Eh?
Tax exempt interest is of disproportional benefit to high earners. An example would be UK government savings certificates, which are regularly recommended as an exceptional deal for higher rate taxpayers.
Taxpayer A holds tax exempt government bonds, paying 2% pa.
If he pays the lowest marginal tax rate on savings of 10%, his equivalent rate of return on the certificates (what he'd have to earn elsewhere to get the same cash return) is 2%/0.9 = 2.22%.
Taxpayer B is a higher rate taxpayer, and his marginal tax rate is 40%.
So his equivalent rate of return on the same bonds is 2%/0.6 = 3.33%.
Opportunitycost! In the US however the tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gain rates: 0%, 15%, 25%, and 28%. The effective rate (0%, 15%, 25%, and 28%) is dependent on calculation of taxable adjusted gross income. IRS. The greater one's adjusted gross, the higher one's applicable rate on distributions. Tax owed on net gain (loss) is calculated and reported under separate cover.
I was expecting a simple example based on volume --purchase power and level of interest-bearing 'savings'. And perhaps effects of defined contribution schemes on adjusted gross income. That's the sort of financial incentive in play to increase investment participation among 'lower income' employees ...especially women. And that policy objective is a definingfeature of Obama campaign literature.
For example, Taxpayer A's gross income is $500K. Thanks to pre-tax payroll retirement plan participation, A contributes 15% of income to purchase Build America bonds. $75K
Taxpayer B's gross income is $125K. Thanks to pre-tax payroll retirement plan, B contributes 15% of income to purchase Build America bonds. $10.75K
Taxpayer C's gross income is $45K. Sadly, Taxpayer C's employer does not offer pre-tax payroll retirement plan. So C invests 15% of after-tax earnings in Build America bonds, paying, say, $5K online for 5 coupons.
Taxpayers A, B, C will each elect the 35% discount ("tax credit") of taxable BAB income and pay applicable tax rates (according to adjusted gross) on the remainder. Taxpayer C may well pay 0%, having collected the least amount of interest from the least amount of 'savings' at any rate.
Eh. The tax shibboleth avoided is two-fold.
(One broker's summary:) The first type of BABs provide a Federal subsidy to investors equal to 35% of the interest payable by the issuer ("Tax Credit BABs"). The second type of BABs provide a direct Federal subsidy that will be paid to state and local governments in an amount equal to 35% of the interest ("Direct Payment BABs"). Both types of BABs must be issued before January 1, 2011.
Note here that the issuer must choose either direct subsidy --or-- taxpayer discount. Further, AFAIKreadingIRSguidance, issuer is not prohibited in any case by fed PPIP terms from taxing interest earned by the bondholder. As if underscore the crucial benefit mechanism derives from defined contribution participation,
Build America Bonds are intended to expand the market for municipal bonds by attracting buyers that normally would not buy tax-exempt bonds [or taxable bonds]. Potential investors of BABs include investors in low income tax brackets, individual retirement accounts, public pension funds and foreign investors.
