Conclusion
In this paper, we reviewed the theoretical and empirical studies on the impact of a transaction tax. Specifically, we reviewed the empirical evidence on the imposition of a FTT in futures markets with regard to trading volume, price volatility, pricing efficiency, and estimated revenue. We discussed a methodology for estimating the potential transaction tax revenue that can be raised from U.S. futures markets.
The empirical model proposed by the authors and used in several previous studies accounts for the endogenous relationships among trading volume, bid-ask spread (transaction cost), and volatility. We explained the estimation of the empirical elasticity of trading volume and post-tax adjusted trading volume using Bjursell, Wang, and Yauâs estimates on 11 futures traded in the United States. We showed that current estimates of the elasticity of trading volume with respect to a transaction tax in U.S. futures markets are much higher than those reported in the extant literature and those used by the government in transaction tax revenue estimation.
As such, a transaction tax would reduce trading volume significantly, may not reduce price volatility, and might only raise a modest amount of tax revenue, much smaller than expected. More importantly, results indicate that with such high estimates of trading volume elasticity, it is very likely that futures trading activities would be shifted to untaxed foreign markets should a transaction tax be imposed. We conclude that a transaction tax on futures trading will not only fail to generate the expected tax revenue, it will likely drive business away from U.S. exchanges and toward untaxed foreign markets.
