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Should Speculators be Taxed?

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Author Info
Rohit Rahi ()
James Dow

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Abstract

A number of economists have supported the taxation of speculation in financial markets. We examine the welfare economics of such a tax in a model of trading in a financial market where some agents have superior information. We show that in some cases a tax on speculators may actually increase speculative profits. This occurs if the speculators benefit from less informative prices offsets the costs of the tax. The effect on the welfare of other agents depends on how revelation of information changes risk-sharing opportunities in the market. It is possible for the introduction of a tax to cause a Pareto improvement.KeyWords: Speculation, Hedging, Transactions Tax, Information Revelation

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Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp291.

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Date of creation: Apr 1998
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Handle: RePEc:fmg:fmgdps:dp291

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  1. Alexander Gümbel, 2000. "Myopic Traders, Efficiency and Taxation," OFRC Working Papers Series 2000fe05, Oxford Financial Research Centre. [Downloadable!]
  2. James Dow & Gary Gorton, 2006. "Noise Traders," NBER Working Papers 12256, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Foucault, Thierry & Themar, David & Sraer, David, 2008. "Individual investors and volatility," Les Cahiers de Recherche 899, HEC Paris. [Downloadable!]
    Other versions:
  4. Alexander Gümbel, 2005. "Should short-term speculators be taxed, or subsidised?," Annals of Finance, Springer, vol. 1(3), pages 327-348, 08. [Downloadable!] (restricted)
  5. Dupont, Dominique Y. & Lee, Gabriel S., 2003. "Effects of Securities Transaction Taxes on Depth and Bid-Ask Spread," Economics Series 132, Institute for Advanced Studies. [Downloadable!]
    Other versions:
  6. Alexander Gümbel & Oren Sussman, 2001. "Optimal exchange-rates: a market-microstructure approach," OFRC Working Papers Series 2001fe13, Oxford Financial Research Centre. [Downloadable!]
  7. Giovanni Cespa, 2000. "Short-term Investment and Equilibrium Multiplicity," Economics Working Papers 520, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2002. [Downloadable!]
    Other versions:
  8. Michael Hanke & Jürgen Huber & Michael Kirchler & Matthias Sutter, 2007. "The economic consequences of a Tobin tax - An experimental analysis," Working Papers 2007-18, Faculty of Economics and Statistics, University of Innsbruck. [Downloadable!]
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