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The Benefits of a Financial Transactions Tax


transactions taxes that are charged to finance the Securities and Exchange Commission and the Commodities and Futures Trading Commission.

A second important feature of the UK law is that a security cannot be legally transferred unless the tax is paid. The stamp is effectively proof of the transfer of the security (this can also be done electronically). In effect, tax evasion would imply ambiguity around the ownership of the asset. Most investors are willing to pay a 0.25 percent fee to ensure their proper claim to the asset.

An obvious complaint against the stamp tax is that it only applies to a narrow class of assets (stock shares) and therefore it can be readily avoided by traders wishing to speculate on other assets, or even those wishing to speculate on stock through the purchase of futures or options. The obvious remedy to this problem is to have a more broadly based tax that applies to transfers of all standardized financial assets. The fee structure would be scaled to the expected life of the asset so that the disincentive to trading will be roughly equal across markets.

Pollin, Baker, and Schaberg (2002) propose a fee structure that is intended to maintain a rough balance across markets. To match a 0.5 percent fee on stock trades, the paper proposes the following fee structure:

Bonds: 0.01 percent for each year remaining until maturity Futures: 0.02 percent of the notional value of the underlying asset Options: 0.5 percent of the premium paid for the option Interest Rate Swaps: 0.02 percent of asset value for each year until the expiration of the agreement

At the time Pollin et al. was written, credit default swaps (CDS) were still relatively new instruments, but the fee structure applied to interest rate swaps would probably be appropriate to transfers of CDS also.

The tax schedule was intended to roughly correspond to current transactions costs for these assets. Since much of the trading for some of these assets is not on exchanges (e.g. interest rate swaps), it is difficult to obtain reliable information on current costs. In order for a tax to be neutral across asset classes (if that is desired), it would be necessary to obtain better information on current costs and adjust these tax rates accordingly.

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The few estimates of the elasticity of trading in stocks and other assets with respect to trading costs are quite dated and not very reliable. In the absence of good data on which to project trading responses, the paper simply constructed a range of revenue projections based on what were considered extreme responses (no change and a 50 percent fall in trading volume) and the midpoint of a 25 percent decline in trading.

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