In other words, the cost to the economy is far greater than the revenue raised. In fact, economists for the European Union estimated a proposed 0.10% transaction tax would lower GDP by 1.76% while raising revenue of only 0.08% of GDP. Lower valuations also increase the cost of capital for companies, which in turn has been shown to cause companies to invest less ultimately reducing GDP. Increasing trading costs hurts the economy That’s one reason why the CBO estimated the first-year impact of a U.S.-wide FTT would be negative.Ĭhart 3: Valuations are also affected by trading costs Importantly for governments considering FTTs, falling valuations also reduces capital gains tax collections. In a related study, Vanguard estimates that a 10-basis-points tax translates to 19% of capital gains over 20 years. That reduces pension funding for all individuals and states. Summarizing the results of multiple studies in Chart 3 again shows that the larger the additional costs, the more stock valuation falls (diagonal slope). That is because trading costs affect the “after trade” returns of stocks, and stocks with lower returns are given lower valuations. Research by Nasdaq, Amihud, and Brugler show lower costs help stock valuations, and Lin, Angel, IMF, Wrobel show higher costs hurt. Its possible that CFDs, by deferring actual cashflows for trades, added to European systemic risks, including helping to hide multi-billion-dollar ETF losses at SocGen and UBS.īased on the data in chart 2, a relatively small increase in costs leads to a significant reduction of volumes, and therefore taxes collected. That’s partly because the industry has engineered a contract for difference (CFD) market to help investors minimize trading costs. In the U.K., the stamp duty taxes only apply to around 30% of trading. This impacts volumes less, but it also limits taxes collected.įor example, recent EU FTTs in France raised less than one-half of its expected revenue, and in Italy less than one-fifth. Some markets exempt market makers in an effort to retain market efficiency and liquidity. Sadly, even after the tax was removed, it’s considered by some that Swedish markets never recovered their previous status in Europe. As a result of activity moving to lower cost countries, the tax collected was a mere 3% of estimates. Futures volumes fell 98%, bond trading fell 85% and the options market shuttered. There are useful case studies to consider too.įor example, when Sweden implemented its FTT, 50% of share volume moved to London almost immediately. When taxes are removed or reduced, the opposite happens, and market quality and competitiveness improvesĬhart 2: Comparing the impact on liquidity of trading cost changes.That also ultimately reduces tax revenues collected Larger cost changes cause a larger changes in liquidity, and when costs go up, liquidity goes down.They diagonal nature of the dots in the chart shows that They found a consistent downward sloping diagonal of the data that shows taxes harm markets when they are added, and markets recover when they are reduced or removed. Nasdaq combined the results from many of these studies, (including by Angel, Two Sigma, Tax Foundation, IMF, Wrobel) in Chart 2 and 3 below. There are also a number of specific studies of FTTs. An IMF Summary of FTT studies concluded that FTTs consistently: Over two dozen (mostly emerging) countries have FTTs and at least a dozen more (mostly developed) countries have repealed FTTs. There is a lot of data and case studies that support these findings. Research finds Transaction Taxes are harmful to the economy doesn’t have, that many countries in Europe and Asia-Pacific do have, is a Financial Transaction Tax (FTT).ĭata suggests that even if these taxes are small, data suggests they can hurt a country's market liquidity and international competitiveness. market has lower costs, from economies of scale, to a stable currency and a moderate and consistent environment.īut one thing the U.S. They find that even small cost savings can have a big impact. Other data shows that deeper liquidity and smaller spreads are shown to reduce costs of capital, and increase valuations, for companies. has the deepest, most liquid market in the world stocks are more than twice as liquid as stocks in other regions.Ĭhart 1: The U.S. market is also the most liquid (Chart 1) and least expensive market in the world. It remains a leading venue for IPOs and capital formation. stock market has significantly outperformed global markets in the past decade.
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