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
Date Written: July 16, 2016
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: Suggested Citation