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Transaction Costs, Trading Elasticities and the Revenue Potential of Financial Transaction Taxes for the United States

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  • Robert Pollin
  • James Heintz

Abstract

This Research Brief reviews the available recent evidence on trading costs and trading “elasticities” in U.S. financial markets and elsewhere, in order to inform ongoing discussions as to the viability of establishing a financial transaction tax (FTT) for U.S. financial markets. Specifically, in discussions in the U.S. around a bill supported by Senator Thomas Harkin and Congressman Peter DeFazio, the proposed FTT rate is 0.03 percent of the value of a trade. This low rate is justified on the grounds that setting the rate higher—for example, at the 0.5 percent rate that now applies to stock trades in the United Kingdom—could render financial market trading prohibitively expensive. Revenues generated by the 0.5 percent FTT could then end up lower than at the 0.03 percent rate, since trading values would fall excessively. However, working with a series of alternative assumptions based on actual current financial market conditions, we show that there is no scenario within our range of assumptions in which a 0.03 percent FTT will generate more tax revenues than a 0.5 percent FTT. Rather, considering all of our alternatives, a 0.5 percent FTT generates between 3 and 17 times more revenue than a 0.03 percent FTT.

Suggested Citation

  • Robert Pollin & James Heintz, 2011. "Transaction Costs, Trading Elasticities and the Revenue Potential of Financial Transaction Taxes for the United States," Research Briefs peri_ftt_research_brief, Political Economy Research Institute, University of Massachusetts at Amherst.
    • Handle: RePEc:uma:perirb:peri_ftt_research_brief
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    File URL: https://per.umass.edu/fileadmin/pdf/research_brief/PERI_FTT_Research_Brief.pdf
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    References listed on IDEAS

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    1. Hu, Shing-yang, 1998. "The effects of the stock transaction tax on the stock market - Experiences from Asian markets," Pacific-Basin Finance Journal, Elsevier, vol. 6(3-4), pages 347-364, August.
    2. Ms. Thornton Matheson, 2011. "Taxing Financial Transactions: Issues and Evidence," IMF Working Papers 2011/054, International Monetary Fund.
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    4. Neil McCulloch & Grazia Pacillo, 2010. "The Tobin Tax A Review of the Evidence," Working Paper Series 1611, Department of Economics, University of Sussex Business School.
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    2. Straetmans, S.T.M. & Candelon, B. & Ahmed, J., 2012. "Predicting and capitalizing on stock market bears in the U.S," Research Memorandum 019, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
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    4. Veronika Solilová & Danuše Nerudová & Marian Dobranschi, 2017. "Sustainability-oriented future EU funding: a financial transaction tax," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 44(4), pages 687-731, November.

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