Optimal Financial Transaction Taxes

Eduardo Davila

No 27826, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper characterizes the optimal transaction tax in an equilibrium model of competitive financial markets. As long as investors hold heterogeneous beliefs that are not related to their fundamental trading motives and the planner calculates welfare using any single belief, a strictly positive tax is optimal, regardless of the magnitude of fundamental trading. Under some conditions, the optimal tax is independent of the belief used by the planner to calculate welfare. The optimal tax can be implemented by adjusting its value until observed total volume equals fundamental volume. Knowledge of i) the share of non-fundamental trading volume and ii) the semi-elasticity of trading volume to tax changes is sufficient to quantify the optimal tax. A calibration of the model consistent with empirically estimated volume semi-elasticities to tax changes and that features a 30% share of non-fundamental trading volume is associated with a 37bps optimal tax.

JEL-codes: D61 G18 H21 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-pbe and nep-pub
Note: AP EFG IFM PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published as EDUARDO DÁVILA, 2023. "Optimal Financial Transaction Taxes," The Journal of Finance, vol 78(1), pages 5-61.

Downloads: (external link)
http://www.nber.org/papers/w27826.pdf (application/pdf)

Related works:
Journal Article: Optimal Financial Transaction Taxes (2023)
Working Paper: Optimal Financial Transaction Taxes (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:27826

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w27826

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().