Speculation and Tobin taxes: Why sand in the wheels can increase economic efficiency
- Cite this article as:
- Palley, T.I. Zeitschr. f. National#x00F6;konomie (1999) 69: 113. doi:10.1007/BF01232416
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The current paper develops the microeconomic case for a Tobin tax. It combines the noise-trader literature with the Tobin-tax-policy literature. Noise traders cause economic losses by inappropriately cashing out their investments. A Tobin tax can reduce such activity, thereby conferring a benefit on fundamentals investors. The paper identifies the conditions under which these gains would be largest and provides guidelines as to whether a tax is warranted. There is a trade-off because Tobin taxes discourage fundamentals investors from trading, and there are occasions when they would rationally choose to trade but do not because of the tax.