For a long time, labor migration to the rich countries of the world has been dominated by the exodus of workers from developing countries. Early on this gave rise to the famous debate about brain drain. The skilled professionals from poorer countries tend to leave in search of a better life in rich and advanced economies. The gap in real wages at the purchasing power parity for similar occupations between poor and rich nations is considered to be the prime driver.

Relocation to a socially and politically more stable country is also deemed as an important pull factor. Sometimes, professionals leave their countries owing to political and religious persecution, indicating push factors at the source. To correct the economic hiatus this exodus leaves a developing country with, the economist Jagdish Bhagwati proposed the imposition of a brain drain tax.

There are myriad complexities associated with enforcing the policy at the origin, or at the destination with support from the host government. But if successfully implemented, it would recompense the source for the loss of human capital that they created out of their meager budgetary provisions for higher education and skill development.

Some countries, including the Philippines, which has a very high rate of emigration, have adopted it though there are exemptions that lessen its impact. Modalities of using tax revenue thus collected are less discussed in this forum, but it is generally believed that the revenue supplements the educational expenses borne by the state such that the creation of human capital does not stall.

Arguably, poor countries subsidize the creation and export of human capital, often used for high economic returns in the labor-deficient developed world. Recent evidence suggests that even by conservative estimates an emigrant with a graduate degree on average raises the host country’s national income by no less than $200,000 during the migrant’s working lifetime. Owing to scarcity of capital, return for skill would be lower in the source country had they stayed, but any positive net return is surely better than zero.

  Taxing outbound workers is one way to benefit from skills migration.

Most developing countries officially receive little or nothing from their high-skilled diaspora. The case with unskilled emigrants is different, however. Many send home remittances that help developing countries efficiently manage the demand for foreign exchange. India, the People’s Republic of China, Turkey and the Philippines are prominent examples in this matter. Further, unskilled migrants (and not the highly skilled ones) may also be a viable source of revenue generation if a policy like an exit tax is implemented. This might be a politically challenging proposition, however.        

 

If the origin country decides to impose an exit tax, one of the main considerations has to be the rates applicable to heterogeneous skill types. Should the skilled and the unskilled be taxed uniformly? Or like most taxes, should it be progressive, so that high income professionals pay more?

There is a third possibility which seems politically unpalatable, although research shows that it has sufficient merit both from the point of view of revenue generation and human capital formation. It suggests that the exit tax be regressive in nature. The unskilled workers pay at a higher rate than the skilled workers, if the main objective of the government is to maximize the tax revenue.

The logic behind this is simple. Skilled migrants from developing world usually bear a signaling cost (such as retraining cost at the destination, appearing for qualifying examinations against a fee, etc.) to make them acceptable to the employers of a rich country who cannot easily interpret their skill types owing to differences in educational and cultural practices. As more skilled workers emigrate, the average skilled wage at the destination falls, squeezing the wage gap between rich and poor countries, such that only a low percentage of highly skilled emigrate. This makes a poor base if exit tax targets the high skilled disproportionately.

Since skilled workers from the Global South often receive a pooled wage, because imperfect information regarding their true abilities leads to bundling of skilled and unskilled types in many overseas businesses, the tax tolerance level for them could indeed be lower than the unskilled, who receive a wage advantage owing to the lumpiness. Besides, skilled workers are more footloose, making choice of destination sensitive to enforcement of high tax rates.

In comparison, unskilled workers in rich countries not only have stable relations with both the destination and the source, but also have a higher tax tolerance level. The short-term migrant status for unskilled immigrants (unlike long term visa holders) allows them tax refunds at the destination depending on country-specific bilateral treaties, part of which compensates the tax burden and part transferred back for supporting education and health.

In an environment of imperfect knowledge about true productivity of a migrant worker, estimates show that higher taxes on the unskilled vis-à-vis the skilled raises tax revenue, unambiguously. Therefore, if the revenue supports and tops up neighborhood education and health expenditures of the families of unskilled migrants, the partial loss in remittance owing to the additional tax burden should not dissuade mobility of such workers. Eventually, the country generates more skilled individuals than it exports, leaving a greater stock of productive labor at home. 

This blog post is based on research from the publication, Skilled Labor Mobility and Migration: Challenges and Opportunities for the ASEAN Economic Community.