Exit tax on emigrating graduates

This idea is gaining momentum. It was in the news sometime ago (and Rohit linked to it), but now within two days, it's on Outlook and Economic Times. Here are the opening lines from the Outlook story by Anuradha Raman:

Will taxing students from institutes of "higher learning" (read IITs and IIMs) who catch the first flight abroad after they complete their degrees stem the brain drain? Members of the parliamentary standing committee on HRD believe that a penalty—or "exit tax"—could act as a deterrent and keep students back in the country.

Picking up on this, Ram Mohan (a professor of finance at IIM-A) has commented on this proposal: he covers a lot of different angles, right from implementation difficulties to philosophical issues. Here are his questions on the implementation:

... At what point is the tax to be collected? Is a candidate expected to make a declaration to the Income tax department that he or she is an IIT/IIM product and leaving the country and, therefore, wishes to have a clearance certificate? What if the compensation is understated? Is the passport supposed to carry a stamp saying the candidate is from IIT/IIM? In the case of fresh graduates leaving immediately after graduation, they may not have the resources to pay the tax. So, are they expected to raise a loan? Will banks provide loans to departing individuals? And what about graduates who return after a few years' experience? Are they eligible for a tax refund? And why only IIT/IIM products?

Indeed, why only IIT/IIM products? Why only those who go abroad?

An across-the-board graduation tax is a good idea, and I am impressed by the Australian model. In this model, the government's higher education subsidy is treated as a loan in the hands of the student; when (and only when) he/she starts earning an income beyond a certain threshold, he/she pays a slightly higher income tax until the loan is repaid. Such a tax can help reduce government expenditure (subsidies) on higher education without sacrificing equity. It is easy to implement. It is easy to use this tax to signal to the students what our nation's priorities are. Even during the repayment stage, the tax is relatively painless, since it just means the ex-student and current tax-payer's marginal tax rate is higher just by a percent or two. I don't know how the Australians treat those who emigrate, but we can think of suitable mechanisms to get them to pay (either a lumpsum payment before they leave, or a transfer of their loan to someone else who would then be responsible for repaying it in installments).

Interestingly, the Economic Times report (which is by Urmi Goswami and someone else whose name I don't recall right now -- the print version mentions them by name) alludes to the Australian model:

... the Australians have worked out a scheme that could be considered for the Indian context. This would fit in with the finance minister’s plans for a simpler tax system. In Australia, higher education is considerably subsidised.

On graduation, students who seek to work outside the national priority areas have to pay back the subsidy, as the nation has not benefited from the investment. This ensures that tax structures are not meddled with and it incentivises working in priority areas through a subsidised cost of education.

I hope the idea of an across-the-board graduation tax also gains traction. It deserves to be considered seriously.