Taxes on Financial Transactions
The statement examines the various motives for implementing a financial transaction tax based on analysis of recent proposals advanced in the United States and the European Union. The statement concludes that although such taxes have superficial appeal, they have large negative consequences relative to the revenue they may be realistically expected to raise. Moreover, the dangers of damaging capital allocation mechanisms and of harming investors in publicly-traded securities are significant. A financial transactions tax would distort markets, reduce liquidity, lower securities prices, and increase the cost of capital throughout the economy. Proponents of financial transactions taxes assume that such taxes would be borne by the financial services industry, but although the industry would collect taxes on transactions that are not shifted to the more opaque over-the-counter markets in attempt to avoid such taxes, the burden would fall primarily on the customers of financial institutions through lower prices and wider spreads between purchase and sales prices. In the short run the financial sector would be penalized, but in the long run the lower prices of financial securities caused by a financial transactions tax would result in lower capital per worker and thus lower wages.
