Dodging Robin Hood: Responses to France and Italy's Financial Transaction Taxes
85 Pages Posted: 2 Feb 2014 Last revised: 28 Aug 2016
Date Written: August 26, 2016
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
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