74th International Atlantic Economic Conference

October 04 - 07, 2012 | Montréal, Canada

A general financial transactions tax: Reasonable but no panacea

Saturday, October 6, 2012: 5:10 PM
Stephan Schulmeister, Dr. Mag. , FB3, Austrian Institute of Economic Research, Wien, Austria
The idea of introducing a 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 summarizes at first the 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%) 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 1.8% of GDP at a tax rate of 0.05% (transaction volume is assumed to decline by roughly 65% at this rate).