Karat and stick

The standing committee has suggested that students leaving India for higher studies abroad should pay an exit tax. Ms Karat has supported this strongly. In her note she has also opposed university fee hikes. These two are linked in a manner Ms Karat may not expect.

Higher education is subsidised in India. All Silicon Valley Indian-born CEOs paid two-figure rupee fees every month while they were in college here. In America, they earn six-figure dollar salaries. There8217;s no return on the expenditure, as the standing committee note observes.

I would extend the argument: higher education is subsidised by taxpayers. But those who go abroad to study and stay there to work 8212; as most Indians are keen to 8212; do not pay taxes in this country. A study by Mihir Desai Harvard University estimated that the number of Indians in America is the equivalent of 0.1 of India8217;s population but their earnings are 10 of India8217;s national income. If these people worked in India, they would have, of course, earned less. But the cumulative taxable income would still have been considerable.

There8217;s an argument that remittances sent by emigrants make up for the fiscal loss of their leaving. The United Nations, which recently released a report on migration, has emphasised this. But the remittance argument doesn8217;t really apply to educated emigrants. Their families are typically with them, not back home. Remittances are largely a byproduct of unskilled migration 8212; irrelevant to the problem Ms Karat was addressing. So, Ms Karat is more right than she thought in arguing that subsidised students leaving this country represent a loss.

Where she8217;s wrong is in her solution. Given her politics, she8217;s wrong in an incredibly ironic way. And, sadly, it8217;s also her politics that comes in the way of seeking the right solution.

Left leaders usually do not think in terms of individual incentives, personal profit maximisation. Incentives, however, determine most decisions in most people8217;s lives. Now consider the incentive for an Indian student whose higher education has been subsidised by taxpayers 8212; he pays little to acquire the skills that, after honing them in the West, will give returns of an order stock market buccaneers can8217;t dream of.

A study conducted in Canada 8212; Canadians, it may surprise Indians, are worried about brain drain as well 8212; estimated that, for a medical student emigrating to the US to work there as a doctor, the rate of return on the education costs he paid in Canada is a wonderful 54. Canada, like India, heavily subsidises higher education. No similar figures are available for India. But obviously, the rate of return for an educated Indian emigrant will be far higher. So, this is a powerful incentive for emigration.

But what if Canadians and Indians had to pay the full cost of education? The same Canadian study shows that after factoring in the full cost of medical education, the rate of return enjoyed by a Canadian emigrant doctor in the US becomes a modest 15. The fall won8217;t be as much in the case of a full education cost paying Indian emigrant. But it would still be substantial 8212; big enough for a new factor to enter the potential educated emigrant8217;s calculations. A decision to study abroad will now have to be balanced much more realistically against future earning potential.

Much more important, India will have recouped at least the cost of education of those leaving the country. So, full-cost higher education should be at least as good an option as an exit tax as far as recouping social investments go.

Actually, it8217;s a better option.

If an exit tax of meaningful magnitude 8212; a really small tax will defeat the purpose 8212; is imposed on all students who leave the country it would hurt those with modest social backgrounds. Children of Indian rich leaving the country can easily pay the tax. But the bright son or daughter of a barely middle-class family who gets admission in an Ivy League university will be hard pressed to find the money. It8217;s the kind of a situation Ms Karat would instinctively object to.

If exit taxes are to be linked to paying capacity, the cost recouping potential gets reduced. Also, it becomes an implementation nightmare. Implementation is a problem if exit taxes are to be linked to future earning streams as well. Our taxmen can8217;t even get rich Indians to pay taxes. Imagine them chasing NRIs. So, an exit tax is neither egalitarian, nor implementation-friendly.

But Ms Karat will argue, as she indeed has in her note to the standing committee, that full-cost education is not egalitarian. She has opposed university fee hikes, saying they will restrict access.

So, this is how her plan will work, whether she wants it or not: subsidise education, therefore hugely incentivise educated emigration, then get upset at people leaving the country and tax them and, consequently, be unfair to the poor but bright among them.

There8217;s such an easy alternative: make higher education full-cost, give scholarships and/or student loans to those who can8217;t pay, and drop the idea of an exit tax. That way children of wealthy Indians going abroad to study will pay for their cost of education here. That way kids from low-income families will not be denied higher education at home. That way the government won8217;t be victimising educated student-emigrants whose parents are not rich. That way Brinda Karat won8217;t be championing India8217;s rich kids.

saubhik.chakrabartiexpressindia.com