The Relationship between Government Financial Condition and Expected Tax Rates Reflected in Municipal Bond Yields Sangkyun Park Yields on long-term municipal bonds reflect both current and expected future tax rates. The main empirical result is that a positive relationship exists between the expected tax rate and federal debt. Inflation also positively affects the expected tax rate, suggesting that investors may expect tight fiscal policies when inflation is high.
Qualitative results are similar across specifications, estimators, and sample periods.