Tariffs could fix both immigration policy and people smuggling

Many of the current debates about reform of immigration policy in Australia are essentially about changing the conditions of the current quota system – tweaking it here and there for political expediency.

A better idea is to replace it altogether with a tariff system. With this approach we could end up with open markets for labour – just as we already have (and benefit greatly from) open markets for capital and goods and services.

Lessons of trade liberalisation

The most successful economic policy in the 20th century was the long, slow, persistent process of trade liberalisation. This took us from the closed and isolated depths of WWI and the Great Depression to the current era of open and prosperous globalisation. This is something, as Greg Mankiw points out in a recent New York Times piece, with near-unanimous agreement among economists.

The pathways for liberalisation of trade both in capital and in goods and services did not jump immediately from autarky to perfect free trade. They followed a phased progression: complete barriers were converted into quotas, then those quotas converted into tariffs, and then those tariffs gradually reduced through each round of trade negotiations to the present point of near elimination.

The phased progression is more politically viable, and economic theory explains why tariffs are superior to quotas. Tariffs raise revenue for government and are less prone to corruption and smuggling. And because they are a price mechanism, they affect incentives at the margin. This leads to a more efficient allocation of resources and more effective development of specialisation and comparative advantage, which drives productivity and wealth creation.

Exactly the same argument that applies to international flows of goods and services, and capital, also applies to labour, or to the international flow of people. The world of global migration in 2015 is basically where the world of capital flows and trade in goods and services was in 1915.

Why tariffs make sense for immigration

The immigration tariff idea is not new. It was long ago proposed by Nobel Prize-winning economist Gary Becker (a gated paper is here). The basic argument in favour of immigration tariffs (or related mechanisms such as an immigration auction or surtaxes) in preference to quotas is made here by Bryan Caplan of George Mason University in the US.

One of the most compelling arguments in favour of immigration tariffs is that the tariff revenue goes to the government to be distributed among citizens, rather than to smugglers. This is a much fairer system, as the immigrant is basically buying their share of the public capital and infrastructure (including intangibles). My very back-of-the-envelope calculation puts that at about A$60,000 (per capita public sector capital stock, generously rounded up).

Furthermore, using financial rather than discretionary means to regulate migration eliminates or mitigates many of the substantial harms associated with the quota system. These include: the incentives to political lobbying and corruption (and the politicisation of migration debate); the strong incentives to smuggling, the flows of revenues to smugglers and the horrible human cost in failed smuggling ventures; the arbitrariness of the mechanism; and fewer wasted resources devoted to the “immigration industry”.

A solution for the poor

However, the argument against such a line of reform usually gets immediately stuck on the equity issue of “what about the poor people?’ and "who can afford that?” Let’s ignore the substantial costs that the quota system imposes on immigrant individuals and Australian citizens, and that the current estimate of smuggling costs divided by probability of success is about A$60,000 already. Let’s also overlook that a tariff can be paid by family and friends, or even by charitable organisations, in a way that a quota system cannot (unless those are high-powered political friends).

A possible solution is government-issued “income-contingent loans”, otherwise known as HECS. Higher education is a good investment, as is Australian citizenship. Borrowing to finance the former is not that different to borrowing to finance the latter.

So let’s shift from immigration quotas to immigration tariffs. Standards of language proficiency and good character can of course be maintained. All who meet those criteria and can pay the tariff would be welcome.

But those who couldn’t pay would be offered (what I will call) Income Contingent Citizenship Loans (ICCLs). These would work in much the same way as HECS.

Plainly, these immigrants would be encouraged into the labour force, rather than prohibited, and it is possible that various exemptions would need to be carved out of labour laws to enable participation. But the general principle would be that an inability to pay upfront would be no barrier to potential inward migration, just as with access to higher education.

Investing in migrants

A substantial body of economic theory and evidence (here, here, here, here and here among others) indicates migrants are a good investment for a well-governed nation, such as Australia. An equally substantial body of theory and evidence indicates tariffs are a better migration control mechanism than quotas. Making ICCLs available would increase the viability of a tariff-based migration policy.

The Productivity Commission has called for an inquiry into new approaches to immigration policy, with a particular focus on the use of charges. We should not let slip by this opportunity to fix something that has been broken for too long.

A broad shift from immigration quotas to tariffs will be a good start in getting the economics right. Income-contingent loans could be an Australian policy innovation that makes this a political reality too.

Jason Potts receives funding from the Australian Research Council. He is an Adjunct Fellow at the Institute of Public Affairs.