Finance professor Dan Weaver on unintended consequences of securities transaction taxes featured in New York Times

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Tuesday, March 26, 2013
New York, NY

From The New York Times:

A study of New York State’s tax from 1932 to 1981 by Anna Pomeranets and Daniel G. Weaver found that it increased the cost of capital for investors and reduced trading volume. Most important, they found the tax actually increased trading volatility by as much as 10 percent.

Increasing volatility is exactly what advocates of the tax don’t want. They want volatility reduced to prevent market disruptions, but the decline in traders in the markets mean fewer buyers and sellers and more price jumps. This finding of increased volatility is in general accord with nine other major papers to study this issue, including studies of the tax in 23 countries, among them Britain, Sweden and Japan. Only one of these papers found that a financial transaction tax reduced volatility.

The New York State tax experience raises a bigger issue — that of traders just going elsewhere. This problem was mirrored in Sweden.

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TAGS: Daniel Weaver Finance