Optimal Financial Transaction Taxes

This paper characterizes the optimal linear financial transaction tax in an equilibrium model of competitive financial markets. As long as investors hold heterogeneous beliefs about the returns of assets in fixed supply and the planner calculates welfare using any single belief, we expect the optimal tax to be positive, even when a fraction of trading is fundamental. Strikingly, the optimal tax is independent of the belief used by the planner to calculate welfare. If assets are in elastic supply, as in q-theory, the sign of the optimal tax is indeterminate, although the optimal tax remains unchanged if the planner uses the average belief of investors to calculate welfare. In dynamic environments, the optimal tax is lower when investors trade more frequently. JEL Classification: D61, H21, G18