Taxpayer A purchased $ 100,000 of corporate bonds yielding 12.5% per annum; the interest income from these bonds is taxed at a rate of 28%. Taxpayer B purchased $ 100,000 of municipal bonds yielding 9% per annum. The interest from these bonds is tax exempt. The bonds have similar maturities and risk. What is the after tax rate of return earned by each taxpayer? Is taxpayer B paying taxes in any sense here?
a. Who are the taxes being paid to?
b. What is the implied tax rate?