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On the incidence of a financial transactions tax in a model with fire sales

Author

Listed:
  • Felix Bierbrauer

Abstract

This paper studies the impact of a financial transactions tax on a financial market where financial institutions trade with each other. Assets are marked to the market and financial institutions with negative equity are forced out of business. There are two main results: First, if all banks have enough liquidity so that they can honor their short-term obligations, a financial transactions tax is entirely neutral. Second, in a model with correlated investment risk and short-term financing of banks, a financial transactions tax contributes to financial distress and undoes other policy measures that are used to stabilize financial markets.

Suggested Citation

  • Felix Bierbrauer, 2012. "On the incidence of a financial transactions tax in a model with fire sales," Working Paper Series in Economics 55, University of Cologne, Department of Economics.
  • Handle: RePEc:kls:series:0055
    as

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    File URL: http://ockenfels.uni-koeln.de/fileadmin/wiso_fak/stawi-ockenfels/pdf/wp_series_download/wp0055.pdf
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    References listed on IDEAS

    as
    1. Summers, L.H. & Summers, V.P., 1989. "When Financial Markets Work Too Well : A Cautious Case For A Securities Transactions Tax," Papers t12, Columbia - Center for Futures Markets.
    2. Enrico Perotti & Javier Suarez, 2011. "A Pigovian Approach to Liquidity Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 3-41, December.
    3. Thornton Matheson, 2011. "Taxing Financial Transactions; Issues and Evidence," IMF Working Papers 11/54, International Monetary Fund.
    4. James Tobin, 1978. "A Proposal for International Monetary Reform," Eastern Economic Journal, Eastern Economic Association, vol. 4(3-4), pages 153-159, Jul/Oct.
    5. Michael Keen, 2011. "The Taxation and Regulation of Banks," IMF Working Papers 11/206, International Monetary Fund.
    6. Andrei Shleifer & Robert Vishny, 2011. "Fire Sales in Finance and Macroeconomics," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 29-48, Winter.
    7. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    8. Allen, Franklin & Carletti, Elena, 2008. "Mark-to-market accounting and liquidity pricing," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 358-378, August.
    9. Rodrigo Cifuentes & Hyun Song Shin & Gianluigi Ferrucci, 2005. "Liquidity Risk and Contagion," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 556-566, 04/05.
    10. repec:hrv:faseco:33077925 is not listed on IDEAS
    11. Genser, Bernd & Winker, Peter, 1997. "Measuring the fiscal revenue loss of VAT exemption in commercial banking," Discussion Papers, Series II 342, University of Konstanz, Collaborative Research Centre (SFB) 178 "Internationalization of the Economy".
    12. Allen, Franklin & Gale, Douglas, 1994. "Limited Market Participation and Volatility of Asset Prices," American Economic Review, American Economic Association, vol. 84(4), pages 933-955, September.
    13. Stiglitz, J.E., 1989. "Using Tax Policy To Curb Speculative Short-Term Trading," Papers t2, Columbia - Center for Futures Markets.
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    Citations

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    Cited by:

    1. Tri Vi Dang & Florian Morath, 2013. "The Taxation of Bilateral Trade with Endogenous Information," Working Papers tax-mpg-rps-2013-07, Max Planck Institute for Tax Law and Public Finance.
    2. Richard M. Bird, 2014. "Global Taxes and International Taxation: Mirage and Reality," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1429, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    3. Richard M. Bird, 2014. "Foreign advice and tax policy in developing countries," Chapters,in: Taxation and Development: The Weakest Link?, chapter 4, pages 103-144 Edward Elgar Publishing.

    More about this item

    Keywords

    Financial transactions tax; financial stability; financial markets; cash-in-the-market-pricing; marking-to-market;

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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