Since the financial crisis and the ensuing 2008-2009 Great Recession, the idea of imposing a tax on financial transactions has appeared somewhat frequently in policy debates At its most basic level, a financial transaction tax (FTT) is a tax imposed on the buyer or seller of a security at the time a financial transaction occurs. An FTT can be applied across the board to all financial transactions, or only those involving specific types of securities (for example, stocks, options, and futures, but not bonds). Similarly, an FTT can be applied to the transactions of all traders, or selectively to only certain types, such as those made by institutional traders but not individual investors.
While an FTT can come in many different forms, three justifications are commonly offered for imposing such a tax: (1) it would reduce financial market volatility by reducing speculation, (2) it would generate a significant amount of revenue and (3) it would help pay for recent and future federal assistance to the institutions that are viewed by some as the source of the financial instability (aka, “Wall Street”). This report briefly discusses the concept of an FTT in a historical and international context, summarizes recent FTT proposals, examines the tax’s effect on financial market volatility and speculation, and analyzes the revenue potential.
Opponents of the tax also generally offer a number of objections. First, it is argued that the tax will introduce distortions into the marketplace as well as raise the cost of capital for businesses looking to finance investment. Second, if raising revenue is the objective it is not clear that an FTT is the best of all available options. And third, regulators may be better suited to increase transparency and reduce volatility using the set of tools at their disposal, which may more directly target improving the function of financial markets if the current financial environment is viewed to have problems.