Why don investors have to pay taxes on tax-exempt municipal bonds?
Since the development of the federal tax system authorized by the Sixteenth Amendment to the Constitution in 1913, the federal government has chosen not to directly tax the income from such bonds. Within the American legal and political tradition, it has been thought that taxing the interest on municipal securities would be a burden to state governments and interfere with the state’s ability to borrow money. The Tax Reform Act of 1986 continues the basic exemption from direct taxation for interest on municipal securities set forth in the Internal Revenue Code.
