The Tax Treatment of Government Bonds
IMF Working Papers, March 1, 1997
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- The Tax Treatment of Government Bonds
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Bibliographic details
- Authors: John Norregaard
- Published: March 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451844221.001
Overview and central finding
- Governments compete with other users of financial capital to finance fiscal deficits at a reasonable cost.
- Governments are the only debt suppliers that can determine the taxation of debt instruments they issue.
- Following an overview of the current tax treatment of government bonds in OECD countries, the paper argues that—on purely economic grounds—there are no reasons for exempting interest on government bonds.
- Administrative difficulties in capturing interest on many other debt instruments in the tax net may, however, provide a rationale for exempting interest on government bonds.
Summary of argument and analysis
- The paper presents the present provisions of taxation of interest from government bonds in OECD countries.
- The economic argument: no intrinsic economic justification for exempting interest on government bonds.
- The administrative argument: practical difficulties in taxing interest on a variety of debt instruments can justify exemptions or special treatment for government bond interest.
Policy implications and considerations
- On economic grounds, policymakers should not treat interest on government bonds as automatically exempt from taxation.
- Policy decisions may be justified by administrative feasibility:
- If capturing interest on many other debt instruments in the tax net is administratively difficult, exemptions for government bond interest could be defensible.
- Consider trade-offs between reducing fiscal financing costs and maintaining tax neutrality across debt instruments.
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- The Tax Treatment of Government Bonds