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|Title||Welfare Effects of a Proportional Tax on Financial Transactions|
|Institution||University of Zurich|
|Faculty||Faculty of Economics, Business Administration and Information Technology|
|Abstract Text||In September 2011 the European Commission proposed the introduction of a harmonized Financial Transaction Tax in the EU member states, which caused extensive public debate regarding the effects the tax would provoke. The most commonly cited concerns relate to inability of the tax to reduce volatility in financial markets, negative impact on liquidity and price discovery process, its questionable feasibility and incidence etc. More generally, regulatory measures of this sort are often disliked due to the belief that they reduce the efficiency of competitive markets and impose welfare costs. This paper attempts to examine the possibility that, other than its expected welfare decreasing effect in efficient markets, a financial transaction tax could have welfare benefiting effects in “speculative” markets, where the notion of speculation is captured by allowing for heterogeneous beliefs among the agents. The results provided suggest that the transaction tax can indeed be welfare improving in a market with very high dispersion of expectations among agents, and/or in a market where the average expectation sufficiently differs from the true expectation.|