If their only concern were the cost of issuing municipal debt, how would you expect the mayors of most U.S. cities to respond to a revenue-neutral change in the federal income tax that sharply lowered the top marginal tax rate?
A) Favorably, since this will significantly increase the demand for municipal bonds.
B) Unfavorably, the demand for municipal bonds will fall and their yields will increase.
C) Favorably, the price of municipal bonds should increase and their yields fall.
D) No reaction, this should have no impact on municipal bonds at all.

Question

Quizplus · Accepted Answer

A revenue-neutral change in the federal income tax that sharply lowers the top marginal tax rate would reduce demand for municipal bonds, as investors will be less inclined to invest in tax-exempt securities with lower tax rates. As a result, the yields on municipal bonds would increase, making their issuance costlier for cities. Therefore, the mayors of most U.S. cities would respond unfavorably to this change as it would increase the cost of issuing municipal debt.

If Their Only Concern Were the Cost of Issuing Municipal