This paper studies how heterogeneous tax clienteles shape bond term structure. I develop a joint term structure model of taxable and tax-exempt bonds with heterogeneous investors and limited arbitrage, and show that it resolves the large and long-standing “muni puzzle”: the tax-exempt municipal yield curve is steeper than the after-tax taxable yield curve. In the model equilibrium, investors with the greatest advantage holding exempt bonds price the short end, while less advantaged investors increasingly price the long end. This endogenous shift in marginal investors raises required yields on long-term tax-exempt bonds. Empirically, tax variation for the most advantaged investors matters most at the short end, while tax variation for less advantaged investors matters more at the long end, consistent with the model’s mechanism. The model also matches several observed investor allocation patterns. The results highlight tax heterogeneity in ownership as a key determinant of the relative pricing of taxable and tax-exempt bonds in term structure.