Science, Finance and Innovation

Could a tax on migration help tackle the costs of brain drain?

5 min


John Paolo R. Rivera

Many doctors and nurses were dismayed when the Philippine government blocked their emigration early in the pandemic. While the policy protected local healthcare services during the crisis, could a tax on temporary labor migration offer a better solution in future?

The imminent problem: The COVID-19 pandemic underscored a critical issue faced by many labor-sending developing economies – brain drain.

Take the case of the Philippines – an economy that deploys its skilled workers and professionals, such as health workers, to many developed economies in North America, Europe, East Asia, and the Middle East. This phenomenon is fueled by the relatively better pay and working conditions abroad. In exchange, the Philippines reaps the benefits of remittances, which keep the economy and dependent households afloat during crises.

This phenomenon has been ongoing for many years, even before the pandemic. However, policymakers pushed it up the agenda during the pandemic when it weighed on the country’s overwhelmed healthcare sector and constrained its ability to support the local population.

Despite the constraints and risks of emigrating during the pandemic, thousands of health workers still took the opportunity to meet healthcare demands abroad and temporarily emigrated to help their own families cope financially during the pandemic.

The government’s immediate response to the problem: In reaction to the emigration, the national government temporarily barred the emigration of doctors, nurses and healthcare workers in 2020.

This policy disappointed many of the workers, especially those who had existing contracts and were already bound to leave, only to be delayed by the pandemic. Eventually, the government allowed only those with existing contracts and complete documentation to be deployed.

The government has not, however, lost sight of reimposing such a deployment ban given the persistent threats from current and impending health crises. And the deployment ban did not really stop workers from emigrating. It just slowed down their exodus.

The premise of brain drain: Concerns around temporary labor emigration of professionals and health workers stem from the argument that it is the labor-receiving developed economies that benefit from the investment in education by labor-sending developing economies.

At the developmental level, the large remittance inflows help tackle poverty, improve workers’ skills, and reduce income inequalities. But these effects are not universal. Some labor-sending developing economies have demonstrated worsening income inequality, a shift in the focus of educational programs towards labor migration, and economic activities redirected to supply foreign demand.

These effects have been more evident when temporary labor emigration involves highly skilled and professional workers.  The cost of training their replacements is notable. As well as the monetary cost of their training, it also takes time before they become fully productive. When that time comes, they will also have a higher chance of working abroad, which may cause a productivity decline in the local economy.

Hence, the emigration of highly trained professionals can lead to brain drain in a country that invests heavily in its citizens’ skills.

The point of intervention: The Philippine government cannot really prevent anyone from taking advantage of better opportunities abroad as it would violate the right of ‘liberty of abode and travel’ as prescribed by its current 1987 Constitution. However, researchers have discussed other tax-based interventions to manage temporary labor emigration of highly skilled professionals.

One possibility considered is  a ‘brain drain tax’, also known as an ‘exit tax’ or the ‘Bhagwati tax’,. This tax would be levied on workers, and so increase the cost of their migration. In principle, it would compensate for the loss of highly skilled labor and reduce the number of people who emigrate.

Theorizing brain drain tax: This tax was first proposed in the 1970s and has received a variety of criticisms. However, there is now value in re-visiting the idea of a brain drain tax given the lessons of the pandemic.

Opponents of the tax argue that: (1) it is inequitable and will reduce welfare gains in the long run because the migrant worker shoulders costs; (2) developing countries do not deserve the proceeds since they did not really fully invest in the first place; (3) it violates constitutional provisions on freedom of abode and travel; (4) it has design issues, such as challenges of execution; and (5) it unintentionally discourages investment in education; among other arguments.  

Proponents of this migration management policy say that it will recompensate the state who covered most of the costs of the workers’ education. It is based on the idea that highly skilled professionals who have benefitted from state-funded universities and colleges must also help cover the cost of their education and the impacts of their migration on their home country.

Migration management policies aim to mitigate the costs of migration to society (e.g. brain drain, Dutch Disease phenomenon, and a shortage of required workers in the country). While a variant of the brain drain tax has been used in the Philippines before through a ‘citizenship-based tax’, it was ineffective due to social, economic, and political complexities (such as exemptions to the rule), limiting its impact.

Consequently, revenues that the government can generate from such a tax policy can be redirected towards: (1) developmental programs; (2) increased budgets to pay for health workers and motivate them to stay; and (3) improvement of health facilities, technology, and working conditions of workers left behind.

The Bhagwati tax policy proposal is motivated primarily by fairness and is theorized to assist labor-sending developing economies in their quest for growth. While there is a lack of real-world evidence on its actual socio-economic impact, it is still important to consider whether it is truly feasible and fair.

Further, in order to design a tax that mitigates the cost of brain drain appropriately and sustainably, policymakers may also benefit from exploring the wider research on tax design. Studies have shown that while taxes are not created equal, it is important to: (1) pay attention to mobility responses when designing tax policy; and (2) have a clear understanding of the inequality that exists in the economy.

The discourse should continue especially in a post-pandemic world where countries are gearing up towards future health crises.

John Paolo R. Rivera
President & Chief Economist, Oikonomia Advisory & Research, Inc.