More on the Financial Transactions Tax

I highly recommend a very convincing argument for the FTT by Stephan Schulmeister of  the Austrian Institute for Economic Research. His paper   effectively counters the “rational markets” view that high volumes of speculative trading move stock, currency and commodity prices towards equilibrium values based on fundamentals. Instead, such trading moves prices away from fundamentals for extended periods, with significant result damage to the real economy.  An FTT would dampen speculation while raising useful amounts of revenue, even if levied at a very low rate.

http://www.wifo.at/wwa/jsp/index.jsp?fid=23923&typeid=8&id=37001&display_mode=2&language=2

The abstract follows:

The idea of introducing a general financial transaction tax (FTT) has recently attracted rising attention. There are three reasons for this interest: First, the economic crisis was deepened by the instability of stock prices, exchange rates and commodity prices. This instability might be dampened by such a tax. Second, as a consequence of the crisis, the need for fiscal consolidation has tremendously increased. A FTT would provide governments with substantial revenues. Third, the dampening effects of a FTT on the real economy would be much smaller as compared to other tax measures like increasing the VAT. The paper summarises at first the six main arguments in favour and against a FTT. It provides then empirical evidence about the movements of the most important asset prices. These observations suggest that a small FTT (between 0.1 and 0.01 percent) would mitigate price volatility not only over the short run but also over the long run. At the same time, a FTT would yield substantial revenues. For Europe, revenues would amount to 1.6 percent of GDP at a tax rate of 0.05 percent (transaction volume is assumed to decline by roughly 65 percent at this rate). In the UK, tax receipts would be highest. Even if only transactions on exchanges are taxed in a first step (at a rate of 0.05 percent), a FTT would yield 3.6 percent of GDP in the UK. In Germany, FTT receipts would amount to 0.9 percent of GDP in this case. If a FTT is introduced in the UK and in Germany at the same time, neither country needs to fear a significant “emigration” of trading. This can be presumed because roughly 97 percent of all transactions on exchanges in the EU are carried out in these two countries.