After the Flood Comes the Tax: European Road to Financial Transactions Tax

Abstract

Purpose

This chapter presents the results of the comprehensive literature survey and supportive empirical assessment of the potential impacts of the Financial Transactions Tax (FTT) recently adopted by the European Commission in response to the significant financial sector misallocations arising from the Global Financial Crisis.

Methodology/approach

A survey of 50 academic articles relating to both Financial Transaction Taxes and Tobin Taxes shows that although a reduction in liquidity can be expected from such taxes, the impacts this will have on volatility and efficiency in a market are less obvious. A regression model quantifying what the possible effect of an introduction of a 0.1% tax on financial transactions would be on trading volumes and levels of volatility in the European equity market confirms the survey results in broader terms.

Findings

The results suggest that, in the current economic climate, such a tax would likely increase volatility levels but may not have much effect on trading volumes.

Practical implications

As a result the proposed tax can be viewed as an exercise in revenue generation but not as a macro-prudential tool for addressing potential future shocks and imbalances within the European financial system. In other words, contrary to political and media statements, the FTT does not appear to be an effective tool for addressing past, present and future risks associated with systemic malfunctioning in the banking and financial systems.

Originality/value

The study presents an extensive and systematic survey of academic literature on FTT and links this survey to empirical model estimation. This twin approach to the analysis is novel to the academic and policy literature on Financial Transactions Tax. Whilst popular belief is that introduction of FTT will aid the objective of achieving greater financial and economic sustainability across the European financial systems, evidence presented in this chapter suggests that such a conclusion is at the very best naive.

Citation

Gurdgiev, C. and Murphy, B. (2016), "After the Flood Comes the Tax: European Road to Financial Transactions Tax", Lessons from the Great Recession: At the Crossroads of Sustainability and Recovery (Advances in Sustainability and Environmental Justice, Vol. 18), Emerald Group Publishing Limited, Leeds, pp. 203-230. https://doi.org/10.1108/S2051-503020160000018009