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Sunday, May 2, 2010

A Securities Transaction Tax: Financial Markets and Revenue Effects

Mark P. Keightley  
Analyst in Public Finance  

Maxim Shvedov  
Analyst in Public Finance

A securities transactions tax (STT) is a tax imposed on the buyer and/or seller of a security at the time a securities transaction occurs. An STT can be applied to all security traders or selectively to only certain types. An STT can be applied across the board to all securities transactions, or only those involving specific types of securities, for example, stocks, options, and futures, but not bonds. While an STT can come in many different forms, there are two justifications commonly offered for imposing a tax of some sort on financial transactions: it would improve financial market operations and/or it would be a significant source of revenue. 

A number of domestic policymakers have recently expressed their opinion about imposing an STT. Speaker of the House Nancy Pelosi has expressed interest in the idea of an STT if pursued in coordination with other countries. In addition, several bills proposing an STT have been introduced in the 111th Congress, including H.R. 676, H.R. 1068, H.R. 1703, H.R. 3153, H.R. 3379, H.R. 4191, H.R. 4646, and S. 2927. On the other hand, 36 House Members sent a letter to then-House Committee on Ways and Means Chairman Charles Rangel expressing their opposition to an STT. And, according to press reports, U.S. Treasury Secretary Timothy Geithner has questioned whether an STT would work. 

This report analyzes the general effects of an STT on financial markets and its ability to raise revenue. The analysis examines how the tax could impact the important functions of financial markets—the determination of security prices, the spreading of risk, and the allocation of resources. The analysis of the financial markets then turns to examining how the tax may have an impact on security price volatility and the level of security prices. 

The ability of an STT to raise revenue is dependent on the design of the tax, but illustrative estimates presented in this report suggest that an STT similar to recent proposals offered in the 111th Congress could raise a significant amount of revenue. The analysis in this report highlights the fact that the economic burden of the tax would ultimately fall on individuals, and it would likely fall more heavily on short-term traders than long-term traders. Finally, the analysis suggests that the tax may contribute to the progressivity of the tax code.

Date of Report: April 19, 2010
Number of Pages: 27
Order Number: R41192
Price: $29.95

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