The societal benefit of a financial transaction tax

Aleksander Berentsen, Samuel Huber and Alessandro Marchesiani ()

No 176, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: We provide a novel justification for a financial transaction tax for economies, where agents face stochastic consumption opportunities. A financial transaction tax makes it more costly for agents to readjust their portfolios of liquid and illiquid assets in response to these liquidity shocks, which increases the demand for - and the price of liquid assets. The higher price improves liquidity insurance and welfare for other market participants. We calibrate the model to U.S. data and find that the optimal financial transaction tax is 1.6 percent and that it reduces the volume of financial trading by 17 percent.

Keywords: Tobin tax; financial transaction tax; OTC trading (search for similar items in EconPapers)
JEL-codes: E44 E50 G18 (search for similar items in EconPapers)
Date: 2014-10, Revised 2016-07
New Economics Papers: this item is included in nep-acc, nep-cfn, nep-dge, nep-mac, nep-mst and nep-pbe
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Citations: View citations in EconPapers (8)

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Journal Article: The societal benefit of a financial transaction tax (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:176

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