A Taxing Idea whose Time has come?
Yet another Nobel Prize for Economics
has been awarded and yet again, that perennial front-runner Jagdish
Bhagwati, the guru of international trade, has missed the accolade.
But one idea of his-a brain drain tax– first put forward around a quarter
of a century ago, is enjoying renewed popularity. A few weeks back,
the influential weekly The Economist in its survey of emigration and
its impact on developing countries like India drew pointed reference
to Bhagwati’s work. Two Harvard professors, Mihir Desai and Devesh Kapur,
along with another colleague John McHale have, over the past year, carried
out detailed empirical investigations into the fiscal impacts of emigration
and built on Bhagwati’s early ideas to devise systems to compensate
countries that lose skilled personnel to the USA and Europe. And in
any discussion on global finance, two ideas are ever-present: the Tobin
Tax, a tax on speculative cross-border capital movements named after
the Nobel Laureate James Tobin and the Bhagwati Tax, not named that
way but deserving of that appellation.
According to detailed calculations made for the first time by the three
academics, the net fiscal loss to India from emigration to the USA in
2001 ranges between 0.24%-0.58% of Indian GDP or about $ 1-2 billion.
This is a significant loss arising largely from the fact that “although
Indian-born residents account for just 0.1% of the population of the
USA, their aggregate income is 10% of India’s national income”. Of course,
fiscal loss is only aspect. More disquieting is the sheer loss of human
capital which has led to a crisis in the entire system of Indian higher
and professional education today. The IITs, the IIMs, the AIIMSs, the
D-Schools, and other elite institutions enjoy great reputation entirely
because of the quality of the students.
Bhagwati talks about rights and obligations and argues that his idea
of a tax on all those who leave a poor country after being educated
and trained at a huge subsidy like in India has acquired new relevance.
If the Indian diaspora in the US wants to enjoy the benefits of dual
nationality then it must be prepared for a tax regime like that of the
US which taxes its citizens according to citizenship and not according
to residence. That is, an American professional working outside America
is subject to American taxes. This, as Bhagwati points out, is contrary
to European practice that India has inherited. Obviously, India cannot
tax Indians who have become American citizens and some system will need
to be devised for this category.
One development that might knock the idea of a Bhagwati-tax on skilled
Indian abroad is the growth of remittances which is presently averaging
$ 8 billion annually. In the late 1970s and through the 1980s, the bulk
of these remittances came from Indian workers in the Middle East. But
there has been a shift in the composition in the last decade and probably
close to half of the remittances are now coming from the USA, UK, Canada
and other western countries. These remittamces, along with software
export earnings show up as “invisibles” in the country’s current account
balance. They have helped keep India’s current account deficit down
to very safe levels. NRI deposits are also an important component of
India’s foreign exchange reserves and now amount to close to $ 21 billion.
