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

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.

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