Jean-Charles Rochet

Taking an optimal mechanism approach à la Mirrlees, we study whether financial transactions should be taxed. We consider agents that differ in their initial endowments, which they can be consumed or saved. Firms issue bonds to finance their investments. At an interim date, agents are hit by liquidity shocks and can trade bonds to smooth out the impact of these shocks. At the final date, agents consume their capital income net of taxes.

When initial endowments are publicly observable, the optimal tax is a personalized lump sum tax (endowment tax). When they are not, optimality requires a mix between an income tax and a financial transaction tax. Even though there is a single adverse selection variable, minimizing distortions requires allocating the tax burden efficiently between the main two services provided by financial markets: savings and hedging.

We show how our conclusions are modified under the threat of tax evasion or financial engineering.