Commodity transaction tax not a prudent idea

Pure economic logic reveals that the potential benefits of CTT will definitely be outweighed by the costs of its levy. Axiomatically, commodity exchanges are supposed to reduce transaction costs associated with finding buyers and sellers. Functionally, such institutions are supposed to promote efficiency in production, planning, storage and marketing through price discovery and hedging functions. Both price discovery and hedging functions are contingent upon volumes and liquidity.

If the idea of a CTT has been conceived to generate revenues, discourage speculative trading and reduce volatility, it needs to be unveiled that the idea is misplaced. This is because the efficiency of this hedging platform is an inverse function of the cost of transacting on it. It needs to be reiterated here that the objectives of garnering revenues and reducing speculation are contrary to each other. CTT, by increasing cost of transactions, will dent short-term transactions. With such ‘crowding out’ of short-term volumes, there can be losses in incomes and concomitant tax collections, which might even outweigh the expected revenues from CTT.

Again, such reduction in market liquidity will increase the bid-ask spread, a major component of transaction costs.

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