Financial Transaction Taxes: International Experiences, Issues and Feasibility (Bank of Canada)

November 2012

KEYWORDS: Financial Transaction Tax, FTT, Volatility, global financial crisis, Speculation, Liquidity, Trading, trading volume, capital, revenue, tax, European Union, European Commission, France, bid-ask spread, noise traders, New York, United Kingdom, Hong Kong, Japan, Korea, Taiwan, India, Sweden, OTC derivatives, Argentina, Australia, Brazil, China, Indonesia, Italy, Russia, South Africa, Turkey, foreign exchange

Authors:

Anna Pomeranets

Organizations:
  • Bank of Canada

Summary:
  • The financial transaction tax (FTT) is a policy idea with a long history that, in the wake of the global financial crisis, has attracted renewed interest in some quarters.
  • Historically, there have been two motivating factors for the introduction of the tax. The first is its potential to raise substantial revenues, and the second is its perceived potential to discourage speculative trading and reduce volatility.
  • There is, however, little empirical evidence that an FTT reduces volatility. Numerous studies suggest that an FTT harms market quality and is associated with an increase in volatility and a decrease in both market liquidity and trading volume. When the cost of acquiring a security rises, its required rate of return and cost of capital also increase. As a result, an FTT may reduce the flow of profitable projects, decreasing levels of real production, expansion, capital investment and even employment.
  • There are many unanswered questions regarding the design of FTTs and their ability to raise significant revenues.

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