Comments on “Adverse Implications of a Securities Transactions Excise Tax” by Joseph A. Grundfest and John B. Shoven

Scholz, John Karl
September 1991
Journal of Accounting, Auditing & Finance;Fall91, Vol. 6 Issue 4, p443
Academic Journal
This article identifies and discusses the potential beneficial effects of a securities transactions excise tax (STET). The first potential benefit is that a STET would raise a substantial amount of tax revenue. The importance of a new revenue source should be clear. Many in the U.S. are concerned about the economic effects of large budget deficits and are pessimistic about the feasibility of reducing the deficit solely by expenditure reductions. There are arguments that a STET could increase efficiency. A heuristic description of one argument is that there are good and bad security traders. The bad traders are sometimes referred to as positive feedback investors, noise traders or investors who do not base their investment decisions on a security's long-term fundamental value. A second pro-STET argument suggests the net private benefits of a good deal of financial-market activity exceeds the net social benefit of such activities. It should be emphasized that the empirical magnitude of these hypothesized benefits is not clear. There is an ongoing debate about whether so-called noise traders add excess volatility to an otherwise efficient market. One of the major problems with a STET is it will raise the cost of capital.


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