4. Financial Transaction Tax A financial transaction tax or stock exchange turnover tax levies a particular percentage of the selling price as a tax on every transaction. Alongside the obvious fiscal motivations, a financial transaction tax, stock exchange turnover tax or Tobin tax(on currency trading) also seeks to discourage transactions that serve exclusively short-term speculation or the exploitation of the tiniest arbitrage opportunities. The aim is to create a situation where market prices are less subject to fluctuation and more reliably reflect the underlying values. That can only be achieved if a financial transaction tax is introduced across the board internationally. Otherwise it will produce only a displacement of business to less regulated regions. So the introduction of a financial transaction tax needs to be pushed at least at the level of the EU, or even better at the level of the G20. It will also be necessary to largely block the possibility of avoidance via OTC trading, with obligatory settlement through organised and regulated markets and platforms. From a fiscal perspective it must also be remembered that the financial transaction tax is always paid at the location, where the product is traded – i.e. the world’s major financial centres(e.g. in Luxembourg for funds based there). It must, therefore, be ensured that the ensuing tax revenues are distributed fairly between the states. Finally it must be noted that although a financial transaction tax can might help to restrain short-term speculative fluctuations on the international financial markets, that will not automatically lead to additional stabilisation of the banking sector. Despite these obstacles, Germany should energetically advance the debate about introducing a financial transaction tax on international basis or at least on EU-level. 1 In economic theory external effects arise where the individual economic subject fails to take into account all the costs(negative external effects) or the entire benefit(positive external effect) of his actions. From the perspective of the welfare of society as a whole this leads to a suboptimal allocation: in the case of negative external effects there will be too much of the activity, while in the case of a positive external effect there will be too little of the activity(because the actor is unable to secure the entire benefit for himself). The idea of the Pigovian tax(or Pigovian subsidy) is to fill precisely this gap and force the individual to take into account all the costs and the entire benefit of his actions. If successful, Pigovian intervention rectifies market failure by preventing the divergence of individual and collective rationality. 9