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April 1, 2013

Transaction Taxes Don't Help

By Peter Chapman

Transaction taxes result in more volatile markets, wider bid-ask spreads, greater market impact and a decrease in volume. Those are key findings of a recent study conducted jointly by the Bank of Canada and Rutgers University into the impact of a transaction tax administered by the State of New York until 1981.

Anna Pomeranets, an analyst with the Bank of Canada, and Dan Weaver, a professor at Rutgers, conducted the study, "Security Transaction Taxes and Market Quality," in light of movement on both sides of the Atlantic to adopt trading taxes. Both European and U.S. politicians have pushed for trading taxes, arguing they would raise revenue and dampen speculative trading activity.

Opponents argue the tax would push up the cost of trading and shift volume to countries that don't tax trades.

In Europe, 11 of the 27 European Union countries were recently given permission from the European Parliament to establish the taxes.

In the United States, Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., reintroduced bills recently they'd previously drawn up, proposing to impose such a tax.

Pomeranets and Weaver studied nine changes to New York State's securities transaction tax between 1932 and 1981, when the tax was phased out. What they found was that increases in the tax were associated with a deterioration in market quality, including increased volatility, wider bid-ask spreads and lower volume.

 

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