Adverse Implications of a Securities Transactions Excise Tax.

This article considers the effect of a securities transactions excise tax (STET) on the cost of capital and economic growth, as well as implementation, compliance and incidence problems associated with adoption of a STET in the U.S. As part of the 1990 budget negotiations, Congress and the Bush Administration preliminarily considered adopting a STET. As described by the Congressional Budget Office, the STET would have a rate of 0.5 percent and would apply to all sales of financial instruments except treasuries securities. The STET would apply to all trades on U.S. markets regardless of the domicile or tax status of the purchaser or seller. Initial calculations suggest even a small STET can have major adverse consequences for the value of instruments subject to the tax and for the cost of capital in the U.S. economy. The tax would also raise substantial implementation and compliance problems that, if not properly solved, could destroy beneficial markets or inefficiently shift capital market transactions from one form to another. In addition, the incidence of a STET may not be as progressive as some of its supporters believe, particularly because wealthier, more sophisticated investors will be better able to restructure their affairs so as to avoid the levy.