Do Tobin taxes help stop stock price bubbles?

Abstract

Purpose This study aims to report on experimental asset markets designed to examine the impact of a levy on trade, as well as the taxation authority’s ability to raise tax revenue when markets are subject to mispricing. Some have suggested that a transaction tax will discourage irrational speculation and lead to more efficient markets, but others argue that a higher cost of trading will prove to be an impediment to trade with no useful outcomes. Design/methodology/approach The authors’ goal is to provide insight on the impact of a transaction tax in a very specific asset market. The authors chose this design because the robustness of the bubble and crash pattern points to an environment that is particularly appropriate for the study of the effectiveness of a transaction tax in promoting efficient pricing. Furthermore, in a laboratory, the authors can control for extraneous factors that are problematic in the study of naturally occurring environments. Findings The authors examine whether a securities transaction tax promotes efficiency in markets that are prone to mispricing and find little evidence that a tax on trade will reduce speculation. Research limitations/implications This study’s experimental environment is, of course, an abstraction of naturally occurring markets and it may be that the model excludes important aspects. Social implications The authors find that a tax on financial transactions allows the taxation authority to raise significant revenue with little impact on pricing or trading volume. Originality/value To the best of the authors’ knowledge, this study is the first systematic examination of a transaction tax on outcomes in a market that is prone to mispricing.