Wednesday, June 29, 2005

The emigration tax idea returns 

Time and again, the idea of taxing emigrants from India enters the public sphere, the logic being that the tax-payer subsidisidised the education of the emigrant and therefore, a compensatory exit tax should be put into place. The latest iteration of this idea, according to the Financial Express, comes in a new book published by the World Bank titled India and the Knowledge Economy. As always, the punching bag of choice are graduates of the IIT system. According to the FE report...

The World Bank says by imposing an exit tax on IIT graduates and other professionals, who leave the country after receiving subsidised education, the government can collect over $1 billion (about Rs 4,400 crore) per annum. This figure is from students going to the US alone. Take into account professionals leaving for the Gulf and other countries, and the total could well exceed the collection from the education cess, which was around Rs 5,000 crore.

Around 100,000 Indians are expected to move to the US this year, seeking work. Assuming these professional earn an average salary of $60,000 per annum, the government could charge two months’ salary or $10,000 from the employee or the firm employing the professional at the time of granting the necessary clearance. The yield: a cool $1 billion.

Although the exit tax would almost certainly face political flak, the benefits would be huge. For instance, the funds would be enough to sustain the mid-day meal scheme, plus there would be cash to spare for building schools in villages and strengthening the elementary education structure. According to UNDP estimates, India loses around $2 billion a year in resources due to the migration of professionals to the US. As the government spends around $15,000-$20,000 in educating a professionally qualified individual, the migration of such an individual virtually subsidises the economies of industrialised countries.

What all these reports forget to take into account, as I've said time and time again on this blog, is the mitigating influence of remittances from these very same emigrants who have supposedly exploited tax-payer resources. As I've said before, even if you assume a higher-than-UNDP-numbers loss to the Indian tax-payer (say $4 billion instead of $2 billion, which is the UNDP number), it pales in comparison with remittances. In 2004, India received over $23 billion in remittances. What's more, remittances beat aid, portfolio flows and even FDI when it comes to quality and stability of funding, since it goes directly to the intended party without any involvement of the government. Now, why on earth would a policy-maker want to turn off the remittances tap, worth $23 billion today (and growing), to make $1 billion in tax revenues instead?

This makes no sense. The reason why I have made more than one post on this is because this is the sort of hare-brained idea that a badly advised Indian government might actually try to implement, which would be the policy equivalent of taking careful aim and shooting yourself in the foot.

PS: In the interest of full disclosure, I need to mention two things here:
a) I worked on the India telecoms chapter of the World Bank book.
b) I haven't read the book yet, so I am going entirely by what the Financial Express is reporting. For all I know, the FE may have got it wrong. It's also possible that the full context may not have been taken into account. For example, the authors may have offered this idea (the emigration tax) as one of many ways to tap the diaspora.

UPDATE: I just came across this IMF paper that disputes my take on the quality of inward remittances.

There seems to be some doubt regarding my stance on the subsidy granted to higher education per se. Don't get me wrong, I think it's a terrible idea to subsidise higher education at the expense of primary education, which creates far more externalities. Atanu has already made the case against subsidising higher education. So has Gaurav Sabnis more recently. I just happen to think the idea of taxing emigrants who make an invaluable contribution to the Indian economy (via remittances) is an equally bad idea.