Question: Assume you face a progressive tax rate system Show that
Assume you face a progressive tax rate system. Show that it does not pay for you to reduce your explicit tax rate on fully taxable income to below the implicit tax rate on tax exempt securities. Under what conditions would you choose not to engage in clientele based arbitrage when your marginal tax rate exceeds the implicit tax rate on tax exempt securities, even absent restrictions on the deductibility of interest on loans?
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