Should Speculators Be Taxed?

Abstract

A number of economists have supported the taxation of speculation in financial markets. We examine the welfare economics of such a tax in a model of trading in a nancial market where some agents have superior information. We show that in some cases a tax on speculators may actually increase speculative profits. This occurs if the speculators' benefit from less informative prices offsets the costs of the tax. The effect on the welfare of other agents depends on how revelation of information changes risk-sharing opportunities in the market. It is possible for the introduction of a tax to cause a Pareto improvement.

JEL Classification: D60, D82, G14, G18