Financial Transaction Taxes: Benefits and Cost
Christopher L. Culp
Compass Lexecon; Risk Management Consulting Services, Inc.; Johns Hopkins University - Institute for Applied Economics, Global Health, and Study of Business Enterprise; University of Bern - Institute for Financial Management
March 16, 2010
Proponents of financial transaction taxes (“FTTs”) claim that such taxes will raise revenue and discourage “destabilizing speculation.” Opponents of FTTs claim that they are unlikely to achieve their stated goals and that FTTs will harm the performance of financial markets by reducing market depth and liquidity, increase market volatility, put downward pressure on asset prices, increase the costs of raising capital, and diminish the international competitiveness of the U.S. financial services industry. This paper evaluates the likely economic consequences of the establishment of FTTs in the United States based on the economic literature and empirical research on various FTTs that have been imposed throughout the world in recent decades. The research indicates that FTTs are unlikely to generate significant revenue and are likely to interfere with the performance of U.S. financial markets. Specifically: (i) the dual goals of FTTs to deter speculation and raise revenue are irreconcilably at odds with one another; (ii) FTTs raise the cost of financial transactions often by significant amounts; (iii) FTTs likely will have adverse impacts on asset prices and will engender commensurate increases in the costs of capital for many corporations; (iv) FTTs likely will divert trading to untaxed jurisdictions and financial markets; (v) FTTs would not necessarily reduce price volatility and, in some instances, can increase price volatility as a result of reduced liquidity; and (vi) FTTs are not expected to affect managerial decision making.
working papers series
Date posted: March 22, 2010 ; Last revised: March 28, 2012
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