Applied Economics
REGULATION: The Financial Transaction Tax
Group Assignment
PE204 – Applied Economics
Abstract
The upcoming constituents of this paper will discuss
the case for and against regulation, and provide an
evaluation in the light of the Financial Transaction
Tax (FTT) as a regulation in the nancial markets.
1 Introduction
Regulatory economics is the economics of regulation,
in the sense of the application of law by government
that is used for various purposes, such as centrally-
planning an economy, remedying market failure, en-
riching well-connected rms, or bene ting politicians.
It is not considered to include voluntary regulation
that may be accomplished in the private sphere. Reg-
ulations can be public, social, or self regulatory.
Regulation may, in fact, not be necessary in nancial
markets, however we will be discussing this in the up-
coming constituents. Over last decade vast amount
of criticism is being directed at regulation and its ef-
fectiveness at preventing crises such as the one we
are currently in, we look at how left to free trade all
the problems regulation seeks to overcome could be
solved.
2 Reasons for Regulation
There are two fundamental advantages of regulation
in the nancial markets – moral hazard and gridlock
problem.
2.1 Gridlock Problem
Without a regulator in the system there are instances
when a grid lock can occur. This happens when, de-
spite knowing how they should act in relation to their
customers, banks take on risky policies in order to in-
crease short term pro ts. It is made more likely by
them having no assurance that other banks are not
following similar policies. These policies may only
come to light in the long run. This can result in two
problems, adverse selection and moral hazard.
With adverse selection good rms may be forced out
of business by the bad as their more risk adverse poli-
cies produce smaller pro ts. With the moral hazard
problem there is the risk that the good banks will
be persuaded to follow suit and take more hazardous
approaches to their deposits. This could be because
they see others taking these routes and the pro ts
that are resulting, or that they have no con dence in
the other bank not undertaking these policies.
2.2 Moral Hazard
A further issue of moral hazard arises with the safety
net that regulation provides; deposit assurance and
lender-of-last-resort. With a lender-of-last-resort in
place in can lead banks to undertake higher risk poli-
cies. Depositor insurance can then result in depos-
itors being less careful as to where they put their
money, and may actively seek higher risk banks on
the basis that with those higher risks comes a higher
reward and should the bank fail their money is safely
1
backed by the government. In general terms, with
the presence of a safety net rms in the nancial sys-
tem are able to a degree to pass their risk onto others
and this can a ect their behavior negatively.
Regulation must be set in place here so as to ensure
that these problems never arise. In any form of in-
surance contract there is moral hazard, the insurers
usually attempt to minimize the potential for the in-
sured to be able to take advantage of it.
3 Financial Transaction Tax as
a Regulation
A nancial transactions tax (FTT) is, a tax on each
and every nancial transaction. Such taxes have been
proposed by economists such as J. M. Keynes and
James Tobin; in past decades and interest has been
revived recently by the Robin Hood Tax campaign
and a variety of ocial bodies such as the European
Commission.
Keynes thought that excessive speculation could be
damaging, although that did not stop him being one
of the most aggressive commodities speculators of his
day. Tobin was worried about exchange rates in the
context the tail end of the Bretton Woods system in
the late 1960s and early 1970s. Fixed exchange rates
(which could only be changed by agreement and in ex-
tremes) were giving way rst to various `dirty’ oats
and then to the more free market approaches of recent
decades. Speci cally he proposed his Tobin Tax on
currency transactions in order to reduce the liquidity
of currency markets. His point was that governments
ought to be able to determine the exchange rates and
speculation made this more dicult to speculation
should be discouraged through taxation.
A nancial transactions tax is certainly feasible. It
is possible to tax just about anything from head of
population through transactions to windows. The
last UK attempt to have a poll tax led to riots and
the results of the taxation of windows can be seen
in the blanks on nearly every Georgian house in the
country does not mean that feasible is to be equated
with desirable and so it is with an FTT.
An FTT can be imposed with varying e ects depend-
ing upon how many other governments do so at the
same time. A purely EU FTT would see much trad-
ing leaving the EU, as happened to Sweden when it
unilaterally imposed such a tax in the 1980s and 90s.
A global tax would not have the problem of trading
moving but would still have all of the other associated
problems.
The feasibility or not of the FTT is something of a red
herring: the UK government does say that it would
only consider one if it were universal but this is much
less important than the longer list of things which are
wrong with an FTT in principle, however widely it
may be levied.
4 Theoretical Consideration of
the Financial Regulation Tax
Recent activity in global markets have complicated
real life situations considerably. These situations
have been examined and re-examined in various stud-
ies that have found the two types of behaviour com-
peting rather than complementary. Though there are
no precisely clear outcomes from a toss-up of these
studies, it is not impossible to identify the slant that
the majority of analytical examinations have taken.
Having said this this, the theoretical consideration of
FTT can be analyzed under the following categories:
1. Prices and Transaction Volumes
2. Volatility
3. General Economic Impact
4. and Revenue Productivity and Collection Costs
2
Add a new sub topic “DATA” to a group report. What you will do under this sub topic is to collect data from world bank website here: http://data.worldbank.org/country for four countries UK,
France, Sweden and Denmark with four variables and analyse it. I have already finished collecting the data for France, please see the new attached file. After collecting the data, use “Gretl” to
create graphs. In your analysis, compare the countries, apply Financial Transaction Tax (FTT) on the countries and talk about the effects and also talk about the size of financial impact on
economies.
Year: 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Inflation 1.699411423 1.630257581 1.916907283 2.109073739 2.134874759 1.735587081 1.68372645 1.488073528 2.813915043
0.088084169 1.529639382 2.117486809 1.9556855 0.86360693
Money (Current LUC) 2.94E+11 3.15E+11 3.36E+11 3.66E+11 4.30E+11 4.55E+11 5.06E+11 5.42E+11 5.77E+11 5.82E+11 6.18E+11 6.63E+11 7.02E+11 7.17E+11
Tax Revenue 2.24435E+11 2.43971E+11 2.61408E+11 2.99499E+11 3.20055E+11 3.33839E+11 3.43663E+11 3.46525E+11 3.51431E+11
3.68707E+11 3.85111E+11 4.05172E+11 4.12958E+11 4.18857E+11
GDP (current US$) 1.32633E+12 1.3383E+12 1.45203E+12 1.79222E+12 2.05568E+12 2.13656E+12 2.25571E+12 2.58239E+12 2.8318E+12
2.61969E+12 2.56504E+12 2.78221E+12 2.61122E+12 2.73495E+12
Inflation
Money (Current LUC)
Tax Revenue
GDP (Current US$)
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