The Impact of Transaction Tax on Stock Markets: Evidence from an emerging market

This paper provides empirical study on the behavior of the Shanghai and the Shenzhen stock exchanges after the Chinese government announced to increase the securities transaction tax from 0.3% to 0.5% in May 9, 1997. We examine the impact of the increased transaction tax on the volatility of stock returns and tax revenue. We find that the return volatility significantly increased. We also find that because the volume decreased considerably, the increase in the tax revenue is relatively small compared to the increased level of the tax rate.