Issues of Enforcement and Evasion in a Tax on Foreign Exchange Transactions

Abstract

Abstract In this chapter, I study, qualitatively, how the volume of foreign exchange transactions reacts to the imposition of a transactions tax. Here, I assume that most countries agree to implement a tax on foreign exchange operations but that the coverage may or may not be com prehensive.1 First, I consider the situation that will arise if a country with a large financial centre does not impose the tax. Then, I analyse the situation in which only countries with smaller financial centres do not impose the tax, and there is no enforcement mechanism that penalizes them for not cooperating. Finally, I consider a situation in which all countries uniformly accept the tax and the tax can be readily imposed on those transactions that are conventionally considered foreign exchange operations-spot, futures and forward foreign exchange trades, and “plain vanilla” currency swaps and options-but not read ily imposed on those transactions that are not traditionally considered foreign exchange. Because activity will move from the taxed set of transactions to the untaxed, I consider a range of products that may serve as untaxed substitutes.