Benefits of a Financial Transactions Tax

The recent economic turmoil has generated renewed interest in a financial transactions tax (FTT). While such a tax will be vigorously opposed by the financial industry, it offers a very attractive mechanism for raising revenue that is arguably efficiency-enhancing. Calculations based on 2000 trading volumes showed that a set of scaled transactions taxes, imposed on transfers of stock and other financial assets, could raise more than $100 billion a year, even assuming large reductions in trading volume.

This article briefly outlines the case for a financial transactions tax. The first section discusses basic design issues, and the section after that discusses the revenue potential for such a tax. The final section summarizes the potential benefits from financial transactions taxes.