Tuesday, November 15, 2011
Mark P. Keightley
Analyst in Public Finance
Policymakers are currently considering taxing certain financial securities transactions. There are two justifications commonly offered for imposing such a tax: (1) it would reduce financial market volatility, and (2) it would be a significant source of revenue. Existing empirical research, however, suggests that volatility could actually increase in response to a securities transactions tax (STT), although the existing research may not be directly applicable to today’s environment. Estimates do indicate that an STT could be a significant revenue source if designed properly.
At its most basic level, an STT is a tax imposed on the buyer or seller of a security at the time a securities transaction occurs. An STT can be applied across the board to all financial transactions, or only those involving specific types of securities (for example, stocks, options, and futures, but not bonds). An STT can be applied to all security traders, or selectively to only certain types, such as intuitional traders but not individual investors.
There are historical precedents for an STT in the United States. At the federal level there was a stock transfer excise tax (sometimes called documentary stamp tax) on the issuance and subsequent transfers of securities from 1914 to 1966. Currently, the Securities and Exchange Commission (SEC) imposes a tax-like fee on certain securities transactions. At the state and local level, the state of New York, in conjunction with New York City, taxed the transfer of stocks from 1905 to 1981.1 There have been proposals in New York to reinstate the transfer tax since its repeal.
This report briefly discusses recent STT proposals, summarizes the possible effects on financial market volatility and speculation, and provides estimates of the potential revenue effects. This report is a condensed version of CRS Report R41192, A Securities Transaction Tax: Financial Markets and Revenue Effects, by Mark P. Keightley. Contained in that report is an in-depth economic analysis of an STT, a detailed discussion of revenue estimates, STT design options, and a summary of historical and international STT examples.
Date of Report: November 9, 2011
Number of Pages: 5
Order Number: R42078
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