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Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax

Author

Listed:
  • Huber, Jürgen
  • Kirchler, Michael

    (University of Innsbruck)

  • Kleinlercher, Daniel

    (University of Innsbruck)

  • Sutter, Matthias

    (Max Planck Institute for Research on Collective Goods)

Abstract

While politically attractive in order to generate tax revenues, the effects of a financial transaction tax (FTT) are scientifically disputed, not the least because seemingly small details of its implementation may matter a lot. In this paper, we provide experimental evidence on the different effects of a FTT, depending on whether it is implemented as a tax on markets, on residents, or a combination of both. We find that the effects of a tax on markets are different from a tax on residents, with negative effects of a market tax on volatility and trading volume. The residence principle shows none of these undesired effects. In addition to studying aggregate market outcomes, we investigate how individual traders react to different forms of a FTT and whether their risk attitude is related to these reactions. We find no such relationship, meaning that a FTT affects traders with different risk tolerances similarly.

Suggested Citation

  • Huber, Jürgen & Kirchler, Michael & Kleinlercher, Daniel & Sutter, Matthias, 2014. "Market vs. Residence Principle: Experimental Evidence on the Effects of a Financial Transaction Tax," IZA Discussion Papers 7978, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp7978
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    2. Iryna Veryzhenko & Lise Arena & Etienne Harb & Nathalie Oriol, 2017. "Time to Slow Down for High‐Frequency Trading? Lessons from Artificial Markets," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 24(2-3), pages 73-79, April.

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    More about this item

    Keywords

    residence principle; experimental finance; Financial Transaction Tax; market principle;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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