Summary
Financial transaction taxes (FTTs) pose significant challenges for investors, companies, and financial markets, creating a ripple effect that ultimately hinders market efficiency, economic growth and employment.
The World Federation of Exchanges represents the operators of over 250 market infrastructures that see more than $124tr in trading pass through them annually (at end-2023). Our goal is to remind policymakers and stakeholders of the significant economic drawbacks these taxes impose. Namely:
- Increased Transaction Costs: FTTs raise the costs associated with trading financial assets, which can reduce net returns for investors and discourage both short-term and long-term investments.
- Market Liquidity and Efficiency: FTTs reduce trading volumes and market liquidity, leading to wider bid-ask spreads, slower price discovery, and increased market volatility, which negatively impacts overall market efficiency.
- Distorted Investment Behaviour: FTTs incentivise investors to alter their strategies to avoid taxed assets, potentially leading to suboptimal investment choices and a shift towards riskier or less regulated markets.
- Impact on Corporate Financing: FTTs increase the cost of capital for companies, making it more expensive to finance new projects, which can stifle innovation and economic growth.
- Global Investment Shifts: The implementation of FTTs can cause investors to move their capital to jurisdictions with lower or no transaction taxes, reducing investment in regions with higher taxes.
Reducing Risk: Stifling trading is dangerous and counterproductive, allowing uncontrollable pressures to build up, as clearly demonstrated by the failure of fixed exchange rates in the later twentieth century. Encouraging trading, on the other hand, ensures that asset prices remain fresh, thereby reducing the risk of bubble, including those fuelled by cheap credit in the banking system. It also ensures that liquidity is maximised for those who wish to change the composition of their portfolios from time to time.