Financial Transaction Taxes

by Aaron

David Brin posted on his blog advocating Financial Transaction Taxes. Basically, Financial Transaction Taxes (FTTs) amount to charging a fee every time securities change hands with the combined goals of raising revenue, and cutting down on speculative and opportunistic trading1. After reading that, and stumbling around the web for a bit, I happened upon a report by the Bank of Canada on The Feasability and Effectiveness of Financial Transaction Taxes which had this particular gem in the conclusion:

Little evidence is found to suggest that an FTT would reduce speculative trading or volatility. In fact, several studies conclude that an FTT increases volatility and bid-ask spreads and decreases trading volume. Furthermore, a number of challenges associated with the design and effectiveness of an FTT could limit the revenues that FTTs are intended to raise.

In other words, FTTs are unlikely to prevent financial chaos or raise significant revenues, and in fact may lead to financial chaos and otherwise poorly behaved markets. So yeah, while FTTs may sound promising, and definitely have a stick-it-to-the-big-faceless-Wall-Street-monolith feel to them, any FTT proposal deserves a whole lot of scepticism... because by the looks of it, they could make things worse instead of better.

[1]The article posits FTTs as a way to kill Hight Frequency Trading (HFT), but that seems awful round-a-bout to me. If you want to kill HFT (and there may be cause to do so), ban HFT. When you're writing legislation, you're making up the rules, so you might as well make the rules you actually want.