An Empirical Note on Income Tax Evasion Behavior and the Real Interest Rate Yield on Municipal Bonds

This exploratory note investigate the impact of the aggregate degree of federal personal income tax evasion on the ex post real interest rate yield on high grade municipal bonds. Several nancial-market, economic, and statutory control variables are included in the system. Empirical estimation for the 1973-2012 study period leads to the preliminary conclusion that the ex post real interest rate yield on high grade tax-free municipal bonds is an increasing function of the aggregate degree of federal personal income tax evasion, implying that a higher degree of income tax evasion acts to raise the real cost of borrowing to cities, counties, and states and thereby acts to adversely aect the pace (and perhaps the geographic pattern) of urban and regional development across the U.S.