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Build America Bonds: A Transfer from the Taxpayer to the Non-Taxpayer

by Matt Mitchell on September 2, 2010

in Stimulus, Tax and Budget

The [Build America Bonds] program can be interpreted as a wealth transfer from the natural holders of municipal bonds, who are individual U.S. taxpayers, to corporations, pension funds, and foreign investors not subject to individual U.S. income taxes.

That is Andrew Ang, Vineer Bhansali, and Yuhang Xing in a new NBER working paper.

The BABs were a part of Stimulus II. They are a new way for municipalities to finance capital projects. Like the traditional method, BABs effectively subsidize state and local borrowing, but the mechanics are slightly different. Traditionally, the interest on muni bonds is not subject to federal taxation. BABs are taxed, but the federal government subsidizes 35 percent of the interest payment. 

(Note that under both cases, local governments receive a special privelege that private borrowers do not.) Ang, Bhansali and Xing trace out some of the less-obvious consequences of shifting the method of finance.

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