Columbia International Affairs Online: Working Papers

CIAO DATE: 06/2008

The Tobin Tax: How to Make it Real. Towards a Socially Responsible and Democratic System of Global Governance

Heikki Patomäki

January 1999

Finnish Institute for International Affairs


In the 1970’s James Tobin proposed a low rate tax on financial transactions of currencies. This tax would make many speculative movements unprofitable and the financial system less volatile and sensitive to daily political news and anticipation of economic policy changes. Consequently, it would create space for more autonomous economic policies of states.

Tobin devised this second-best solution in the absence of realistic possibilities for the best option, namely global unification (single currency, central bank, and elements of economic policy). But he advocated simultaneous steps towards better governance of global economy. Twenty years after Tobin’s original proposal, new rationales for the tax have risen: it would yield huge revenues both to the states and the world community; and it is also seen, more and more often, as an invaluable element in restoring democratic values and accountability. Moreover, the endless stream of world financial crises has corroborated Tobin’s analysis and strengthened the appeal of his remedy.

This Report develops a new approach to making the Tobin tax real. The major problem has always been the lack of realistic political possibilities. Tobin and his followers have assumed that all major financial centres and most other states would have to consent with the idea before it is workable. We argue that this is not the case.

Hence, it is proposed that the Tobin tax could be realised in two phases: (1) In its first phase, the system would consist of the euro-EU and a group of other countries, or, alternatively, a bigger group of other countries without the EU. However constituted, this grouping should establish an open agreement – any state can join at any time – and a supranational body orchestrating the tax and collecting the revenues of a small underlying transactions tax (10 basis points, at most); much bigger exchange surcharge (1%- 3% or even more); and a relatively high tax, perhaps 1%, on domestic-currency lending to non-residents (only to non-residents who are not yet within the tax regime). This arrangement would solve the tax evasion problem and is economically sound.

(2) In the second phase, which should be carried out either when all major financial centres and most other countries have joined the first phase system, or at latest by, say, year 2010, a universal and uniform Tobin tax at a higher – yet absolutely low – 1% rate would be applied.

This arrangement is politically more realistic than any previous proposal. It would make it possible for a(ny) grouping of countries to proceed quickly without the consent of every state (including such financial centres as London/UK or New York/US), yet it would not compromise the aim of a universal and uniform tax. However, it is devised in such a manner that it would build up pressure for the outsiders to join it, too.

In the fifth chapter, we develop the idea of the Tobin tax organisation (TTO) and its relation to political principles of sovereignty, democracy and justice further. We argue that the Tobin tax regime should be seen as defending some aspects of state sovereignty, yet it also opens up new global political problems of governance.

The organisation that implements and supervises the Tobin tax must be empowered with surveillance capabilities and sanctions. Moreover, in itself, the tax constitutes a form of social control and regulation. The potentially huge revenues – in the second phase, possibly more than USD1 trillion a year – it creates can be used for economic and social purposes that must be determined globally. It thereby revives also the problems of justice and democracy in a new, global context.

We argue for an interim TTO that recognises the validity of the norms and ideals of democracy not by excluding nondemocratic states but by giving some powers to a democratically representative and participatory body.

As far as the allocation of revenues is concerned, we make only two modest proposals (besides arguing that the collecting states should get a fair share of the revenues themselves, perhaps a third). The first proposal is to dedicate a relatively small part of the revenues to the UN system. This should give leverage to democratic reforms and prepare for, in the second phase, a more autonomous and democratic UN to take over the TTO (while perhaps leaving the headquarters and some parts of the structure and functions of the TTO intact). Also, it might be desirable to allocate some money for a global political campaign for the Tobin tax.

The second proposal is that it is absolutely crucial that all decisions about revenues will follow public, transparent, fair and democratic procedures, and that the decision-makers are strictly accountable for their actions both to the member-states and the wider, democratic world republic. Only this will guarantee legitimacy of the decisions of the TTO, and later, possibly, the Economic Security Council of the UN.