Discussion of Benefits and Challenges in Implementing Securities Transaction Taxes

Abstract

This paper examines the views of financial market practitioners and academic researchers on whether or not to impose taxes on security transactions (STTs). The debate on whether to impose such taxes has recently been revived due to the urgent need for all governments both developed and developing to find new sources of income in the face of the unprecedented ongoing financial constraints they face. The paper uses the two main schools of taught one which is favour of STTs and the other which is opposed to such taxes.

Those in favour of STTs argue with empirical evidence that such taxes have and could continue to raise substantial tax revenue to the tune of around $10 billion per annum in the US to augment existing tax revenues. They also argue that STTs are necessary weapons in any financial market to curtail the activities of speculators and ‘noise traders’ whose trading activities cause security prices to move away from their intrinsic values by diluting the quality of information revealed by market prices

Those who oppose the imposition of STTs also argue that the cost of administering and implementing such taxes could far outweigh the revenue it could raise. They argue that imposing such taxes has the potential to increase the cost of capital for trading, reduce market efficiency and liquidity which could lead to reduction in security prices. They also argue that imposing STTs could affect the prices of various classes of securities differently which could ultimately affect the structure and volume of investment portfolios. The opponents also contend that imposing STTs could move security trading from countries where such taxes are in existence to countries where they non existing using the case of Sweden where in 1984 a 1% security transaction tax led to over 50% movement of trading volume to the London security market

Comparing the two views, the authors conclude using the case of bail out strategies adopted by the US and the austerity measures being adopted by some European countries that imposing taxes on security transactions could be counter-productive which could ultimately affect growth that is so critically important to move countries out of recession. By adopting the bail-out strategy, the US is officially out of recession judging by the figures for the third quarter of 2013 released by the US Government, while their European counterparts which adopted the austerity measures are still grappling high unemployment rates and unmet growth targets. In line with the authors’ view, many countries notably India have either reduced their STTs rates or eliminated completely.  Where STTs are still being administered or intended to be administered, the authors’ recommend that for STTs to aid in growth targets, the tax rates should not be more than 0.5% based on empirical evidence otherwise it could lead to higher cost of trading which could affect trading volumes and ultimately reduce tax revenue for which the STTs are supposed to avoid

Additionally, developing economies such as Ghana, might have to consider factors such as the size of the security market, the tax rate applicable, capacity of existing tax collection agencies, the capacity of the Securities and Exchange Commission and other related regulatory agencies if such taxes can work.

Key words: Securities Transaction Tax, derivatives, stock markets, tax benefits, challenges.