Boom or Bust: The Potential for a Financial Transaction Tax in the US

Sales tax is simply a fact of life for Americans, except for one group: corporations. While the average American pays sales taxes on groceries or gas, corporations make millions without a dime being taxed. By trading with algorithms, corporations move billions through the market every day with no consequence. In the American status quo, there is no tax on massive-portfolio firms or investors who trade stocks, bonds, and derivatives. In many other countries around the world, however, a “financial transaction tax” (FTT) is commonplace. FTTs introduce a marginal percentage fee on the trade of securities for both individual investors and corporations.

The fundamental idea of an FTT is two-fold. First, it serves to provide the government with revenue, which may be used to provide welfare or bolster military strength, among a plethora of other options. Second, it seeks to deter high-frequency trading. Historically, the United States has levied financial transaction taxes. From 1914 to 1966, the government levied an FTT. Although it was eventually repealed, its use for revenue was effective. For example, the government doubled the tax during the Great Depression to increase the efficiency and volume of government spending. These taxes are not simply federal – states have levied them too. New York imposed an FTT from 1905 to 1981 in order to bolster revenue, but it was repealed due to concerns that investing firms would leave because of the stock exchange tax. Critics of FTTs claimed that they would make New York non-competitive, especially while the state’s trading jobs were already at risk. Indeed, according to the U.S. Bureau of Labor Statistics, “from 2008 to 2019, New York State saw its securities jobs fall by 20,000.” 

From just a simple exploration of the U.S.'s history with FTTs, it is evident that there are strong arguments both in favor of and against the implementation of these taxes.

Regarding the benefits of the tax, FTTs have a solid empirical foundation that proves their effectiveness in generating revenue. More than 30 countries around the world have FTT-like policies, and they bring in a large amount of revenue –  more than $4.5 billion in the UK and $7.5 billion in South Korea, Taiwan, and Hong Kong annually. This revenue is mostly siphoned from the wealthy and redistributed into the economy through government spending, which is why an FTT is often aptly called the “Robin Hood Tax.” One of the most compelling arguments for FTTs is the fact that they would not affect the average investor but would greatly benefit the country. This is because FTTs are so marginally small, that, for the volume that the average investor trades, they go unnoticed. The Tax Policy Center estimates that proposed FTTs in the U.S. could raise $75 billion dollars in revenue at only a 0.34% rate. The idea is thus that simply a small fee on security trades — unnoticeable to the corporate giants in question — would greatly benefit the public and the government, incentivizing less high-frequency trading and generating revenue to be invested back into general welfare. As the Tax Policy Center concludes, a financial transaction tax would be “quite progressive” and has the potential to do much more good than harm.

Beyond the monetary benefits, FTTs provide value in their inherent deterrence of high-frequency trading. High-frequency trading is the practice of corporations to flash-trade stocks on Wall Street over percentage differences than ordinary investors cannot notice. Unlike traditional trading, in which individuals make rationalized decisions based on their analysis of a stock, high-frequency trading is conducted by algorithms packed with pattern recognition data. 

Gravely, high-frequency trading currently drives about half of the U.S. trading volume and it is getting worse. Experts found that “between 2005 and 2011, the median length of a [chance to profit] on the Chicago Mercantile Exchange and the New York Stock Exchange declined from 97 milliseconds to 7 milliseconds.” This means that the average investor is losing their chances at profiting to machines and corporations. Even worse, high-frequency trading also increases costs for investors by up to $5 billion annually. The final detriment of high-frequency trading is found in its effect on the market. The October 10, 2025, market crash is a recent example of the teetering volatility of the market, demonstrating that investors can lose significant portions of their portfolio unexpectedly. High-frequency trading is often the culprit of such crashes, as evidenced by the Flash Crash of May 2010 where high-frequency trading caused a trillion-dollar crash that happened in minutes. Additionally, high-frequency trading creates a disadvantage for non-conglomerate investors, leading to adverse selection: a phenomenon where one party has better information about the market than the other. In this case, algorithms know more than investors, which in turn causes a decline in market quality.

Overall, proponents of FTTs provide compelling evidence to suggest that an FTT in the U.S. could bolster revenue, combat wealth inequality, and curb the negative impacts of high-frequency trading.

However, other economists and politicians suggest that FTTs actually do more harm than good. FTTs have empirically reduced trading volume, as trades that were previously profitable with lower transaction costs may no longer be profitable with the introduction of an FTT. Such is the case in Sweden, where trading fell significantly after the introduction of an FTT. In 1984, Sweden levied an FTT of 0.5% on the purchase and sale of equities. In the tax’s peak year of revenue, it only raised about 5% of its original estimated revenue. The Swedish government swiftly repealed the tax due to its failure, but not before it caused lasting damage to the market. Sweden is not alone in this struggle. From 1991 to 2016, Germany, Italy, Japan, the Netherlands, and Portugal repealed FTTs as well. These examples demonstrate that statistics showing the benefits of FTT revenue could be based on survivorship bias. Considering that many countries failed with have FTTs, the U.S. may fail as well.

FTTs can also reduce the liquidity of the market. By nature, an FTT “drives a wedge” between the bids and asks of a stock: the highest buying price and the lowest selling price. When they are close, it signifies that the market agrees on the value of an asset. But when they are far apart, the market is slow, inefficient, and illiquid. An illiquid market is bad for investors because they cannot sell quickly and efficiently when they want to. Empirically, the tendency of an FTT to decrease liquidity is supported by examples from the U.S. and Canada. Increases in the New York FTT, “raised bid-ask spreads,” and the introduction of an FTT in Canada caused an increase in bid-ask spreads as well. 

The question of whether or not an FTT should be introduced in the U.S. is especially relevant in the status quo considering the constant government shutdowns and heated tax debates. The fact is, though, that FTT proposals from a variety of senators have been rejected for decades since the majority believes in the drawbacks of FTTs, not the benefits. Whether an FTT is favorable for the U.S. or not is certainly up for debate, but it seems likely that we will not see any FTTs being applied federally in the near future.