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Financial transaction tax: Small is beautiful

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  • Zsolt Darvas

    ()
    (Bruegel Brussels Belgium, Corvinus University of Budapest Budapest Hungary, Institute of Economics of the Hungarian Academy of Sciences Budapest Hungary)

  • Jakob Weizsäcker

    ()
    (Thüringer Wirtschaftsministerium Department for Economic Policy and Tourism Erfurt Germany, Bruegel Brussels Belgium)

Abstract

The case for taxing financial transactions merely to raise more revenues from the financial sector is not particularly strong. Better alternatives to tax the financial sector are likely to be available. However, a tax on financial transactions could be justified in order to limit socially undesirable transactions when more direct means of doing so are unavailable for political or practical reasons. Some financial transactions are indeed likely to do more harm than good, especially when they contribute to the systemic risk of the financial system. However, such a financial transaction tax should be very small, much smaller than the negative externalities in question, because it is a blunt instrument that also drives out socially useful transactions. There is a case for taxing over-the-counter derivative transactions at a somewhat higher rate than exchange-based derivative transactions. More targeted remedies to drive out socially undesirable transactions should be sought in parallel, which would allow, after their implementation, to reduce or even phase out financial transaction taxes

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Bibliographic Info

Article provided by Akadémiai Kiadó, Hungary in its journal Society and Economy.

Volume (Year): 33 (2011)
Issue (Month): 3 (December)
Pages: 449-473

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Handle: RePEc:aka:soceco:v:33:y:2011:i:3:p:449-473

Note: The paper benefited from comments and suggestions from many colleagues, for which the authors are grateful. Juan Ignacio Aldasoro provided excellent research assistance. An earlier version of this paper was written at the request of the European Parliament’s Economic and Monetary Affairs Committee. The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the official position of the European Parliament
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Related research

Keywords: transaction tax; Tobin tax; financial transactions; global financial crisis; financial regulation;

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References

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  1. Stephan Schulmeister, 2009. "A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal," WIFO Working Papers 344, WIFO.
  2. Mannaro, Katiuscia & Marchesi, Michele & Setzu, Alessio, 2008. "Using an artificial financial market for assessing the impact of Tobin-like transaction taxes," Journal of Economic Behavior & Organization, Elsevier, vol. 67(2), pages 445-462, August.
  3. Steve Bond & Mike Hawkins & Alexander Klemm, 2005. "Stamp Duty on Shares and Its Effect on Share Prices," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(3), pages 275-, November.
  4. Zsolt Darvas, 2008. "Leveraged carry trade portfolios," Working Papers 0802, Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest, revised 18 Jun 2008.
  5. Robert Pollin & Dean Baker & Marc Schaberg, 2003. "Securities Transaction Taxes for U.S. Financial Markets," Eastern Economic Journal, Eastern Economic Association, vol. 29(4), pages 527-558, Fall.
  6. Badi Baltagi & Dong Li & Qi Li, 2006. "Transaction tax and stock market behavior: evidence from an emerging market," Empirical Economics, Springer, vol. 31(2), pages 393-408, June.
  7. Victoria Saporta & Kamhon Kan, 1997. "The effects of Stamp Duty on the Level and Volatility of Equity Prices," Bank of England working papers 71, Bank of England.
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Cited by:
  1. Copenhagen Economics, 2011. "Elasticities of Financial Instruments, Profits and Remuneration," Taxation Papers 30, Directorate General Taxation and Customs Union, European Commission.
  2. Vinko Zlati\'c & Giampaolo Gabbi & Hrvoje Abraham, 2014. "Reduction of systemic risk by means of Pigouvian taxation," Papers 1406.5817, arXiv.org.

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