Abstract
We consider the impact of transaction taxes on financial markets in the context of four questions. How important is trading? What causes price volatility? How are prices formed? How valuable is the volume of transactions? Drawing on the literature on market microstructure, asset pricing, rational expectations, and international finance, we argue that securities transaction taxes “throw sand” not in the wheels, but into the engine of financial markets. We conclude that transaction taxes can have negative effects on price discovery, volatility, and liquidity and lead to a reduction in the informational efficiency of markets.
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