on 10-year AAA-rated fully taxable bonds is 4.66%, and that on 10-year AAA-rated tax-exempt bonds 3.71%

Since 3.71% is 20% less than the 4.66% that investors could get on same-risk, same-maturity bonds elsewhere, they are paying an implicit 20% income tax to the state issuer of the 3.71% state bonds. (Which they do voluntarily, since the 20% is less than the combined federal and state tax rate that they'd pay on fully taxable bonds.)

The Times thinks government can have it's cake (bonds) and eat it (taxes) too.

Deficits should not be considered as a failure to collect taxes. Voluntary bonds sales are the most progressive means for government to raise money. The people who will pay the most (lowest interest) for government bonds are the people who least need their money for other use.