Financial transaction tax: Small is beautiful
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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Volume (Year): 33 (2011)
Issue (Month): 3 (December)
|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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