Britain’s Pay-Your-Own-Way Immigration Rule

by Reihan Salam

Starting next month, the British government will require that skilled workers from outside of the European Union will have to earn at least £35,000, or roughly $50,000 at the current exchange rate, to become lawful permanent residents. Donna Ferguson of The Guardian has a good summary of the policy. Right now, non-EU migrants can secure a Tier 2 visa once they’ve been offered a job in the UK that pays at least £20,800 (around $30,000) and can demonstrate that they have a rather modest £945 (around $1350) in their bank account. There are a few other modest requirements, including a hilariously small healthcare surcharge, a certificate of sponsorship from an employer, and proof of English-language fluency. These Tier 2 visas can last for no more than 6 years, but skilled workers can apply for settle permanently after 5 years. The new 35k rule, as its been dubbed, adds another hurdle: only those who earn more than the threshold will be able to apply for “indefinite leave to remain.”

Pro-immigration activists are objecting to this new provision on the grounds that it is arbitrary and inhumane, and they have a point. In an ideal world, this provision would apply not just to workers from outside the EU, but also to workers from within it. That, of course, would not please the activists who are so exercised by the new 35k rule, but it would certainly make it less arbitrary. If Britain chooses to leave the European Union, as I believe it should, it will be in a position to apply the 35k rule more comprehensively. My objection to the 35k threshold is that I might set it at a somewhat higher level. 

To explain why, consider a recent article by the economists Alan Auerbach and Laurence J. Kotlikoff on lifetime spending inequality in the United States. That is, rather than focus solely on inequality in labor income and wealth, they factor in the the effect of taxes and transfers on consumption over time. They then report differences in spending levels and net tax rates across individuals within various age cohorts.

The top 1 percent of 40-49-year-olds face a net tax, on average, of 45 percent. This means that the present value of their spending is reduced by the fiscal system to 55 percent of the present value of their resources. So someone in that age group who has resources with a present value of US$25.5 million can spend $14 million of it after fiscal policy.

For the bottom 20 percent, the average net tax rate is negative 34.2 percent. In other words, they get to spend 34.2 percent more than they have thanks to government policy (they get to spend, on average, $552,000 over their lifetimes, which exceeds their $411,000 in average lifetime resources).

One way to understand the 35k rule is that the British government is hoping to ensure that the economic migrants who permanently settle in the UK will pay positive net tax rates rather than negative net tax rates. “Permanent” is a long time, particularly for younger workers, and so you’d ideally want to set a threshold that doesn’t just clear the threshold separating those who pay into the fiscal system on a net basis from those who don’t, because there’s always a possibility that a young person might face an expensive illness later in life, or that she might face some trauma that makes it impossible for her to work. The higher you set the threshold, the more likely it is that the migrant in question will pay a higher net tax rate over the course of her working life. Granted, there are of course workers who earn a low income for much of their lives only to see it soar dramatically later on. That could be why the 35k rule is, in the end, so reasonable: the British government is not limiting the right to apply to permanent residency to the ultra-rich, perhaps on the assumption that some workers will take their time to climb the economic ladder. And that is fair enough. But given that so many economic migrants from around the world are eager to live in the UK, even if it is for only five years or less, my sense is that the British government can afford to be selective.

Keep in mind that the 35k rule gives workers five years to raise their incomes. Large numbers of skilled workers will still be free to enjoy a temporary stay in the country, and to gain skills and build their networks. They’re just expected to return home if they can’t earn enough to make it a safe bet that they will pay more into the fiscal system than they will get out of it. Is this really such an unreasonable notion? Some will object that it is Britons who will be harmed if skilled workers earning modest amounts are forced to leave the country. Who will serve as music therapists (one of the women profiled in Ferguson’s article) or as arts administrators, or in other skilled but not terribly well-compensated roles?

There is actually a very straightforward way to address this dilemma: British firms can rely more heavily on offshoring. That is, they can hire remote workers in the U.S. and Australia, or the developing world, for that matter, to take on these jobs if it really is true that there are no English workers who could possibly fill them at the right price. The beauty of remote workers is that they can provide low-cost services, yet they will have virtually no impact on the British fiscal system. Firms and consumers can pay them low wages without guilty consciences, as their modest incomes (by British standards) will go much further in low-cost overseas locales. British taxpayers will be under no obligation to subsidize the housing or the medical care of remote workers, nor will they be expected to finance the education of remote workers’ children. As virtual-reality technologies continue to advance, all of the supposed advantages of importing low-wage service workers can increasingly be had for none of the fiscal cost.

One hopes that the British government will stick with its 35k rule, and that Americans will one day consider adopting a similarly sane policy.

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