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After the Flood Comes the Tax: European Road to Financial Transactions Tax

Forthcoming 1Q 2016: Chapter 10 in Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery, edited by Constantin Gurdgiev, Liam Leonard & Alejandra Maria Gonzalez-Perez, Emerald, ASEJ, vol 18; ISBN: 978-1-78560-743-1

28 Pages Posted: 11 Jan 2016  

Constantin Gurdgiev

Trinity College, Dublin; Middlebury Institute of International Studies at Monterey (MIIS)

Barry Murphy

Trinity College (Dublin)

Date Written: January 10, 2016

Abstract

This chapter presents the results of the comprehensive literature survey and supportive empirical assessment of the potential impacts of the Financial Transactions Tax recently adopted by the European Commission in response to the significant financial sector misallocations arising from the Global Financial Crisis. A survey of fifty academic articles relating to both Financial Transaction Taxes and Tobin Taxes shows that although a reduction in liquidity can be expected from such taxes, the impacts this will have on volatility and efficiency in a market is less obvious. A regression model quantifying what the possible effect of an introduction of a 0.1% tax on financial transactions would be on trading volumes and levels of volatility in the European equity market confirms the survey results in broader terms. These results can be used to infer that such a tax would likely increase volatility levels but may not have much effect on trading volumes. As a result the proposed tax can be viewed as an exercise in revenue generation but not as a macro-prudential tool for addressing potential future shocks and imbalances within the European financial system.

Keywords: Financial Transactions Tax, Tobin Tax, Macro-prudential Regulation, Global Financial Crisis

JEL Classification: E58, E61, E62, E65, F33, F38, F42, F65, G01, G12, G14, G28

Suggested Citation

Gurdgiev, Constantin and Murphy, Barry, After the Flood Comes the Tax: European Road to Financial Transactions Tax (January 10, 2016). Forthcoming 1Q 2016: Chapter 10 in Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery, edited by Constantin Gurdgiev, Liam Leonard & Alejandra Maria Gonzalez-Perez, Emerald, ASEJ, vol 18; ISBN: 978-1-78560-743-1. Available at SSRN: https://ssrn.com/abstract=2713332

Constantin Gurdgiev (Contact Author)

Trinity College, Dublin ( email )

Trinity College
Dublin 2

Middlebury Institute of International Studies at Monterey (MIIS) ( email )

460 Pierce St
Monterey, CA 93940
United States

Barry Murphy

Trinity College (Dublin) ( email )

2-3 College Green
Dublin, Leinster
Ireland

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