Making the Tobin Tax Real in a Democratic Way: A Two-Phase Proposal Heikki Patomäki Network Institute for Global Democratisation, NIGD. heikki@nigd.u-net.com

Introduction

James Tobin and his followers have assumed that all financial centres have to be within the Tobin tax regime from the outset. This assumption has had two far-reaching implications. First, every financial centre has a veto-right over the initiative. For instance, if the US or the UK refuse to join, the Tobin tax will remain a pipe dream. Second, as a consequence of this, it has seemed obvious that the IMF – or possibly some other existing international organisation – should assume responsibility for first studying, and then, perhaps, realising the currency transaction tax.

There is a democratic alternative. By amending the currency transaction tax, it becomes possible for any grouping of countries to start the system without the consent of other economic ‘great powers’. Together with the global civic movement for the Tobin tax, this grouping of states is free to decide upon the working principles and rules of the regime.

However, a new organisation must be established. There is no existing organisation that would match the membership and aspirations of those setting up a currency transaction tax. What, then, should the organising principles of the Tobin Tax Organisation, TTO, be? Given that it will also have a role in collecting and allocating the potentially very significant revenues generated by the tax, the question is: how can we guarantee a fair democratic representation in its agenda-setting and decision-making and establish the possibility of accountable, transparent and just outcomes of its proceedings?

The dual problem of the democratic way

There is in fact a dual problem of democratic emancipation from the ills caused by the power of global financial markets, including economic instability, unemployment, poverty, growing disparities and reinforcement of undesirable policies[1], namely:

1)    The process of making the Tobin tax real;

2)    The outcome of this process, i.e. the Tobin tax regime and its institutional arrangements.

To put it in terms of contemporary political struggles, (1) is the problem of those global movements – including NGOs, churches, progressive newspapers, trade unions, parties and states – endorsing the Tobin tax and related reforms. These movements have raised a democratic concern about the lack of voice on financial decisions and developments by those whose lives are transformed by the consequences of financial outcomes; and they are particularly interested in the process of change. The main problem of (1) is that a few powerful state actors have a veto right over any reform proposal. To make a democratic will-formation possible, it has to be possible to devise a strategy of realising the Tobin Tax even in the absence of universal consent.

As far as (2) is concerned, very few have given any serious consideration to this matter. At the time of the Asian crisis, the Clinton administration and others who value stability over change responded to (1) by widening the basis of participation in the existing organisations and forums, of course with very limited powers to actually change anything. It is important to acknowledge, however, that the actors working to establish a Tobin tax regime and related reforms, will eventually face the problem of (2). The problem is: in the world where politics is organised in sovereign states, how to rethink international and global institutional arrangements in democratic terms? A global tax regime with sanctions and surveillance systems and potential for big revenues raises the whole problematic of political theory in the global context. What are the principles of legitimation of collective organisations? How should they be assessed in terms of material benefits and their distribution, rightful authority, justice and democracy?

It is my first argument that a non-universal Tobin tax would work. The tax regime can be amended by adding a third element to it: a punitive tax on trading with the outsiders and a relatively high tax on domestic-currency lending to actors not resident in the Tobin Tax Zone (TTZ). Given the constellation of the global political forces at the turn of the century, this also seems the most feasible political strategy to establish a Tobin tax regime. Obviously, this is a democratic, non-exclusive strategy, not an end in itself. The ultimate aim is a global, universal tax.

A two-phase process of making the Tobin tax real

Tax evasion is a problem. There are two major concerns: financial substitutes for currency transactions, and locational substitutes for contemporary financial centres (or booking sites). There are examples of failed financial taxes; but there are also examples of successful taxes, that have been sustainable for long periods of time, even in the current neoliberal world economic context.

With Tobin and most economists, we can assume that a low-level, universal tax would be relatively easy to implement. Possible attempts to evade currency transaction tax can be managed swiftly, like attempts to avoid paying any taxes (income tax, capital tax, VAT, customs etc.). However, the tax can be high, and some major states may decide to remain outside, at least in the beginning. There are in fact four cases of the problem of tax evasion.

Table 1: Four cases of the problem of tax evasion

For the purpose of this paper, I leave aside cases B and D[2]. The question is: how would it be possible to realise a low-level currency transaction tax when some financial centres are outside, the case C in Table 1? The sceptics are strong in their judgement: “If any major financial centre does not comply with the regulations then unbalanced foreign exchange positions and foreign exchange transactions will be booked to offshore institutions in that centre”[3]. Garber and Taylor discuss the implications of a hypothetical unilateral French tax (which, in 2001, is already outdated by the EMU). They claim that even if the French regulators could impose the tax on French bank subsidies abroad, its implementation will immediately push foreign exchange transactions out of Paris either to London or to New York, and the transactions will be booked in those centres. “If the French regulators can impose the tax on French bank subsidies abroad, the French banks will be cut out of the foreign exchange business”. [4]

Garber and Taylor further presume that the French banks would have to pay the tax only when they trade with the Banque de France. It is hard to see why. A unilateral tax could be much lower, and every transaction by any actor is liable to tax at a gross value of each transaction (there are electronic means to gather the relevant information without excessive administrative costs; and the ex ante administrative approach would make it even easier to control and tax all currency transactions).

The only really notable tax-avoidance option taken up by Garber and Taylor is the transferral of currency transactions to tax-free banks outside France. “National efforts to stem such transactions will drive the forex component of these bank deposit transfers offshore; and the transactions will appear on domestic balance sheets only as a domestic currency credit item.”[5] This is also the crux of Garber’s argument. In another paper, against a non-universal Tobin tax, he argues that a new division of labour between banks would emerge: “The role of banks in the taxed jurisdictions will be to provide cross-border credit to the untaxed banks”[6].

But is it reasonable for the French banks to transfer their funds to foreign banks? It is likely that a low tax (0.05%) would not seriously threaten the profitability of currency transactions of the French banks. Up to half of the banks’ profits come from forex dealing and they are unlikely to give up such a profitable business so easily. There are also institutional reasons why banks and their customers would continue business as usual, despite the small tax. It takes time and money to build a trust-based relationship between a customer and a bank. Although in the super-efficient forex markets, the basis for institutionalised, trust-based relations with customers may have been eroding rapidly, it remains a factor. Moreover, in contrast to Garber and Taylor’s claim, under a low tax of 0.05%, any transaction with a cover higher than mere 2.5 basis points would remain profitable. When the profit margin is high enough, even a 5-10 basis points additional cost should by no means be an insurmountable obstacle.

At the margin, however, even with a very low tax, some French banks certainly would sometimes find it better to lend francs to non-French investors who would make the required forex deals and then return the francs (plus possible profits, minus a premium to the foreign bank or broker). Technically, in the OTC markets, this would be a standard operation.

Moreover, although the fund-transferral may seem a less severe problem with a very low tax rate, in a non-universal system nothing would prevent foreign actors from speculating with French francs, or euros. However, the francs or euros have to come from somewhere. Currency traders wishing to bet against the French franc must obtain francs or euros in order to sell them short. Except for francs or euros made available by the liquidation of existing offshore asset positions, which are by definition limited in amount, these can be obtained only by borrowing from French or European financial institutions. Hence, the idea of taxing or placing deposit requirement on loans in domestic currency to non-residents.[7]

We do not need to presume, as Garber and Taylor do, that “measures are [only] aimed at forex transactions and positions […] and not at cross-border credit”. To protect the non-universal Tobin tax regime from the transferral of funds and activities, we can make the banks residing in tax-free areas pay a higher tax on cross-border credit to non-residents of the Tobin tax zone (TTZ). If the basic rate of the Tobin tax is low, say, 0.05 %, or 0.1%, the tax on loans to non-residents could well be twenty times higher, say 1% or 2%, or more. This should prevent banks from transferring funds to the rest of the world for forex purposes. If the TTZ is big enough, it may even encourage non-resident banks to be more favourable to the extension of the Tobin tax to their respective countries as well.[8]

Moreover, it should be easy to implement this tax. It can be administered, like the Tobin tax proper, by adding a few lines of code to banks’ computerised trading programmes; and compliance could be monitored by periodic inspection of banks’ computer records. An additional problem may be that a government that wanted to provide a tax-free dealing site could adopt or invoke a legislation to confer confidentiality on individual foreign transactions. A possible response is to penalise all non-booked transactions, wherever they occur, and to raise the tax for cross-border inflows and outflows involving non-cooperative tax havens much higher.

A non-universal system of taxation should be conducted on national basis. In a national system the head office of each bank (or, more generally, deal-makers and investors) would collect and consolidate the necessary data on all of its transactions liable to tax and pay the taxes due to the authorities of the home country. This is the country where the actor has its real headquarters (all the offshore holding companies, etc., should be included).[9] Automatically, e-brokers and other computerised systems – and perhaps the global netting system – will provide the authorities with information about forex transactions. The most important benefit of this system is that since the tax is levied on a national basis, actors cannot avoid it by moving their dealing sites to tax-free locations  – to countries, whose governments do not collect the tax. Moreover, in a non-universal first phase of the tax regime, it would make it possible to tax offshore activities. For instance, in London in 1995, foreign-owned institutions accounted for 79% of aggregate turnover.[10] Even with both the US and the UK outside the Tobin tax regime, at least some of these institutions should nonetheless pay tax for the deals made in the City of London.

Hence, a low, non-universal Tobin tax is not only possible but quite feasible as well. However, it is best to make the TTZ as large as possible. It may be written into the Tobin tax agreement that it will not enter into force before, say, 30 countries have joined it and roughly 20% or more of the global forex markets is covered by it. A non-universal Tobin tax has to be complemented with a somewhat high tax on domestic-currency lending to non-residents; and with a much higher punitive tax on any capital outflows and inflows to and from non-cooperative tax havens.

However, the punitive tax on capital outflows to and inflows from the blacklisted tax havens may give rise to a novel tax evasion problem. Since the punitive tax could be as high as 25%, it is likely that attempts will be made to circulate money from these tax havens to the TTZ via the non-blacklisted jurisdictions outside the TTZ. The key to this problem is global co-operation on information sharing and enforcement of transparency of the offshore centres. These must be coupled with strict sanctions on those banks and other actors attempting tax evasion. If the risk is a temporal or partial suspension of state guarantees or a highly punitive central bank interest rate, say, for a year, the banks should think twice before engaging in such illegal activities.[11] For other actors, an ultimate sanction might be dissolution of their corporate identity and reorganization of their existing economic activities. Moreover, the relevant management should bear a personal responsibility for this kind of grave violation of tax laws.

In the first phase, the rule is that the actors based in the TTZ should pay the full amount if the counterparty is from the outside. However, when the tax is still non-universal, it might be a particularly attractive idea to impose tax in both ‘places’: first at the place where it is recorded and secondly also in the dealing sites, which are located within the TTZ if any of the parties is not from within the Tobin tax zone. This would maximise the tax coverage.

The two-phase model makes it possible for a grouping of countries to proceed quickly without the consent of every state. Yet, it would not compromise the aim of a universal and uniform tax. There would be an open invitation for countries to join the system when they wish. There must also be a political build-up for the outsiders to become more favourable to the idea of the Tobin tax. Besides the demonstration effect of a successful Tobin tax regime, and an explicit political campaign for it, the fact that banks are encouraged to trade with each other within the TTZ rather than with outsiders should also build pressure on others to join, particularly along the enlargement of the TTZ. The tax-imposing countries would also have the privilege of participating in deciding what to do with the revenues, in addition to keeping a portion of those revenues themselves. This should add to the political pressure for the remaining financial centres and other countries to join in. 

There is no space in this paper for a detailed discussion of all the technical problems of implementing the tax. Moreover, version A of the two-phase model (Table 2) does not address all concerns about the efficiency of the tax. A more comprehensive version B complements the currency transaction tax with an exchange surcharge triggered by exceptional changes (Spahn model); and a Global Intervention Fund to stabilise further the exchange rates (following Woodward).[12] However, the point is simple, yet far-reaching: any grouping of country can take the initiative at any time. To make the TTZ workable, perhaps some 20% of the forex markets have to be covered by it; and some 30 countries should immediately join the regime.

Who should take the initiative?

The contradictory situations brought on by global finance can only be overcome by means of collective, multilateral action aiming at curbing the power of finance and redefining the rights, obligations and accountability in the global financial markets.[13] The two-phase model enables any grouping of states to take the initiative and establish a collective organisation that manages the tax and which could, possibly, also take further actions against tax havens and other initiatives. The present global movement for the Tobin tax prepares the ground for the realisation of the first phase.

Which states could form the group of initiators? The implementation of the first phase presupposes a relatively large grouping of states, some of them home countries for significant financial actors  – say at least thirty states together accounting for at least 20% of global currency markets. The more participants there are in the first phase, the better. The tax regime should be as inclusive as possible and encourage others to join in.

Given the opposition of the US and the UK, and the reluctance of Japan and other Asian financial centres, it is likely that it would be impossible to realise the two-phase model without Europe. In 2000, eleven countries, including Germany, France, Italy and Spain, with a combined USD 6 trillion economy, are participating in the third phase of the EMU. This phase will be completed by summer 2002 when national currencies will be replaced by the euro also as notes and coins. Britain, Sweden, and Denmark have decided not to participate. Greece has not met the Maastricht criteria. However, Greece is expected to join the euro area possibly before the end of the transition period in 2002. The new euro is likely to be among the strongest currencies in the world, along with the US dollar and the Japanese yen, and possibly the second most important reserve currency after the US Dollar.

Because of the joint currency, none of the eleven countries could participate in the Tobin tax regime individually. The first-phase system would “leak” through the outsider EMU-countries. Hence, the EMU-countries would have to work together, either as the EU or as an informal grouping of countries. The EU option seems politically unrealistic (think about the recent savings tax episode in the EU; or more generally, the stand of the UK ‘New Labour’ government). However, the EMU countries could form the core of the first phase of the Tobin tax regime.

What are the political implications of the EMU? It is often acknowledged that the EMU is ambivalent to the welfare state and regulations of capitalist markets.[14] On the one hand, it seems to institutionalise the principles of neoliberalism and the Washington consensus in Europe. “EMU is part of this process in so far as it represents an ‘internal’ structural adjustment programme for Europe.”[15] Yet, it can also be claimed that the EU is “not causing but [only] exacerbating the problems that the European welfare states are facing”[16]. Further, the unification created by the EMU might be necessary for empowering alternative possibilities, as many hope.[17]

Most European countries have not initiated the liberalisation of capital movements. Rather, their governments have often felt compelled to liberalise, even against their original intentions and will. In many cases, alternatives have been actively searched for. The EU-Europeans are also much more used to taxing financial transactions, added value and related items. And certainly, there has been more discussion about, and support for, the Tobin tax in the Continental Europe than in the UK or the US.

There are also signs of readiness to go for the Tobin tax option even without the consent of the London-Wall Street-Washington axis. For instance, Martin and Schumann have proposed realising, unilaterally, the currency transactions tax by the European Central Bank. The premise is that “London and New York are always going to prevent it” from being implemented globally.[18] Similarly, Olivier Giscgard d’Estaing has talked about the EMU-model of establishing a tax on speculative transactions. The more resistant countries – the UK in particular – could be left out and the others could take further steps towards a better system of political governance.[19]

The UK does not have to be “in” in the first phase. With other states, the EMU countries can take the initiative also without the consent of the UK. The system must be based on an open invitation for any country to join in at any time, and on the premise that the final aim is a global tax regime.

There is, however, another potential obstacle. Consider Article 73b of the Treaty of the European Union (the Maastricht Treaty). This article seems to make illegal all attempts at regulating global financial markets:

1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.

2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.[20]

The Maastricht Treaty takes a strong stand for the freely floating and convertible exchange rate regime and the global, unregulated financial markets. In a sense, it even constitutionalises these principles: the Maastricht Treaty is more difficult to amend than any existing constitution, for any amendment requires unanimity of states. Moreover, at the time when the Treaty of the European Union was concluded, all member states were – and still are – committed to Article VI of the Agreement on the International Monetary Fund. Section 3 of Article VI (“Controls of capital transfers”) states that “members may exercise such controls as are necessary to regulate international capital movements”[21]. The US has been campaigning against this Article, and it seems that the EU countries have voluntarily abandoned this right by a collective, quasi-constitutional agreement.

Does this mean that the EU cannot take any initiative towards establishing the Tobin tax before changing the Maastricht Treaty first? Not necessarily. The Treaty of the European Union (TEU) can of course be revised.[22] However, in the shorter run, it is more relevant that a small, market-friendly transaction tax should not necessarily be counted as a “restriction” to capital movements. Certainly a small – at the most 10 basis points – basic rate tax is not a “restriction”. Perhaps only the punitive tax on movements to and from the blacklisted offshore centres would count as a “restriction”? Yet, it is already an accepted principle that free riding on tax evasion and money laundering is unacceptable.[23] Moreover, Article 73c of the TEU seems to open up the possibility of unspecified “measures” such as those needed for the first phase of the Tobin tax regime:

Whilst endeavouring to achieve the objective of free movement of capital between Member States and third countries to the greatest extent possible and without prejudice to the other Chapters of this Treaty, the Council may, acting by a qualified majority on a proposal from the Commission, adopt measures on the movement of capital to or from third countries involving direct investment - including investment in real estate -, establishment, the provision of financial services or the admission of securities to capital markets.

Indeed, the measures needed for the first phase of the Tobin tax regime would seem to fall within this category. In the case of more serious difficulties, it might be possible to assume even more “restrictive” measures without violating the TEU, for Article 73f enables the Union to take “safeguard measures with regard to third countries for a period not exceeding six months”, if, “under exceptional circumstances, movements of capital to or from third countries cause, or threaten to cause, serious difficulties for the operation of economic and monetary union”.

In sum, there is nothing in the TEU that would prevent the EMU-countries from adopting measures necessary for the first phase of the Tobin tax regime. Even though current interpretations and practices make the TEU support neoliberalist practices and monetarist economic policies, there is also room for alternatives. Given the weight of the eurolandia, the EMU-countries could form the core of the first phase.

A democratic Tobin Tax Organisation, TTO

The second problem of democratic emancipation – from the undesired determinations stemming from the power of global financial markets – concerns the outcome of the process, namely the Tobin Tax Organisation. The 2-phase model may be the only politically realistic way of establishing the Tobin tax. In the first phase, a new international organisation is needed to set the rate of taxation, define taxable transactions, determine exemptions from the tax and undertake monitoring and auditing tasks, as well as to collect the revenues from national authorities.[24] These are the tasks of the Tobin Tax Organisation, TTO. The initiators and the first participants will install the TTO and lay down its basic principles. These should include the following:

§       Deciding the location of its headquarters. Preferably, it should be located in one of the initiators and/or first participants.

§       Defining the exact levels of first phase taxes, including the basic tax, the additional surcharge, the extra-domestic lending tax, and the punitive tax on the blacklisted offshore centres.

§       Determining the details of the system of mutual crawling pegs, including the way the moving average of the target rate is calculated and the brackets within which the exchange rate can move freely without activating the surcharge.

§       Determining the structure and decision-making rules of the TTO. For instance, it could consist of a qualified majority decision-making in the Council of Ministers; and a body representing democratic parliaments and global civil society, with motion-setting rights as well as some budgetary controls and veto-powers.

§       Determining whether there should be any exemptions from the tax. Preferably, at least in the beginning, there should be no exemptions, to prevent holes in the system from arising. However, those actors deemed to suffer from this non-exemption could be compensated.

§       Determining the national and global shares of revenues. For instance, the OECD countries could get 30% of the revenues they collect, and others 60%. The rest should go to the central fund of the TTO.

§       Deciding upon the global intervention fund. What share of the global revenues should be allocated to it, and what exactly would be its principles of operation?

§       Setting the basic methods of surveillance and countering tax evasion, and creating the corresponding administrative functions. This part of the TTO needs to be rapid and relatively autonomous in its actions, even if always 100% accountable; changes in electronic codes and routines of the banks as well as national laws about book-keeping might be needed. It has to be verified that booking operations are not transferred to tax-free centres.

§       Deciding about the technical and financial support for members who have difficulties in implementing the rules; and sanctions against those members who turn out not to follow the rules of the regime.

Two ethico-political issues of organising the TTO are particularly important and delicate. The first concerns the structure and decision-making rules, the second the allocation of resources. Democracy should play a major role in deliberations about the first, while financial stability and social justice seem to be more important considerations in the latter.

At the heart of traditional democratic theory is the idea of an autonomous political community, which rightly governs itself and determines its own future. In a world of regional and global inter-dependencies and internationalised, shared state powers, these are issues that raise questions concerning the nature of consent and legitimacy, the nature of a constituency, the meaning of representation, and the proper form and scope of political participation. How could democratic ideals in the world of globalised power and dependency relations be worked out?

The TTO would be responsible and accountable for potentially huge amounts of money. First, a word or two on the estimations of the revenues. Naturally, the potential revenue is not easy to estimate. Researchers make different assumptions about, for instance, the elasticity of foreign currency exchange demand, the average pre-tax costs of foreign exchange transactions, and the likely amount of tax evasion and exemptions. All the existing estimates are based on a global, uniform tax. Michalos discusses some estimates[25], but, like Felix and Sau[26], he does not really consider taxes higher than 0.25%. Felix  and Sau advise against applying higher tax rates on the grounds that ”such high rates would disrupt foreign exchange trading so much that exchange rate volatility may not be reduced”[27]. These estimates of the revenue from a low-level tax vary from USD 70 billion up to USD 350 billion. Frankel cites Tobin’s own estimation of USD 1.5 trillion annual revenues from a relatively high 0.5% tax, but he thinks Tobin’s calculations are simplistic. However, Frankel claims that under very cautious assumptions, it seems that a 1% tax would yield at least USD 500 billion, but may exceed USD 1 trillion a year.[28] This too may be an exaggeration; it is hard to imagine who could afford to pay such taxes. Frankel’s estimate nonetheless indicates the size of the revenues.

There seems to be plenty of room for experimentation with the tax and its level, and the TTO should be flexible enough to quickly adjust to the lessons of these experiments. In the first phase, the level of taxation has to be low. In the second phase, it could be raised gradually, if experience shows that to be feasible. Now, assuming that, say, one third of the world’s currency transactions are directly covered by the currency transactions tax in the first phase; and that, in addition, there would be the additional surcharge, extra-domestic lending tax, and the punitive tax on the movements from and to the blacklisted offshore centres, the annual revenues would be around perhaps USD 50-100 billion. Obviously, the more countries join the regime, the higher the revenues.

In the second phase, it seems reasonable to assume that the global share of revenues could be up to 200-300 billion US dollars a year. This is five times the GDP of Egypt; two and a half times that of Finland or Norway; half of that of South Korea or Brazil; or a quarter of the GDP of the UK in 1995.[29] It is also 50-70 times more than the annual main budget of the UN. The TTO will also have powers to establish sanctions. It is therefore crucial that the decisions made by the TTO will be conceived as being legitimate, fair, accountable and, when needed, revisable. That is, they have to be as just and democratic as possible.

It is a basic democratic ideal that suffrage is based on the equality of human beings, not on their inherited privileges, inherited or acquired possessions, nor on the power to threaten others. It also seems that international law no longer holds to the de facto approach to statehood and government; mere military control of state institutions does not suffice. There is a tendency to accept only liberal democratic governments as fully legitimate. Should we thus exclude non-democratic states from the TTO? Even after the ”third wave of democratisation”, in the simplest liberal democratic score, a third of states are in no way democracies, and many are – at best – partial democracies. The category of non-democracies include many economic powers such as China (the fastest growing economy), Singapore (one of the major financial centres of the world) and Nigeria (accounting for about one-fifth of the population of Sub-Saharan Africa, with its substantial oil revenues and a military predatory state). Also, most of the Islamic world is non- or quasi-democratic  – although, it should be emphasised, only in the simple and formal liberal-democratic sense; some of them claim to be different kinds of democracies.[30] Democracy is a contested concept. Democracy is really a process of democratisation rather than a model. In other words, there are no fixed, always and everywhere valid yardsticks.[31] Moreover, any norm that operates by total exclusion is problematic.[32] Exclusion would contradict the universality of international law, and the universalist idea that the TTO must be open to all states.

Instead of any form of exclusion, all states should be invited to join the TTO. Despite obvious deficiencies in the legitimacy of some states, it should be assumed that they represent their population and weigh the decision-making powers in the TTO accordingly. The votes of states could be weighted roughly in accordance with the size of their respective population, but rather than arithmetically, say, placing them in three categories and with votes from 1 to 3. The rule should be qualified majority decision-making with secret ballots. Whether democratic or not, states would thus make many of the important decisions. However, it is possible to recognise the validity of the emerging international legal norm of democracy in less exclusionary ways and to apply it more imaginatively. The TTO could have two main bodies, the Council of Ministers and the House of Democracy. The House of Democracy should comprise only representatives from those national parliaments whose members are appointed by multi-party elections, and a sample of civil society actors, picked through a screening procedure and lottery. The House of Democracy would thus be the more direct democratic pillar of the system.

For instance, the House of Democracy could have 600 seats, 350 representing national parliaments, weighed roughly on the population of these countries, and 250 representatives of civil society. The civil society actors should include NGOs, non-national parties, labour unions, transnational religious movements etc. These actors could be based also in the non-participating or non-democratic countries. The civil society actors would have to apply for a seat. In the screening process, they would have to demonstrate that they are neither artificial products of, nor directly dependent on, states or private corporations, and that they have a sufficient, spontaneous, popular basis. Among the qualified civil society actors, the seats should be distributed through a lottery procedure; and no one actor would be entitled to hold a seat twice in row. Even though the inclusionary, state-centric Council of Ministers would have a stronger say in decision-making, the House of Democracy should be fully empowered to set motions and have limited control over the budget. The House should also have a qualified veto-power over some of the major decisions of the Council. Perhaps there should also be joint decision-making concerning certain important issues of the TTO?

The first major decision about the revenues concerns the national share. There are three main considerations. States have to be compensated for the administrative costs of organising the tax collection. A generous remuneration might also stimulate enthusiasm among the financial ”great powers” to join the regime and implement its rules. Finally, there lies a deep-rooted sense of justice in the principle that national states possess the products of activities that have taken place within their territory.[33] However, this may also be increasingly outmoded in the world of global flows, networks and off shores. As Castells puts it:

The social construction of new dominant forms of space and time develops a meta-network that switches off nonessential functions, subordinate social groups and devalued territories. By so doing, infinite social distance is created between this meta-network and most individuals, activities and locales around the world. […] The new social order, the network society, increasingly appears to most people as a meta-social disorder.[34]

If this is a common perception of the world, the metaphors and ontological assumptions behind a standard, idealised account of state sovereignty must appear increasingly implausible  – except perhaps as a nostalgic reaction against the ”meta-social disorder”. Yet, a persistent common-sense national belonging and the notion of state sovereignty have real effects in the world, and should be taken into account in all global political arrangements. Hence, from this conventional point of view, it is also fair that the states will get a direct share of the revenues.

What, then, would be a fair compensation and just share for the participating states? There is no way of calculating this; it is an issue that needs to be agreed upon. I would like to suggest, however, that the OECD countries should get 30% of the revenues they collect and others 60%. This is substantial enough to compensate for administrative costs and create incentives to join in (also for the poorer states), and it also addresses the conventional notion of justice. Yet, it does not violate the idea that the Tobin tax regime is a global and collective endeavour.

The second major decision concerns the allocation of the global fund of revenues. As the existing literature on the Tobin tax reveals, there are many good possible purposes for the spending of these resources. The revenues could be used to radically alleviate poverty in the world or to re-structure the debts of the poorest nations; to create stabilising, global investment funds; to establish the basis of global social policy; for medical research and treatment; and for many other socially useful purposes. But instead of making a monological argument for using the money for a particular purpose – it should rather be decided dialogically – let me merely suggest two things.

The Tobin tax regime should from the beginning allocate a slice of the revenues – say USD 1-2 billion a year – to the UN basic budget, in order to rescue the organisation from the constant financial threat of a disaster. This allocation could also give leverage to more democratic reforms than those currently considered at the UN headquarters. Some additional support could be given also to other, selected parts of the UN system (UNDP, UNCTAD, etc.). Naturally, funds for certain specific purposes may also be channelled and organised via the UN. This would prepare for a more autonomous and democratic UN for taking over the TTO in the second phase. However, the transition should perhaps leave the TTO headquarters in its established location and parts of its structure and functions intact.

Moreover, some funds could also be dedicated to an organised, global political campaign for a universal Tobin tax. The revenues of the first phase tax could be used to subsidise this campaign. For instance, in the first year, some USD 500 million could be allocated to an advertisement and publication campaign addressed both to the customers of the banks and to the citizens of democratic states such as the UK and the US. This would possibly include the establishment of more permanent elements of a pluralistic, transnational public sphere: newspapers, on-line publications, virtual TV channels, etc.[35]

The support for the UN system should prepare the organisational structure for the second phase. The political campaign would add on the mounting pressure on the outsiders, although the main pressure should be stemming from the economic incentives built into the regime itself (stability, revenues, decision-making rights, etc.).  However, instead of making any further recommendations about the usage of the funds, I would like to leave these decisions to the participants and democratic processes of the TTO. All decisions about the allocation of revenues would have to follow public, transparent, fair and democratic procedures. The decision-makers should be strictly accountable for their actions both to the member-states and the wider, democratising world republic. Only if the participants feel that they are sufficiently involved in determining these decisions on an equitable basis will the decisions and practices of the TTO be legitimate in the longer run. Democratisation does not exhaust issues of social and distributive justice, yet it clearly constitutes an essential ingredient of any just and socially responsible system.[36]

Conclusion

The real effects of financial relations and practices have been and are experienced in most parts of the world, outside such financial centres as London or New York. The veto power of the respective governments is thus highly undemocratic. Yet, this is the consequence of the assumption of James Tobin and his followers that all financial centres have to be within the Tobin tax regime from the outset. And if the governments closely associated with these centres of financial activities can dictate the terms of the discussion, the preferred forum for talks will be the IMF, which they control.

It is, however, possible to make the Tobin tax real in a democratic way. The two-phase proposal enables any grouping of countries – in collaboration with the global civil society – to establish a currency transaction tax regime at any time. The system has to be devised in such a manner as to prevent the markets from being transferred to ‘places’ outside the Tobin tax zone. A nationally based system of taxation, coupled with a higher tax on outside lending (transfers) should do the bulk of work.

There will be no difficulty whatsoever in getting at least 30 countries into the system, once the initiative is taken. However, the recent openings by Lionel Jospin and Gerhardt Schröder are important because, given the opposition of London and Washington, and the reluctance of Tokyo, it is hard to see how a sufficient portion of forex markets could be covered without the EMU-Europe. The question is, really, whether Continental Europe will have the courage required for autonomous will-formation, or whether it will remain subservient to the so-called Washington ‘consensus’.

It is important also to think beyond the process of establishing a currency transaction tax, and to begin a detailed discussion on the outcome of the process. I have argued that the Tobin Tax Organisation, TTO, should follow democratic principles more thoroughly than any of the existing international or regional organisations. It is possible to combine state-representation with parliamentary and civil society representation. The Council of Ministers should follow qualified majority decision-making with secret ballots, and by empowering the representative and participatory pillar of the system with real powers such as motions, veto-rights, budgetary rights, etc. This system does not exclude non-democratic states from the organisation and its Council of Ministers, but retains the right of parliamentary representation to democratic parliaments, and verifies the spontaneity of the civil society actors by a combination of a screening process and lottery. In other words, this model also follows some ancient Greek procedures, putting them to work in a new context.

These new institutional arrangements would not hinder the processes of globalisation but would rather politicise and democratise them. This may prove historic. In the irreversible historical processes of structuration, the new phase of globalisation would also inevitably lead to new kinds of political sagas. The TTO may well play a crucial role in some of these episodes, at least in the beginning. For instance, the TTO may provide a countervailing power and a partial alternative to the Bretton Woods institutions. It can also support democratic reforms of the UN. Even more ambitiously, it can set an example of global organisation more fitting for the conditions of the twentyfirst century than the anachronistic institutions that we have inherited from World War II.

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