The name is absent

2. Impact on market volatility

The power of an international financial transactions tax to reduce market volatility
through increased transactions costs is an empirical issue. If anything, empirical observations
do not provide a firm link, however. For example, in recent years, average transactions costs
in the United States have fallen significantly; nevertheless stock market volatility has not
increased (Schwert, 1993). Similarly, nowhere did the existence of a domestic transactions
tax seem to influence the severity of the October 1987 stock market crash (Hakkio, 1994).
Finally, the argument of Summers and Summers (1990) that the tax would discourage
investment by "noise traders"—those whose information is not based on fundamentals—has no
empirical support.

3. Distribution and incidence effects

It may be argued that a global financial transactions tax would be progressive under
particular assumptions regarding the main participants in currency conversions. Nevertheless,
some of the primary market operators—pension funds, insurance companies, mutual funds—
hold assets of a broad cross-section of the population. This would dampen the progressive
nature of the tax.

In terms of cross-country incidence of the tax, it is likely that a general tax on
currency conversions would fall most heavily on countries trading intensively in international
financial markets and would depend, therefore, on the size of the traded sector. Thus while
large developing countries whose traded sectors are small compared to their GDPs may be
shielded, small, open developing economies may suffer in particular.

4. Revenue productivity

The attraction of the tax lies in its revenue potential. Assuming that global net
turnover in the world’s currency markets (spot, contract and derivative contracts) is US $1
trillion per day, a 0.01 percent tax would yield US $25 billion per year under static
assumptions. The possible economic effects of the tax discussed above could, however,
dampen its revenue productivity, especially under non-static conditions. For example, it was
argued by some participants during the U.N. Meeting that the tax base could shrink
significantly even with a very small tax, which could, therefore, be expected to be highly

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