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No Limit: Unintended Consequences
Posted By Malcolm A. Kline On February 21, 2013 @ 1:36 pm In Faculty Lounge | No Comments
In the academic and political worlds in which our laws are incubated and passed, there is one statute scholars and politicos routinely ignore: the law of unintended consequences.
“In the wake of the recent financial crisis, several commentators have suggested a transaction tax on financial markets,” George H. K. Wang and Jot Yau  point out in a policy analysis for the libertarian Cato Institute. “The potential consequences of such a tax could be hazardous to the financial markets affected as well as to the economy.”
Wang is research professor of finance at the School of Management at George Mason University, and former deputy chief economist at the U.S. Commodity Futures Trading Commission. Yau is Dr. Khalil Dibee Endowed Chair in Finance at the Albers School of Business and Economics, Seattle University.
“We find that the impact of a transaction tax on market activity (trading volume, bid-ask spread, and price volatility) will determine the potential of such a tax as a source of government revenue,” they write. “We also find that the current estimated elasticity of trading volume with respect to a transaction tax in the U.S. futures markets is much higher than those reported in the extant literature and those used by the government in such computation.” Wang is the former deputy chief economist at the U.S. Commodity Futures Trading Commission.
“A review of the literature and estimates contained here indicates that there is an inverse relationship between transaction cost (bid-ask spread) and trading volume; to the extent that a transaction tax increases costs, trading volumes will likely fall. There is also a positive relationship between transaction cost and price volatility, suggesting that the imposition of a transaction tax could actually increase financial market fragility, increasing the likelihood of a financial crisis rather than reducing it. Perversely, the imposition of a financial transaction tax could have results that are exactly the opposite of those hoped for by its proponents.”
Finally, there is no statute of limitations on the law of unintended consequences.
Malcolm A. Kline is the Executive Director of Accuracy in Academia.
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URLs in this post:
 George H. K. Wang and Jot Yau: http://www.cato.org/publications/policy-analysis/would-financial-transaction-tax-affect-financial-market-activity-insights-futures-markets?utm_source=Cato+Institute+Emails&utm_campaign=b0a4a832c2-CPF_3_13_2013&utm_medium=email&mc_cid=b0a4a832c2&mc_eid=861
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