TEBs are hailed in the U.S. as a cheap source of municipal funding, but in our view, the instruments are severely flawed with inefficiency and inequity. For one, in theory, the yield on TEBs should settle at a level that is equivalent to the after-tax return on other competing taxable instruments. This equilibration normally occurs at the level of the average marginal tax rate. As a result, individuals with higher-than-average tax rates enjoy disproportionately higher returns by investing in TEBs, while those with below-average tax rates would actually be at a disadvantage in purchasing TEBs rather than an equivalent taxable bond. For illustrative purposes, the average federal marginal tax rate in Canada is 22 per cent and the yield on a taxable 10-year government bond at the start of the year was 4.8 per cent. Therefore, the equivalent yield for TEBs would be 3.74 per cent in theory. Taxpayers in the highest bracket (29 per cent) would obtain after-tax cash of $3.74 per every $ 100 bond year, compared to $3.41 if they bought the taxable bond. That means the taxpayer has retained an additional $0.33 per $100 bond year by purchasing the TEB. In contrast, individuals in the lowest income tax bracket of 16 per cent would obtain after-tax cash of $4.03 per $100 bond year on a regular taxable bond, meaning they would forgo $0.29 cash per $ 100 bond year if they purchased TEBs instead of taxable bonds. TEBs clearly favour those in least need of a tax break - high income earners - making it a regressive application of a federal tax-subsidy