ARE THERE TAX EFFECTS IN THE RELATIVE PRICING OF US GOVERNMENT BONDS

We investigate the impact of the Tax Reform Act of 1986 on the relativ e pricing of U.S. Treasury bonds. We obtain positive statistically and economically significant estimates for the implicit tax rates of a '' representative'' investor in the late 1970s and early 1980s. After the 1986 Tax Reform, the point estimates for the tax rate are close to ze ro. Tests for a regime shift associated with the 1986 Tax Reform suppo rt the hypothesis that this event largely eliminated tax effects from the term structure. We discuss both institutional and statutory explan ations for this change.