When Financial Markets Work Too Well: A Cautious Case for a Securities Transaction Tax

Abstract

journal of financial services research, 3: 261-286(1989) © 1989 kjuwer academic publishers when financial markets work too well: a cautious case for a securities transactions tax lawrence h. summers professor of economics littauer 229 harvard university cambridge, ma 02138 victoria p. summers deputy director, international tax program harvard university, cambridge, ma 02138 abstract unlike most major industrialized nations, the united states does not impose an excise tax on securities transactions. this article examines the desirability and feasibility of implementating a u.s. securities transfer excise tax (stet) directed at curbing excesses associated with short-term speculation and at raising revenue. we conclude that strong economic efficiency arguments can be made in support of a stet that throws "sand into the gears," in james tobin's (1982) phrase, of our excessively well-functioning financial markets. such a tax would have the beneficial effects of curbing instability introduced by speculation, reducing the diversion of resources into the financial sector of the economy, and lengthening the horizons of corporate managers. the efficiency benefits derived from curbing speculation are likely to exceed any costs of reduced liquidity or increased costs of capital that come from taxing financial transactions more heavily. the examples of japan and the united kingdom suggest that a stet is administratively feasible and can be implemented without crippling the …

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