This paper assesses the potential implementation of a federally levied Financial
Transaction Tax (FTT) in the Canadian context. First, examples of how financial
transaction taxes have worked historically, as well as how they may work in a future
Canadian context are discussed. This is followed by a brief overview of the tax's history.
The tax is then evaluated on a theoretical level. Hypothetically the tax should correct for
market failure caused by excessive speculation and price volatility. It is shown using
various models that the tax may correct for volatility- however, empirical evidence does
not offer the same conclusion. Some empirical studies actually show an increase in
volatility. Optimal taxation theory finds that the optimal tax rate depends on a number of
factors. The most important of which is the composition of trader types. The tax may
result in significant economic distortions. These distortions could include; intertemporal
distortion, locking-in effect, inter-asset effect, and industry distortion. The tax may also
negatively affect household savings, resulting in decreased aggregate consumption and
consequently a reduction in GDP. Revenue projections are favorable, but vary depending on a number of factors,
elasticity of market volume to transaction costs being amongst the most important.
International examples of countries having levied a FTT are given and the data for
revenue generated as a percentage of GDP allows for the hypothesis that revenue
estimates may be considerably overvalued.