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Should Speculators be Taxed?

Author

Listed:
  • Rohit Rahi
  • James Dow

Abstract

A number of economists have supported the taxation of speculation in financial markets. We examine the welfare economics of such a tax in a model of trading in a financial market where some agents have superior information. We show that in some cases a tax on speculators may actually increase speculative profits. This occurs if the speculators benefit from less informative prices offsets the costs of the tax. The effect on the welfare of other agents depends on how revelation of information changes risk-sharing opportunities in the market. It is possible for the introduction of a tax to cause a Pareto improvement.KeyWords: Speculation, Hedging, Transactions Tax, Information Revelation

Suggested Citation

  • Rohit Rahi & James Dow, 1998. "Should Speculators be Taxed?," FMG Discussion Papers dp291, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp291
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    Keywords

    speculation; hedging; transactions tax; information revelation;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D60 - Microeconomics - - Welfare Economics - - - General

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