Working Paper: NBER ID: w27826
Authors: Eduardo Dvila
Abstract: This paper characterizes the optimal transaction tax in an equilibrium model of competitive financial markets. As long as investors hold heterogeneous beliefs that are not related to their fundamental trading motives and the planner calculates welfare using any single belief, a strictly positive tax is optimal, regardless of the magnitude of fundamental trading. Under some conditions, the optimal tax is independent of the belief used by the planner to calculate welfare. The optimal tax can be implemented by adjusting its value until observed total volume equals fundamental volume. Knowledge of i) the share of non-fundamental trading volume and ii) the semi-elasticity of trading volume to tax changes is sufficient to quantify the optimal tax. A calibration of the model consistent with empirically estimated volume semi-elasticities to tax changes and that features a 30% share of non-fundamental trading volume is associated with a 37bps optimal tax.
Keywords: No keywords provided
JEL Codes: D61; G18; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive transaction tax (F38) | Welfare gain for optimistic buyers and pessimistic sellers (D69) |
| Heterogeneous beliefs (D80) | Optimal transaction tax (H21) |
| Difference in beliefs between buyers and sellers (L14) | Optimal transaction tax (H21) |
| Dispersion of beliefs (C46) | Optimal transaction tax (H21) |
| Optimal transaction tax (H21) | Trading behavior adjustment until observed trading volume equals fundamental volume (C69) |