Research & Commentary: Financial Transaction Tax Update

Published July 31, 2013

In the years since the 2007–2008 financial crisis, legislators in the United States and other nations have proposed new taxes on certain financial transactions, including securities trading and stock transactions. For proponents of these financial transaction taxes, commonly known as “Robin Hood” taxes, the goal is twofold: to raise government tax revenue and to slow down short-term, speculative trading, which they argue causes unnecessary market volatility.

The idea has yet to gain significant support in the United States, but several countries in Europe already impose a transaction tax or are strongly considering it. In August 2012, France imposed a new 0.2 percent transaction tax on certain stock purchases, and early in 2013, 11 members of the European Union created a new tax of 10 basis points on stock and bond trades and 1 basis point on derivatives.

Two pieces of legislation to create a financial transaction tax are currently being considered in Congress. The Wall Street Trading and Speculators Act would impose a 0.03 percent, or 3 basis points, tax on stock and bond trades. The Inclusive Prosperity Act of 2013 would be significantly more draconian: a tax of 0.5 percent, or 50 basis points, on stock trades.

Transaction tax proponents argue the market could absorb the additional costs with little disruption and that the burden would be borne by speculators, thus punishing them for their alleged role in the financial crisis. Such taxes, however, would in fact suppress financial markets worldwide, and by increasing the cost of financial transactions, the taxes would decrease trading volume and limit any potential for government revenue generation.

Opponents of financial transaction taxes note these levies raise the cost of investing not only through the direct cost of the tax itself but also by reducing liquidity and widening bid-ask spreads. This raises the cost of capital and reduces returns for investors, thus shrinking the incentives for job-creating investment. These taxes disproportionally affect financial products that are important to middle- and lower-income families, including pensions, retirement savings, and financial tools such as annuities, charitable trusts, and low-risk money market funds. 

Instead of promoting market stability, transaction taxes suppress market activity and increase volatility while generating less revenue than expected, and the damaging effects are widespread, not limited to undefined “speculators.” Governments should steer clear of this disruptive tax.

The following documents provide more information on financial transaction taxes.

Financial Trade Tax Looks Unlikely
Darrell Delamaide of USA Today discusses financial transaction taxes and the difficulties legislators have had passing legislation creating them.

The Stupidity of the Robin Hood Tax Reaches America
Kenneth Rogoff, professor of economics and public policy at Harvard University, writes in Forbes about the “Robin Hood” tax and argues against its implementation in the United States: “There is, in short, ample reason to be angry at financiers, and real change is needed in how they operate. But the FTT [financial transaction tax], despite its noble intellectual lineage, is no solution to Europe’s problems—or to the world’s.”

Investors, Take Note: The Robin Hood Tax Might Be Coming to America
John Grgurich of Daily Finance reports on the efforts across Europe to create and implement financial transaction taxes on stock, bond, and derivatives trades, with the proceeds directed toward fighting poverty and climate change. Grgurich also discusses efforts by Sen. Tom Harkin (D-IA) and Rep. Peter DeFazio (D-OR) to levy a Robin Hood tax in the United States at an even higher rate than those in Europe.

Some Criticism of the Tobin Tax
Markus Haberer states many of the assumptions behind the Tobin financial transaction tax are quite questionable. Haberer argues a Tobin tax of a sensible rate would be too small to protect countries from currency fires and would generate little monetary autonomy. In addition to economic doubts there are political problems that make the tax infeasible.

Some Evidence that a Tobin Tax on Foreign Exchange Transactions May Increase Volatility
Using regression analysis, Robert Z. Aliber, Bhagwan Chowdhry, and Shu Yan demonstrate volatility is positively associated with the level of transaction costs, and volume is negatively associated with transaction costs. These results are consistent with the expectation that an increase in transaction costs would lead to a reduction in volume of trading, but the observed effect on volatility is the opposite of what proponents of the Tobin tax assume.

Some in Congress Want US to Follow France Down Transaction Tax Path
Writing in the Heartlander digital magazine, Jeffrey V. McKinley, a Heartland Institute policy advisor and principal at Senex Solutions LLC, reports on the new taxes in France and the possible effects of financial transaction taxes in the United States.

Would a Financial Transaction Tax Affect Financial Market Activity? Insights from Futures Markets
Writing for the Cato Institute, George H.K. Wang and Jot Yau review the relevant literature on the theoretical rationale for a financial transaction tax plus the empirical evidence of measured outcomes from the imposition of such a tax.

The Tobin Tax: Reason or Treason? A Comparative Study of the Potential Effects of a UK Tobin Tax
Adam N.S.G. Baldwin of the United Kingdom’s Adam Smith Institute examines the possible effects of a Tobin tax in the U.K. The study finds that implementation of a Tobin tax by the U.K. would be tantamount to economic suicide: “Almost 60% of trading volume of the 11 most actively traded Swedish shares migrated to London during Sweden’s attempted Tobin tax. The temptation, and indeed relative ease, with which capital flight and cross-border arbitrage can occur would spell disaster for the U.K.”

Hitting the Wrong Target: Why a “Wall Street” Transaction Tax Will Hit Main Street Investors and Miss the Mark on Other Fronts
Robert Litan of the Brookings Institution examines the proposed financial transaction taxes and finds the assumptions made by proponents are incorrect. The transaction tax is unlikely to drive out short-term speculators or generate substantial revenues for the government, he concludes.

A Short Note on the Tobin Tax: The Costs and Benefits of a Tax on Financial Transactions
Almost every time volatility in equity, debt, or currency markets increases, there are cries to introduce a tax on financial transactions, first proposed by Tobin in 1974. This tax is motivated by the view that the excess volatility in financial markets is the result of trading by “speculators.” Even a small tax on financial transactions, proponents argue, would “throw some sand in the wheels” of financial markets, and the consequent slowdown in trading by speculators would reduce market volatility. In this article, Raman Uppel discusses the costs and benefits of such a tax on financial transactions.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Finance and Insurance News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at