Transaction Taxes

BIBLIOGRAPHY

Although transaction taxes can be taxes imposed on any transaction, the term generally refers to the taxes imposed on trading of currencies, stocks, and other financial instruments by economists.

One of the most influential transaction tax is the Tobin tax. After the United States’s suspension of convertibility from U.S. dollars to gold and the collapse of the Bretton Woods system in the early 1970s, James Tobin, an economist who later won the Nobel Memorial Prize in Economics in 1981, proposed a charge on all exchange transactions between currencies in all countries. The proposed charge is called the “Tobin tax.” The purpose of the Tobin tax is to discourage short-term speculation in global foreign-exchange markets and thus reduce the exchangerate volatility, or, in Tobin’s words, “to throw some sand in the wheels of our excessively efficient international money markets” (Tobin 1978, pp. 154–155). Because the Tobin tax is to be levied on all currency-exchange transactions worldwide, it has been suggested that an international organization such as the United Nations, the International Monetary Fund, or the World Bank would manage the Tobin tax, which would be used to stabilize the international economy and promote peace and reduce poverty. Opponents of the Tobin tax argue that such taxes would reduce the liquidity in the exchange markets and actually lead to more volatile exchange rates.

Another type of transaction taxes, securities transaction taxes (STT), has been proposed and implemented in many equity markets. STT are taxes imposed on the trading of stocks, bonds, futures contracts, and option contracts. Unlike the Tobin tax, the implementation of STT does not require international cooperation. Proponents of STT argue that in addition to generating revenues, these taxes may reduce excess volatility. However, opponents argue that the taxes may reduce market liquidity, decrease market efficiency, and drive trading to other countries. G. William Schwert and Paul Seguin (1993) provided an overview of the costs and benefits of STT. John Campbell and Kenneth Froot (1994) reviewed some international experiences associated with securities transaction taxes and found that the behavioral responses from investors are large in the sense that investors move a significant portion of the trading to markets with lower STT. In the United States, the then House Speaker Jim Wright proposed a “stock transaction tax” in 1987. The 1994 Clinton budget proposal contained a fee of 14 cents for each contract bought and sold on an organized futures exchange. But such taxes have never been passed by Congress. Empirical evidence on the subject has been mixed. Some researchers found that a higher transaction tax leads to a more volatile stock market, contrary to what the proponents claim. The transaction tax can be viewed as part of the transaction costs, which may include broker fees and stamp duty, among other costs associated with trading of stocks, bonds, futures, and options.

SEE ALSO Financial Markets; Speculation; Taxes; Tobin, James

BIBLIOGRAPHY

Buiter, Willem H. 2003. James Tobin: An Appreciation of His Contribution to Economics. Economic Journal 113: 585–631.

Campbell, John Y., and Kenneth A. Froot. 1994. International Experiences with Securities Transaction Taxes. In The Internationalization of Equity Markets, ed. Jeffrey A. Frankel, 277–308. Chicago: University of Chicago Press.

Schwert, G. William, and Paul J. Seguin. 1993. Securities Transaction Taxes: An Overview of Costs, Benefits, and Unsolved Questions. Financial Analysts Journal 49: 27–35.

Tobin, James. 1978. A Proposal for International Monetary Reform. Eastern Economic Journal 4: 153–159.

Dong Li