Recovering Lost Tax Revenue Through Taxation of Transnational Households

Abstract

This Article addresses the difficult problem of raising revenue in developing countries with significant outmigration. Migrant-source country governments face a unique policy dilemma because emigration reduces domestic human capital and tax revenue, but simultaneously improves outcomes for migrant workers and their families. Thus, governments must balance contrasting needs to maximize government revenue while protecting the welfare of migrant worker households. I argue that migrant-source countries may find a solution to this dilemma by taxing income remitted by migrant workers to family members remaining in their home countries. If constructed properly, a tax on remittance payments could raise revenue without burdening migrant workers or restricting their freedom to migrate. In this Article, I push back against common anti-remittance-taxation arguments based on both normative and practical considerations, with a focus on improving and updating the taxation of families separated by national borders. After surveying the tax policy instruments available in remittance-receiving developing countries, I offer a menu of policy designs through which policymakers can leverage these important inflows. Proposed policies range from an ideal case of bilateral cooperation between host and home countries to a third-best regime that seeks to harness remittance gains indirectly via consumption and property taxation. Abstract ..............................................................................................................100.............................................................................................................100 Introduction .......................................................................................................101 I. Background on Migration and Remittances ...................................................103 A. Emigration and Taxation in Source Countries ..............................103 1. Emigration and Welfare ..........................................................103 2. Migration Policy Proposals and the Bhagwati Tax .................105 B. Remittances and Welfare in Source Countries ..............................109 1. Background on Remittance Flows ..........................................109 DOI: http://dx.doi.org/10.15779/Z384G3Z * Acting Assistant Professor of Tax Law, New York University School of Law. I am grateful to Michael Graetz and Anne Alstott for their thoughtful insights and support on this piece, and to my clients in the Bet Tzedek Legal Services Tax Clinic, for allowing me to help them with their tax problems. Thank you also to the editors of the Berkeley Journal of International Law, especially Nathan Berry and Christopher Yandel. 2016] RECOVERING LOST TAX REVENUE 101 2. Remittances and Welfare ........................................................111 3. The Argument Against Remittance Taxation .........................115 C. Migration Taxation in Practice ......................................................116 II. Normative and Practical Justifications for Remittance Taxation .................119 A. Taxation of Intra-Family Transfers ...............................................120 B. Inter-Nation Equity ........................................................................123 C. Government Tax Goals Principles .................................................126 1. Increasing Revenue Mobilization ...........................................126 2. Progressivity ............................................................................128 III. Tax Realities in Developing Countries ........................................................130 A. Tax Policy Building Blocks ...........................................................130 1. The Personal Income Tax (PIT) ..............................................130 2. Consumption Taxation—The VAT .........................................131 3. The Property Tax ....................................................................132 B. Tax Capacity of Remittance-Receiving Countries ........................133 1. Survey of Tax Policies in Selected Migrant-Source Countries .................................................................................133 2. Why the VAT is Not Enough ..................................................137 IV. Proposed Policy Structures ..........................................................................140 A. Policy 1: Deduction in the Host Country via Bilateral Tax Treaties ..........................................................................................140 1. Aggregate Transfer of Tax Revenue .......................................142 2. Individual Deductions and Subsequent Taxation in Home Countries .................................................................................143 B. Policy 2: Tax Inflows to Recipients, Offsetting for Double Taxation .........................................................................................145 C. Policy 3: Indirect Remittance Taxation .........................................148 1. Property Taxation ....................................................................149 2. Consumption Taxation ............................................................150 V. Administrative Considerations .....................................................................151 A. Distorting Remittance Behavior ....................................................152 B. Political Will ..................................................................................153 C. Evasion ..........................................................................................153 D. Corruption ......................................................................................154 Conclusion .........................................................................................................155