Municipal Bonds
How tax-free bonds meant to fund city infrastructure accidentally became a wealth transfer mechanism — benefiting rich investors more than the communities they serve.
A city needs to build a water treatment plant. It costs $100 million. The city lacks the cash. Banks could lend, but terms would be harsh and interest would spark public anger. Instead, the city issues bonds. Investors buy the promise of repayment from tax revenue. The ingenious part is federal tax law. Interest earned on municipal bonds is not taxed. A wealthy investor in a 40% tax bracket gets the equivalent of a higher yield than a corporate bond paying more interest. The city gets cheaper borrowing. The investor gets tax efficiency, but this creates strange dynamics. A wealthy person in a high tax bracket finds money bonds irresistible. They get paid by the government to lend to their own city.
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