This paper tests several competing models of municipal bond market equilibrium. It analyzes the influence of changes in both personal and corporate tax reforms on the yield spread between taxable and tax-exempt interest rates. The findings suggest that changes in personal income tax rates have...

This paper provides clear evidence that the yield spread between long-term taxable and tax-exempt bonds responds to changes in expected individual tax rates, a finding that refutes theories of municipal bond pricing that focus exclusively on commercial banks or other financial intermediaries....