Should We Throw Sand in the Gears of Financial Markets?

By Hakkio, Craig S. | Economic Review - Federal Reserve Bank of Kansas City, Second Quarter 1994 | Go to article overview

Should We Throw Sand in the Gears of Financial Markets?


Hakkio, Craig S., Economic Review - Federal Reserve Bank of Kansas City


The volatility of financial markets in recent years has led to increased concern. As trading of financial assets on organized exchanges and over-the-counter markets has grown, events such as the 1987 stock market crash and the 1992 Exchange Rate Mechanism crisis in Europe have raised fundamental questions about the role these markets play in the economy. In particular, there is concern that much of the increased trading of financial assets is of a short-term, speculative nature that adds little value to the intermediation process and in the extreme case may distort the efficient functioning of financial markets.

This view has led some economists to advocate a securities transaction tax (STT). Such a tax, it is argued, when applied to a broad range of financial transactions, would raise the cost of short-term speculative trading, reduce financial market volatility, and improve the efficiency of financial markets. This type of tax might also raise substantial revenue that could help reduce the federal budget deficit. The revenue potential has not gone unnoticed in Washington, where recent budget proposals by both the Bush and Clinton administrations have included an STT.

The proposal of an STT, however, is highly controversial. Opponents doubt that an STT would reduce financial market volatility. According to these analysts, throwing even a little sand in the gears of financial markets is not benign--it would damage the markets by reducing liquidity and raising the cost of capital for U.S. business. Opponents also doubt an STT would yield substantial revenue gains because investors could avoid the tax by shifting to tax-exempt activities or moving transactions outside U.S. markets.

This article explores the pros and cons of a securities transaction tax. The article first presents a brief introduction to securities transaction taxes. The article next presents the case for introducing a small securities transaction tax which rests on the assumption of large potential benefits from the tax. The article then presents the case against a securities transaction tax, including the prospective costs incurred by imposing the tax. The article concludes that the proponents have overstated the likely benefits of a securities transaction tax and underestimated the potential costs.

INTRODUCTION TO SECURITIES TRANSACTION TAXES

A securities transaction tax is levied on the sale of securities, such as stocks, bonds, options, or futures. The tax is paid each time a security is sold. As such, a number of operational issues are involved including which security transactions are taxed and at what rate.

Economists advocating an STT tend to favor a broad-based tax. A broad-based tax would apply to all marketable securities--stocks, bonds, options, futures, and other financial derivatives. Such a tax was considered, but not adopted, in the negotiations on the Omnibus Budget Reconciliation Act of 1990. Over the years, a number of prominent economists, including John Maynard Keynes, Lawrence Summers (now Undersecretary of the Treasury), and Joseph Stiglitz (now a member of the President's Council of Economic Advisers) have supported a broad-based STT.

More narrow taxes have been proposed in Congress and by the Bush and Clinton administrations. The narrow taxes could, for example, be levied only on trading in derivative markets. Congress, the Bush Administration, and the Clinton Administration have considered taxes on futures trading or options on futures trading. More specifically, various Bush Administration budgets included fees on futures trading: an 11 cent fee (in 1991), a 13 cent fee (in 1992), and a 15 cent fee (in 1993). The Clinton Administration proposed a fee of 14 cents on futures and options on futures (1994).[1]

Another kind of narrow transaction tax has been proposed by Eichengreen and Wyplosz. They recommend an implicit tax on foreign exchange transactions to reduce the likelihood of speculative attacks against European Monetary System (EMS) currencies. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Should We Throw Sand in the Gears of Financial Markets?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.