Dodging Robin Hood: Responses to France and Italy's Financial Transaction Taxes

85 Pages Posted: 2 Feb 2014 Last revised: 28 Aug 2016

See all articles by Maria Coelho

Maria Coelho

University of California, Berkeley, College of Letters & Science, Department of Economics

Date Written: August 26, 2016

Abstract

This paper analyzes the effect of the introduction of financial transaction taxes in equity markets in France and Italy in 2012 and 2013, respectively, on asset returns, trading volume and market volatility. Using two natural experiments in a difference-in-differences design, I identify bounds on elasticity estimates for three categories of avoidance channels: real substitution away from taxed assets, retiming (anticipation of transaction realizations and portfolio lock-in), and tax arbitrage (cross-platform and financial instrument shifting). I find large responses on all margins, that account for significantly lower revenues than projected. By far the strongest behavioral response comes from high-frequency trading lock-in on regulated exchanges, with a high tax elasticity of this type of turnover in the order of -9. In contrast, real substitution from taxed assets (measured by capitalization of tax costs in the short-run) is substantially smaller than would have otherwise been predicted by simple exogenous trading frequency models. Cross-border trading migration – formerly recognized as a major channel of evasion for these types of taxes, no longer seems to be a characteristic phenomenon, given broader opportunities for avoidance. The results shed light on overlooked features of optimal FTT design, suggesting they may be poor instruments for both revenue-raising and Pigouvian objectives.

Keywords: Financial Transactions Tax, Tax Shifting, Elasticity, Capital Markets, Natural Experiment

JEL Classification: H250, H230, G280, H320, G180

Suggested Citation

Coelho, Maria, Dodging Robin Hood: Responses to France and Italy's Financial Transaction Taxes (August 26, 2016). Available at SSRN: https://ssrn.com/abstract=2389166 or http://dx.doi.org/10.2139/ssrn.2389166

Maria Coelho (Contact Author)

University of California, Berkeley, College of Letters & Science, Department of Economics ( email )

Berkeley, CA
United States

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