Financial Transaction Tax Contributes to More Sustainability in Financial Markets

17 Pages Posted: 31 Mar 2012

See all articles by Dorothea Schaefer

Dorothea Schaefer

German Institute for Economic Research (DIW Berlin); JIBS

Date Written: March 1, 2012

Abstract

We argue that a financial transaction tax complements financial market regulation. With the tax, governments have an additional instrument at hand to influence trading activity. FTT aims to reduce regulatory arbitrage, flash trading, overactive portfolio management, excessive leverage and speculative transactions of financial institutions. The focus clearly addresses these classes of activities that have contributed to the financial crisis. However, if contrary to expectations harmful transactions will not be curbed, FFT generates at least large tax revenues that can contribute to cover the costs of the financial crisis. The trend towards centralized clearing and depositaries makes tax evasion more difficult than it was in the past. Tax avoidance is, of course, never completely avoidable. Therefore the effect of the tax should be monitored closely so that governments can react quickly if tax loopholes and tax induced geographical relocation plans of financial institutions come to light.

Keywords: Financial stability, transaction tax, public good, central depository

JEL Classification: G20, G24, G28

Suggested Citation

Schaefer, Dorothea, Financial Transaction Tax Contributes to More Sustainability in Financial Markets (March 1, 2012). DIW Berlin Discussion Paper No. 1198, Available at SSRN: https://ssrn.com/abstract=2030831 or http://dx.doi.org/10.2139/ssrn.2030831

Dorothea Schaefer (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany
+49 30 8978 9162 (Phone)
+49 30 8978 9104 (Fax)

JIBS ( email )

Jönköping, 55111
Sweden

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