If Congress is tempted to tax securities transactions, it may want to consider Sweden's experience. The Congressional Research Service has estimated that a proposed 0.5 percent tax on transactions in stocks, bonds and other exchange-traded assets would raise $10 billion in annual revenue. But when Sweden imposed such taxes, people shifted their trading to countries with no transactions taxes or to untaxed assets.

Sweden imposed a 0.5 percent tax on the purchase and sale of shares by Swedish brokers only in 1984 and doubled the tax in 1986. As a result:

• In 1988, only 27 percent of the trading in shares of Ericsson, Sweden's most actively traded company, took place in Sweden, with the remainder of the trading done in other countries.

• Large U.S. institutions, which were paying 68 percent of the statutory tax rate on the Swedish shares they traded when the tax doubled, were paying only 13 percent of the statutory tax rate by 1990 by eliminating the use of Swedish brokers or trading outside Sweden.

At the beginning of 1989, the Swedish government began taxing transactions in bonds and other fixed-income investments - and much the same thing happened again.

• During the first week of the tax, bond trading volume fell by 85 percent from its summer 1987 average.

• Instead of trading in taxed assets, people traded in untaxed assets such as Swedish debentures, variable-rate notes and forward-trade agreements.

• Instead of the 1.5 billion kroner per year in revenue the government expected, it realized only 50 million kroner, about 3 percent of the estimated amount.

Based on these experiences, the Swedish government abolished taxes on fixed-income securities in April 1990, and it abolished all remaining taxes on securities trading on December 1, 1991. By 1992, the percent of trading in Ericsson shares in Sweden was up to 42 percent. - David R. Henderson.

Source: John Y. Campbell and Kenneth A. Froot, "International Experiences with Securities Transactions Taxes," Working Paper No. 4587, December 1993, National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, MA 02138, (617) 868-3900.

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