Emigration Tax

Is the Finance Ministry becoming Hotel California?

You can check out any time you want but you can never leave. So sang The Eagles in 1970. Here at Vox Sapiens we suspect that country residence could begin to resemble living at Hotel California. There may come a time when you will be unable to leave the country without paying your share of the public debt.

Let us explain a bit more about the state of public finances before returning to the pay-as-you-leave hypothesis …

The state of public debt around the world

If we look at the public debt per capita metrics, we notice a big variation between countries. There are various sources of the statistics, including:

We should note the difference between public debt and external debt:

  • Public debt (also known as government debt and national debt) is the debt owed by the public sector (central government, local government and some publicly owned corporations where there is a government backing behind the debt). Public debt can be divided into internal public debt (owed to lenders within the country) and external public debt (owed to foreign lenders).
  • External debt (also known as foreign debt) represents foreign currency liabilities for the combination of the public sector (external public debt) and the private sector (external private debt).

Both of these measures of debt are important. The former is related to creditworthiness – the ability to repay the debt. The latter is related to the foreign exchange requirements (thus, even if the government debt is very low, a country can get into crisis if it has insufficient foreign currency reserves to allow private companies to pay for imports).

One may argue that a direct per capita comparison is unfair because of the difference in per capita income between countries. An alternative approach to the issue is to use debt as a percentage of GDP. The relative rankings of countries will change, but the overall theme of this article will not.

The implications for an emigration tax

So let us suppose that a resident of a country wishes to emigrate. During the time the resident has lived in the country it is likely that the debt per capita has increased (less taxes have been paid than are required to maintain a constant level of public debt). In other words, the resident has consumed more public services than he/she has paid for. And now he/she can emigrate and leave behind the obligation to pay for these services. The obligation is transferred to those who stay behind.

Firstly, is this fair? Should a resident that remains be forced to take on the obligations of one that emigrates?

Well the philosophy of taxation fairness is beyond the scope of this article. And most work in this area addresses fairness within a tax year, not over a longer period (including the transfer of the obligation to repay debt from one generation to the next, even before the impact of immigration and emigration is considered). The Wikipedia article on optimal tax, for example, has no mention of migration (as at the date this Vox Sapiens article was published). Even the majority of the work on the Tiebout model was restricted to a national scope until fairly recently – see, for example, Tiebout goes Global, in 2008, and Fiscal policy and migration flows, in 2006, for papers on international migration and the Tiebout model. But even these papers are focused on the short term choice of public services, not the long term impact of government debt.

But if we were to ask a sample of a population, I’m sure the response would be “no, it’s not fair that a person enjoys the benefits but is not responsible for fully paying their share” (however their share, or even their fair share, happens to be calculated).

Political implications

So if the practicalities could be overcome of how to calculate and levy an exit charge for emigrants, we at Vox Sapiens guess that governments and tax authorities would jump at the chance. This is a vote booster – the non-emigrants see that the emigrants are not allowed to become (partial) free-loaders. And the emigrants, who might vote against a government imposing such an emigration tax, would not be able to vote anyway (except the USA and Philippines which represent special cases because taxes are based on citizenship instead of residence, so an emigrant would still be able to vote unless he/she gave up their citizenship but, until then, would remain subject to tax in the home country anyway).

So can the practicalities be overcome?

Given the increase in sovereign debt since the 2007/2008 economic crisis, one can be sure that there is much more focus on this than before, and hence the likelihood of realizing a practical approach is much greater.

Debt migrants

If the emigrant migrates to a country with a lower per capita public debt, he/she could be considered to have become a “debt migrant.” As the population becomes more aware of the desolate future indicated by the huge public debt mountains, will debt migrants become more common?

Will low-debt countries – the greener countries on the Wikipedia map – become the lands of opportunity? Will Norway become the twenty first century America? Will Libya?

Will parents encourage their children to migrate to a lower-debt country in the manner that earlier generations encouraged their children to migrate to a higher-opportunity country?

What about immigration?

If debt immigration becomes a non-negligible phenomenon, will the extant population accept the immigration?

What about the new immigrant’s obligations in the destination country?

Well, in theory, governments should offer inducements to immigrants to compensate them for taking on their share of the national debt.

For countries with higher levels of debt, how else will they persuade immigrants to settle? And if they don’t, and populations shrink, the debt per capita will continue to increase, presenting a greater and greater problem for the country.

And if immigration grants are offered, presumably they would be age-based to correspond to the remaining economically active life of the immigrant. And would a medical be required? Would the terminally ill immigrate and send the grant to their families?

What about holidaymakers and international business travelers?

If an emigration tax becomes a reality, an obvious tax avoidance mechanism would be to leave the country on holiday/business but not return.

Does this mean holidaymakers and business travelers (or their employers) may be required to post a bond as a form of surety against “debt defection?” This could be a killer for international tourism and business.

Watch this space

At the moment there are so many unknowns that here at Vox Sapiens we don’t want to put our heads on the block and predict what will happen. But we do think that there is a greater and greater risk of governments tinkering with payments for immigration and emigration.

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