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The Currency Transaction Tax: Rate and Revenue Estimates

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The Currency Transaction Tax: Rate and Revenue Estimates

Published: October 4, 2007

The Currency Transaction Tax (CTT) is a potential source of independent and stable finance for development and other global projects.

What should the tax rate be? How much money would it raise? How would it affect foreign exchange markets? The CTT is functionally equivalent to the bid-ask spread in foreign exchange markets: both are transaction costs. We estimate by econometric regression the relationship between the spread and transaction volume. We fi nd that a CTT of 0.5 basis points (0.005%) in the major currency markets would reduce transaction volume by 14 percent. Post-CTT spreads and transaction volumes would be well within the range of recent observations and would not be disruptive. A 0.5-basis point CTT would raise at least US$ 33 billion every year, probably more.

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