Brain Drain, Education Subsidy and the Bhagwati Tax

An early view, related to the Bhagwati tax, is that skilled migration – a brain drain – has a negative impact on migrants' source countries. A more recent view is that a brain drain generates a brain gain that can have a positive impact on source countries. This view is based on a model with education's positive externalities. I examine whether, despite opposite results, the two approaches are compatible. Some main findings are: i) Under an open economy and an optimal education subsidy (given education's positive externality), with equal government weights for emigrants and residents, education is higher than under closed economy, with ambiguous impact on welfare; ii) Under a smaller government weight for emigrants than for residents, education and welfare are lower than under equal weights; iii) The Bhagwati tax benefit is related to political economy considerations, i.e., an optimal reduction in the education subsidy might be hard to achieve (as the education bureaucracy and parents' and teachers' organizations are likely to oppose it), so that an excessively high subsidy could be compensated by a higher tax. Thus, the two instruments are policy complements; and iv) Proposals for collecting the Bhagwati tax are presented.