The Economic Consequences of a Tobin Tax. An Experimental Analysis.”, Working Paper

The idea of introducing a transactions tax on foreign exchange markets has floated around since the early 1970s when James Tobin first proposed it in order to cut back speculation and to reduce volatility. Recently, this so-called Tobin tax has become popular – mainly among politicians – as a possible source for tax revenues. The economic consequences of introducing a Tobin Tax are, however, completely unknown, as such a tax has not been introduced on any real foreign exchange market so far. We report an experimental study where a tax is introduced on a subset or all foreign exchange markets. The consequences are very clear: If introduced unilaterally, the Tobin tax causes a dramatic shift of trading volume to the untaxed market (thereby yielding almost no tax revenues), together with an increase in volatility and a decrease in efficiency in the taxed market. If the tax is introduced simultaneously on all markets, volatility is hardly affected, but trading volume and efficiency are still reduced substantially