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Financial transaction tax: Small is beautiful

Author

Listed:
  • 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

Suggested Citation

  • Zsolt Darvas & Jakob Weizsäcker, 2011. "Financial transaction tax: Small is beautiful," Society and Economy, Akadémiai Kiadó, Hungary, vol. 33(3), pages 449-473, December.
    • 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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    Cited by:

    1. Stephan Schulmeister, 2011. "Implementation of a General Financial Transactions Tax," WIFO Studies, WIFO, number 41992, June.
    2. Edward Sun & Timm Kruse & Min-Teh Yu, 2015. "Financial Transaction Tax: Policy Analytics Based on Optimal Trading," Computational Economics, Springer;Society for Computational Economics, vol. 46(1), pages 103-141, June.
    3. Tri Vi Dang & Xiaoxi Liu & Florian Morath, 2022. "Taxation, Information Acquisition, and Trade in Decentralized Markets: Theory and Test," Working Papers 2022-08, Faculty of Economics and Statistics, Universität Innsbruck.
    4. Vinko Zlatić & Giampaolo Gabbi & Hrvoje Abraham, 2015. "Reduction of Systemic Risk by Means of Pigouvian Taxation," PLOS ONE, Public Library of Science, vol. 10(7), pages 1-18, July.
    5. Copenhagen Economics, 2011. "Elasticities of Financial Instruments, Profits and Remuneration," Taxation Papers 30, Directorate General Taxation and Customs Union, European Commission.
    6. Neil McCulloch & Grazia Pacillo, 2010. "The Tobin Tax A Review of the Evidence," Working Paper Series 1611, Department of Economics, University of Sussex Business School.
    7. Stephan Meyer & Martin Wagener & Christof Weinhardt, 2015. "Politically Motivated Taxes in Financial Markets: The Case of the French Financial Transaction Tax," Journal of Financial Services Research, Springer;Western Finance Association, vol. 47(2), pages 177-202, April.
    8. Patrick Thöni, 2020. "On the non-homogeneous effect of financial transaction taxes," Economics and Business Letters, Oviedo University Press, vol. 9(3), pages 230-239.

    More about this item

    Keywords

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    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • F30 - International Economics - - International Finance - - - General

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