Optimal Financial Transaction Taxes
First published: 07 November 2022
This paper characterizes the optimal transaction tax in an equilibrium model of financial markets. If investors hold heterogeneous beliefs unrelated to their fundamental trading motives and the planner calculates welfare using any single belief, a positive tax is optimal, regardless of the magnitude of fundamental trading. Under some conditions, the optimal tax is independent of the planner’s belief. The optimal tax can be implemented by adjusting its value until total volume equals fundamental volume. Knowledge of i) the share of nonfundamental trading volume and ii) the semi-elasticity of trading volume to tax changes is sufficient to quantify the optimal tax.