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On the incidence of a financial transactions tax in a model with fire sales

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  • Felix Bierbrauer

Abstract

This paper studies the impact of a financial transactions tax on a financial market where financial institutions trade with each other. Assets are marked to the market and financial institutions with negative equity are forced out of business. There are two main results: First, if all banks have enough liquidity so that they can honor their short-term obligations, a financial transactions tax is entirely neutral. Second, in a model with correlated investment risk and short-term financing of banks, a financial transactions tax contributes to financial distress and undoes other policy measures that are used to stabilize financial markets.

Suggested Citation

  • Felix Bierbrauer, 2012. "On the incidence of a financial transactions tax in a model with fire sales," Working Paper Series in Economics 55, University of Cologne, Department of Economics.
    • Handle: RePEc:kls:series:0055
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    References listed on IDEAS

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    Cited by:

    1. Tri Vi Dang & Florian Morath, 2013. "The Taxation of Bilateral Trade with Endogenous Information," Working Papers tax-mpg-rps-2013-07, Max Planck Institute for Tax Law and Public Finance.
    2. Richard M. Bird, 2014. "Global Taxes and International Taxation: Mirage and Reality," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1429, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    3. Richard M. Bird, 2014. "Foreign advice and tax policy in developing countries," Chapters, in: Richard M. Bird & Jorge Martinez-Vazquez (ed.), Taxation and Development: The Weakest Link?, chapter 4, pages 103-144, Edward Elgar Publishing.

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    More about this item

    Keywords

    Financial transactions tax; financial stability; financial markets; cash-in-the-market-pricing; marking-to-market;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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