ÖSTERREICHISCHES INSTITUT FÜR WIRTSCHAFTSFORSCHUNG
AUSTRIAN INSTITUTE OF ECONOMIC RESEARCH
Stephan Schulmeister  Margit Schratzenstaller  Oliver Picek
A General Financial Transaction Tax – Motives
and Effects
Study of the Austrian Institute of Economic Research (WIFO) commissioned
by Ökosoziales Forum Europa and co-financed by the Ministry of Finance
and the Ministry of Economics and Labour
Executive Summary
The issue of whether a tax should be levied on transactions of financial assets (FTT) has been
controversial ever since it was proposed by John Maynard Keynes. The debate turns on the
answers to three questions. First, is there excessive trading in financial markets which causes
exchange rates, stock prices, and commodities prices to fluctuate excessively over the short
run as well as over the long run? Second, would a small tax on financial transactions hamper
destabilizing speculation without reducing liquidity beyond the level needed for market
efficiency? Third, will the revenues of a general FTT even at a low tax rate be substantial
relative to the costs of its implementation?
In order to answer these questions, the study first documents the development of trading
volume and price dynamics in financial markets over the past decades. It’s main
observations are as follows:

There is a remarkable discrepancy between the levels of financial transactions and the
levels of the “underlying” transactions in the “real world”. E. g., the volume of currency
transactions is almost 70 times higher than trade of goods and services; transaction
volume of interest rate securities is even several 100 times greater than overall
investment.

These discrepancies have risen tremendously since the late 1990s, i. e., financial
transactions have expanded several times faster than transactions in the “underlying”
markets for goods and services.

Trading in derivatives markets has expanded significantly stronger than trading in spot
markets. As a consequence, derivatives trading in Europe was already in 2006 84 times
higher than nominal GDP, whereas spot trading was 12 times higher.

Asset prices like exchange rates, stock prices, or crude oil prices fluctuate in a sequence
of medium-term upward and downward trends (“bull and bear markets”). These trends
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are the result of the accumulation of short-term (intraday) runs which persist in one
direction longer than the counter-movements, i. e., in a “bullish” market upward runs
persist longer than downward runs, the opposite is true in a “bearish” market.
These observations suggest that asset markets are characterized by excessive liquidity and
excessive price volatility leading to large and persistent deviations from their fundamental
equilibria. This pattern of asset price dynamics implies that the cumulative effects of
increasingly short-term transactions are rather destabilizing than stabilizing. The growing
importance of technical trading systems in financial markets contributes significantly to the
volatility of asset prices over the short run as well as over the long run.
A general FTT would render transactions more costly the shorter is their time horizon is.
Hence, it would tend to dampen technical trading, which is increasingly based on intraday
price data. At the same time, technical trading strengthens price runs which in turn
accumulate to medium-term trends that involve growing departures from long-run
fundamental levels. As a consequence, a FTT can be expected to reduce excessive liquidity
stemming from transactions which are very short-term oriented and might be destabilizing at
the same time.
The study estimates the potential revenues of a general FTT for three tax rates, namely, 0.1%,
0.05%, and 0.01%. The calculation assumes that the tax base is the notional value of the
respective transaction. This design implies that the tax burden, relative to the cash invested
to acquire a certain instrument, grows as transaction costs fall and the leverage effect rises.
Such an FTT will hamper specifically those transactions that involve high leverage and,
hence, a high risk (chance) of great losses (profits).
The revenue estimates are based on the assumption that transaction volumes will be
reduced by the introduction of an FTT. The size of this reduction effect depends on the tax
rate, the pre-tax transaction costs and the leverage in the case of derivatives instruments.
For each tax rate and type of instrument, a low, medium and high “transactions-reductionscenario” (TRS) is specified.
The potential revenues of a general FTT are estimated for selected European countries, as
well as for major regions of the world and for the global economy as a whole. In Austria, e.
g., overall receipts of an FTT of 0.1% would amount to 0.62% of GDP in the medium TRS. If the
tax rate were only 0.01%, tax receipts are estimated at 0.21% of GDP.
In Germany, FTT revenues in the case of the medium TRS would amount to 1.50%, 1.07%, and
0.47% of GDP for tax rates of 0.1%, 0.05% and 0.01%, respectively. Most of these revenues
would stem from derivatives trading at EUREX. Tax revenues from spot transactions of stocks
and bonds would be small (less than 0.1% of GDP even at a tax rate of 0.1%).
As regards the size of financial transactions relative to nominal GDP, the UK is a “special
case”. Hence, also revenues from an FTT would be exceptionally high. E. g., even in the case
of the high TRS our calculations imply overall tax revenues of 2.49% of GDP at a (low) tax rate
of 0.01%.
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For the world economy as a whole, overall tax revenues would amount to 1.52% of world
GDP at a tax rate of 0.1%, and to 0.49% at a tax rate of 0.01%. In North America and Europe,
tax revenues would be similar in size, i. e., they should lie between 0.7% and 2.2% of GDP. In
the Asian-pacific region, FTT revenues as a percent of GDP would amount to 1.5% and 0.5%,
respectively.
A general taxation of financial asset transactions in all major economies can only be the
final stage in the process of implementing an FTT. The first stage could be the
implementation of a tax levied only on spot and derivatives transactions on organized
exchanges in some major EU economies. In fact, it would be sufficient if only the UK and
Germany implemented such a tax (almost 99% of all spot and derivatives transactions on
exchanges in the EU are carried out in these two countries).
This extreme concentration of transactions on exchanges in Europe (only 6% are spot
transactions, 94% refer to futures and options) clearly shows that network externalities of wellestablished market places are the most important factor for their success. This in turn implies
that an FTT of 0.05% or even only 0.01% will not induce any considerable “emigration” of
transactions.
This presumption is confirmed by the success of the British “stamp duty” on stock transactions
(as documented in this study). Even the comparatively high tax rate of 0.5% has obviously
not done any harm to the attractiveness of the London stock exchange. At the same time,
the revenues from the “stamp duty” are substantial, amounting to 0.7% of total tax receipts.
Based on the experience with an FTT levied only on transactions on organized exchanges
one could include in the second stage all OTC transactions within the Euro area which
involve no other currencies, i. e., primarily euro interest rate derivatives. The third stage would
then include also spot and derivatives transactions in the foreign exchange market.
Due to network externalities, financial asset transactions are highly concentrated in certain
markets. The same would be true for the potential revenues of an FTT. E. g., if an FTT would
be implemented in “stage 1” on all transactions on exchanges in the EU27, almost all
revenues would stem from transactions on the London and Frankfurt market places.
However, the tax will effectively be paid by all actors who make use of the exchanges in
London and Frankfurt. If one assumes that trading activities are roughly proportionate to the
overall economic performance (i. e., nominal GDP) then an FTT might well be in line with the
principle of a fair sharing of the tax burden. To put it differently: The fact that most of the tax
revenues would be collected in the UK and Germany does not mean that only these
countries carry the burden of the tax.
Of course, for providing such efficient market places as London and Frankfurt, the UK and
Germany should get some fixed share of tax revenues (not the least also for political
reasons). However, the other part of the revenues could be used to finance supranational
projects at the EU level or at the global level.