ranges for the total real returns on Treasury bonds and the total real re-
turns on municipal bonds, which are exempt from federal taxes, are dis-
played. Since municipal bond yields are generally lower than Treasury
bond yields, the total return on Treasuries is higher than municipal
bonds for untaxed investors, but lower for most taxable investors.
The historical real after-tax returns for four tax brackets are dis-
played in Table 5-1. Since 1913, when the federal income tax was insti-
tuted, the after-tax real return on stocks has ranged from 6.3 percent for
untaxed investors to 2.8 percent for investors in the highest bracket who
do not defer their capital gains. For taxable bonds, the real annual return
ranges from 1.9 to –0.7 percent, and in bills from 0.5 to –2.3 percent, de-
pending on the tax bracket. Municipal bonds have yielded a 0.9 percent
annual real return since the income tax was instituted.
68 PART 1 The Verdict of History
FIGURE 5-2
After-Tax Real Return for Various Federal Tax Brackets, 1802 through December 2006