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Financial Transaction Tax: Small is Beautiful

Zsolt Darvas () and Jakob von Weizsäcker ()

No 1001, Working Papers from Department of Mathematical Economics and Economic Analysis, Corvinus University of Budapest

Abstract: The case for taxing financial transactions merely to raise more revenues from the financial sector is not particularly strong. Better alternatives to tax the financial sector are likely to be available. However, a tax on financial transactions could be justified in order to limit socially undesirable transactions when more direct means of doing so are unavailable for political or practical reasons. Some financial transactions are indeed likely to do more harm than good, especially when they contribute to the systemic risk of the financial system. However, such a financial transaction tax should be very small, much smaller than the negative externalities in question, because it is a blunt instrument that also drives out socially useful transactions. There is a case for taxing over-the-counter derivative transactions at a somewhat higher rate than exchange-based derivative transactions. More targeted remedies to drive out socially undesirable transactions should be sought in parallel, which would allow, after their implementation, to reduce or even phase out financial transaction taxes.

Keywords: transaction tax; Tobin tax; financial transactions; global financial crisis; financial regulation (search for similar items in EconPapers)
JEL-codes: D62 F30 G10 H20 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-01-11, Revised 2010-08-31
New Economics Papers: this item is included in nep-acc, nep-cwa, nep-pbe, nep-pub and nep-reg
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Journal Article: Financial transaction tax: Small is beautiful (2011) Downloads
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