The Financial Transactions Tax versus (?) the Financial Activities Tax

35 Pages Posted: 22 Jan 2012 Last revised: 6 Mar 2012

Daniel Shaviro

New York University School of Law

Date Written: March 1, 2012

Abstract

In both Europe and the United States, there has been much recent debate regarding whether, in response to the 2008 financial crisis, one should enact a financial transactions tax (FTT) or a financial activities tax (FAT) – commonly viewed as mutually exclusive alternatives. This article evaluates these two alternative instruments, focusing on recent proposals by the European Commission and the International Monetary Fund. It concludes that the case for enacting an FAT is considerably stronger than that for an FTT, mainly because the FAT focuses on a broad “net” measure, rather than a narrow “gross” measure, of financial sector activity.

The article further concludes that a rationale for the FTT not emphasized by the European Commission – its addressing wasteful over-investment in the activity of seeking trading gains at the expense of other traders – could conceivably support its enactment, though it is uncertain that the social benefits would exceed the costs. The issues raised by this alternative rationale are independent of whether or not an FAT has been enacted. Finally, the desirability of enacting an FTT may be affected by broader political economy constraints on revenue-raising and on the pursuit of greater tax progressivity by alternative (including clearly superior) means.

Keywords: financial sector taxation, financial transactions tax, financial activities tax

JEL Classification: G20, H20, H21, H23, H25

Suggested Citation

Shaviro, Daniel, The Financial Transactions Tax versus (?) the Financial Activities Tax (March 1, 2012). NYU Law and Economics Research Paper No. 12-04. Available at SSRN: https://ssrn.com/abstract=1989163 or http://dx.doi.org/10.2139/ssrn.1989163

Daniel Shaviro (Contact Author)

New York University School of Law ( email )

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