Research & Commentary: Financial Transaction Taxes

Published August 28, 2012

Since the 2007-2008 financial crisis, legislators in the United States and across the world have proposed new taxes on certain financial transactions, including securities trading and stock transactions. For proponents of these financial transaction taxes the goal is twofold: to raise revenue for the national governments through the new tax and to slow down the short-term speculative trading they believe causes unnecessary market volatility.

In early August, France imposed a new 0.2 percent transaction tax on certain stock purchases; Germany, Italy, and Spain are considering similar levies. Here in the United States, Sen. Tom Harkin (D-IA) and Rep. Peter DeFazio (D-OR) have introduced legislation, the “Wall Street Trading and Speculators Act,” that would create a 0.03 percent tax on trading transactions.

Proponents of transaction taxes argue the market can absorb the new tax with little disruption, with the burden being borne by speculators who are dangerous to the economy. These new taxes, however, would harm financial markets and fail to raise the expected revenue: By increasing the cost of financial transactions, the taxes will decrease trading volume and suppress taxable revenue.

According to a recent study by the Cato Institute, the creation of a transaction tax may even worsen the market volatility that proponents are seeking to address. The study found a positive re¬lationship between transaction cost and price volatility. These results suggest that “the imposition of a transaction tax could actually increase financial market fragility, increasing the likelihood of a financial crisis rather than reducing it. Perverse¬ly, the imposition of a financial transaction tax could have results that are exactly the opposite of those hoped for by its proponents.”

Writing in Forbes, Duncan Niederauer of NYSE Euronext stated transaction taxes fail because they ignore the real-world effects of new taxes on financial markets in an effort to punish Wall Street for a crisis in which it is merely one of many actors at fault, including the government.

Instead of promoting market stability, a transaction tax is more likely to decrease market activity and increase volatility. It will raise the cost of investing, through not only the cost of the tax itself but also by reducing liquidity and widening bid-ask spreads. This will raise the cost of capital for corporations and other entities that issue stocks and bonds, and it will reduce returns for investors, including individual investors and the vehicles that invest on their behalf, such as mutual funds and pension funds. Governments worldwide should steer clear of this disruptive tax.

The following articles examine the proposed financial transaction tax and its possible effects from multiple perspectives.

Some in Congress Want US to Follow France Down Transaction Tax Path
Jeffrey V. McKinley, a Heartland Institute policy advisor and principal at Senex Solutions LLC, reports on the new transaction taxes in France and the possible effects of such 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 ratio¬nale for a financial transaction tax and the empirical evidence that measures outcomes of such a tax.

A Short Note on the Tobin Tax: The Costs and Benefits of a Tax on Financial Transactions
In this article, Raman Uppal of the EDHEC-Risk Institute discusses the costs and benefits of such a tax on financial transactions. “Almost each time volatility in equity, debt, or currency markets increases, there are cries to introduce a tax of financial transactions, first proposed in Tobin (1974). This tax is motivated by the view that the excess volatility in financial markets is the result of trading by “speculators”; thus, even a small tax on financial transactions would “throw some sand in the wheels” of financial markets, and hence, by slowing down the trading activity of speculators would reduce volatility.”

The Tainted Transaction Tax
Duncan Niederauer, chief executive officer at NYSE Euronext, writes in Forbes about the proposed transaction tax, arguing it would have do great harm to U.S. financial markets.

Robin Hood, Nearing European Victories, Still Struggling to Awaken in the U.S.
Heather Rogers of Remapping Debate examines the debate over a financial transaction or “Robin Hood” tax in the United States, comparing it to taxes being considered and implemented overseas.

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 Foundation examines the proposed financial transaction taxes and finds the assumptions made by the taxes’ supporters are incorrect. The transaction tax is unlikely to drive out short-term speculators or generate substantial revenues for the government, he concludes.

A Transaction Tax Would Hurt All Investors
Writing in The Wall Street Journal, Burton Malkiel of Princeton University and George Sauter of Vanguard Group Inc. argue the proposed transaction taxes would make certain types of trades unprofitable and make trades more expensive for all investors, not just those on Wall Street.

Foolish Revenge or Shrewd Regulation? Financial-Industry Tax Law Reforms Proposed in the Wake of the Financial Crisis
Richard T. Page of Georgetown University Law Center evaluates four recent proposals to reform tax laws affecting the financial industry. Page provides a theoretical framework for evaluating them and then relies on this framework to explore the benefits and drawbacks of each. Ultimately, Page rejects two proposals that call for imposing financial-transactions taxes.

Potential and Unintended Consequences of the Financial Transaction Tax
Irene Aldridge, managing partner at ABLE Alpha Trading, discusses the potential and unintended consequences of the financial transaction tax on high-speed, computerized trading.

The Robin Hood Tax: The Big Idea
This document in favor of the transaction tax examines argues it will raise revenue for national governments and reduce speculation and market volatility.

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 Budget & Tax News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].