Should speculators be taxed?

A number of economists have supported the taxation of speculation in financ ial markets. We examine the welfare economics of such a tax in a model of a financial market where some agents have superior information and others ha ve a hedging motive. We show that a tax on speculators may actually increas e speculative profits. This occurs if the speculators' benefit from less-in formative prices offsets the cost of the tax. The effect on the welfare of other agents depends on how information revelation changes risk-sharing opp ortunities. It is possible for the introduction of a tax to cause a Pareto improvement.