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Transaction taxes in a price maker/taker market

Rosenthal, Dale W.R. and Thomas, Nordia Diana Marie and Wang, Hefei (2013): Transaction taxes in a price maker/taker market.

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Abstract

We develop a price maker/taker model to study how a financial transaction tax affects markets where potential traders either take a price or quote prices for the next potential trader. We find taxes widen quoted and effective spreads by many times the tax; reduce volume, gains from quoting, and gains from trade; may decrease volatility slightly without market makers; increase volatility significantly with market makers; and, do not eliminate destabilizing speculators. These effects are amplified in markets with market makers. We find revenue-optimal rates of 55-70 basis points but that the socially-optimal tax would be zero.

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