In late 1990, the U.S. government announced that it might try to reduce the budget deficit by imposing a 0.5% transfer tax on all sales and purchases of securities in the U.S., with the exception of Treasury securities. It projected the tax would raise $10 billion in federal revenues – an amount derived by multiplying 0.5% by the value of the $2 trillion trading on the New York Stock Exchange each year.

a. What are the likely consequences of this tax? Consider its effects on trading volume in the U.S. and stock and bond prices.

b. Why does the U.S. government plan to exclude its securities from this tax?

c. Critically assess the government’s estimates of the revenue it will raise from this tax.