The Societal Benefit of a Financial Transaction Tax

University of Zurich, Department of Economics, Working Paper No. 176

37 Pages Posted: 24 Oct 2014 Last revised: 20 Jul 2016

See all articles by Aleksander Berentsen

Aleksander Berentsen

University of Basel - Faculty of Business and Economics; CESifo (Center for Economic Studies and Ifo Institute)

Samuel Huber

University of Basel

Alessandro Marchesiani

University of Bath - Department of Economics

Date Written: July 16, 2016

Abstract

We provide a novel justification for a financial transaction tax for economies, where agents face stochastic consumption opportunities. A financial transaction tax makes it more costly for agents to readjust their portfolios of liquid and illiquid assets in response to these liquidity shocks, which increases the demand for - and the price of liquid assets. The higher price improves liquidity insurance and welfare for other market participants. We calibrate the model to U.S. data and find that the optimal financial transaction tax is 1.6 percent and that it reduces the volume of financial trading by 17 percent.

Keywords: Tobin tax, financial transaction tax, OTC trading

JEL Classification: E44, E50, G18

Suggested Citation

Berentsen, Aleksander and Huber, Samuel and Marchesiani, Alessandro, The Societal Benefit of a Financial Transaction Tax (July 16, 2016). University of Zurich, Department of Economics, Working Paper No. 176, Available at SSRN: https://ssrn.com/abstract=2513370 or http://dx.doi.org/10.2139/ssrn.2513370

Aleksander Berentsen (Contact Author)

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Samuel Huber

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Alessandro Marchesiani

University of Bath - Department of Economics ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

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