Likewise, there is a lack of robust evidence on the relationship between transaction volume/turnover rate and price fluctuations as well as between transaction volume/turnover rate and the deviation of prices from the level justified by fundamentals. The “right” price is hardly determinable. However, proving that excessive trading activity causes inefficient pricing is rather difficult. 1Īgainst the background of these prevailing paradigms, opponents of the FTT typically require FTT proponents to demonstrate that excessive trading activities are actually the cause of sharp price fluctuations and of market price deviations from fundamental values. Second, financial markets in which large volumes were traded with high frequency were considered highly liquid and, therefore, would show a strong tendency towards efficient price formation. First it was thought that findings from the Arrow-Debreu world applied: financial innovation would make the financial markets more complete and foster better management and distribution of risk. Two scientific opinions dominated the attitude of economists towards financial markets in the years prior to the financial crisis. The Paradigm of Efficient Financial Markets Is Dead Attempts at tax avoidance are, of course, inevitable, and therefore the effect of the tax should be monitored closely so that governments can react quickly if tax loopholes and tax-induced geographical relocation plans of financial institutions come to light. However, if, contrary to expectations, harmful transactions are not curbed, the FFT will at least generate large tax revenues that can contribute to covering the costs of the financial crisis. The FTT aims to reduce regulatory arbitrage, flash trades, overactive portfolio management, excessive leverage and speculative transactions of financial institutions – activities that have contributed to the financial crisis. With the tax, governments have an additional instrument at hand to influence trading activity. We argue in this Forum contribution that a financial transaction tax (FTT) complements financial market regulation. Finally, the paper by Ross Buckley analyses common myths, inaccuracies and untruths about the EU’s proposed FTT. Donato Masciandaro and Francesco Passarelli focus on how an FTT measure aimed at reducing financial systemic risk can cause political distortions, leading to inefficient and ineffective policies. John Vella identifies some commonly made claims about an FTT which are of questionable foundation and compares the FTT with some alternative taxes on the financial sector. The paper by Stephan Schulmeister discusses the essential features of a general FTT that will ensure that the more short-term oriented and riskier a transaction is, the greater the effect of the FTT on transaction costs. The FTT can therefore make an important contribution to preventing the decoupling of financial markets from the real economy. Dorothea Schäfer regards as the main policy goal of an FTT to be the prospect of slowing down the mutually reinforcing and growing trends of an increasing number of derivative products and shorter holding periods. Against the backdrop of the debate over the introduction of a financial transaction tax (FTT) in the European Union, this Forum is dedicated to the discussion of issues concerning the implementation and impact of such a tax on the financial sectors of the member states.
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