Sustainability Of The Financial Transaction Tax: Decision And Uncertainty

Opinion leaders and other policymakers want profound changes in rights (such as Medicare and Social Security) and a tax on financial transactions - which would simultaneously raise money and would discourage another crisis - should be part of the discussion. We explore whether a Financial Transactions Tax (TTF) is likely to correct the market failures that have contributed to the financial crisis, to what extent FTT succeeds in raising revenues, and how the FTT compares to alternative taxes in terms of efficiency. Taxing of transactions is not well targeted at behaviour that leads to excessive risk and systemic risk creation. The empirical evidence does not suggest that the introduction of an FTT reduces volatility or asset price bubbles. When compared to alternative forms of taxation of the financial sector, the FTT is likely less efficient given the amount of revenues. In particular, taxes that more directly address existing distortions, such as the current VAT exemption for banks, and the bias towards debt financing, provide more efficient alternatives.