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Financial Transaction Tax: Small is Beautiful

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  • Zsolt Darvas
  • Jakob von Weizsäcker

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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File URL: http://web.uni-corvinus.hu/matkg/working_papers/wp_2010_1_darvas_weizsacker.pdf
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Bibliographic Info

Paper provided by Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest in its series Working Papers with number 1001.

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Length: 22 pages
Date of creation: 11 Jan 2010
Date of revision: 31 Aug 2010
Handle: RePEc:mkg:wpaper:1001

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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. 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.
  2. Marc Schaberg & Dean Baker & Robert Pollin, 2002. "Securities Transaction Taxes for U.S. Financial Markets," Working Papers wp20, Political Economy Research Institute, University of Massachusetts at Amherst.
  3. Stephan Schulmeister, 2009. "A General Financial Transaction Tax: A Short Cut of the Pros, the Cons and a Proposal," WIFO Working Papers 344, WIFO.
  4. Steve Bond & Mike Hawkins & Alexander Klemm, 2004. "Stamp duty on shares and its effect on share prices," IFS Working Papers W04/11, Institute for Fiscal Studies.
  5. 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.
  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. 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.
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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.

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