Tuesday, March 02, 2010

Incidence of Financial Transactions Taxes: new study

The think tank Re-Define has published a useful new paper looking at the incidence of Financial Transactions Taxes - an issue that forms one of the key controversies in the FTT debate. As the abstract says:

"This paper examines the all important question of the incidence of financial transaction taxes, seeking to answer the question ‘who pays in the end’, should FTTs be widely introduced. It shows that across a number of market segments trading volumes are increasingly dominated not by traditional investors such as pension funds or insurance firms but by high frequency traders, hedge funds and investment banks. The paper further shows that the initial incidence of the tax falls on the dominant actors who also have the capacity to absorb a large proportion of the tax.

This ensures that the tax burden is highly progressive falling mainly on those most able to pay – hedge funds and investment banks and their highly paid employees. Moreover, governments would be able to take steps to minimise even the small effect on the pension funds or savings of the broader public.

Furthermore, introducing a well-thought out differentiated schedule of taxes across markets could improve market function and reduce systemic risk by 1) penalizing excessive short-termism across all markets 2) penalizing complexity by imposing higher rates on more complex transactions 3) penalizing lack of transparency and excessive counterparty risk by imposing higher tax rates on over the counter transactions and 4) imposing higher rates of taxes on socially harmful or less useful transactions."

It contains much useful material.


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