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Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax

53 Pages Posted: 1 Mar 2014  

Juergen Huber

University of Innsbruck; University of Vienna - Department of Finance

Michael Kirchler

University of Innsbruck

Daniel Kleinlercher

University of Innsbruck

Matthias Sutter

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods; University of Cologne - Department of Economics

Abstract

While politically attractive in order to generate tax revenues, the effects of a financial transaction tax (FTT) are scientifically disputed, not the least because seemingly small details of its implementation may matter a lot. In this paper, we provide experimental evidence on the different effects of a FTT, depending on whether it is implemented as a tax on markets, on residents, or a combination of both. We find that the effects of a tax on markets are different from a tax on residents, with negative effects of a market tax on volatility and trading volume. The residence principle shows none of these undesired effects. In addition to studying aggregate market outcomes, we investigate how individual traders react to different forms of a FTT and whether their risk attitude is related to these reactions. We find no such relationship, meaning that a FTT affects traders with different risk tolerances similarly.

Keywords: Financial Transaction Tax, experimental finance, residence principle, market principle

JEL Classification: C91, G10, E62

Suggested Citation

Huber, Juergen and Kirchler, Michael and Kleinlercher, Daniel and Sutter, Matthias, Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax. IZA Discussion Paper No. 7978. Available at SSRN: https://ssrn.com/abstract=2403115

Juergen Huber (Contact Author)

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

University of Vienna - Department of Finance ( email )

Bruenner Strasse 72
Vienna, 1210
Austria

Michael Kirchler

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Daniel Kleinlercher

University of Innsbruck ( email )

Universitätsstraße 15
Innsbruck, Innsbruck 6020
Austria

Matthias Sutter

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

University of Cologne - Department of Economics

Cologne, 50923
Germany

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