Giving an amnesty to 500,000 people living illegally in the UK could raise £1bn in taxes, a report suggests.
Removals: Could cost billions, warns think tank
The Institute of Public Policy Research says the cost of finding and deporting illegal immigrants would be outweighed by the gains from taxing them.
The think-tank called for the UK to copy amnesties in other countries such as Spain.
But immigration minister Tony McNulty said the government would not "simply accept" illegal immigration.
Nobody knows how many people live and work illegally in the UK. But a Home Office report put the figure at between 310,000 and 570,000.
Most of these are thought to work in low-paid jobs in the black economy, such as agriculture, the catering industry or cleaning.
According to the IPPR's report, it would cost about £4.7bn to deport all of Britain's illegal workers, a figure based on £11,000 per removal, recently calculated by the National Audit Office.
In contrast, the think tank argues that an amnesty would raise enough tax to abolish the starting rate of stamp duty or increase child tax credit by £150.
The easiest way to bring these people into the system would be in 2008 when the government is planning to issue ID cards to foreign nationals.
Nick Pearce, director of the IPPR, said: "Nobody likes illegal immigration. And the subject is a deeply difficult one for politicians to tackle.
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"But the bare truth is that we are not going to deport hundreds of thousands of people from the UK. Our economy would shrink and we would notice it straightaway in unclean offices, dirty streets and unstaffed pubs and clubs.
"So we have a choice - make people live in the shadows, exploited and fearful for the future; or bring them into the mainstream, to pay taxes and live an honest life."
Both Spain and the US have held recent amnesties, with Madrid saying its 2005 programme netted 750m euros in extra taxes. Many groups like the Joint Council for the Welfare of Immigrants support amnesties, saying they would stop exploitation.
The UK government has steered away from any talk of a major amnesty. But it has granted residency to asylum families who have waited a long time for a decision and continues a long-standing scheme of discretionary acceptance of people who can prove they have lived in the UK for 14 years.
Home Office Minister Tony McNulty said he would not simply accept illegal immigration - and the new points-based migration system aimed to welcome workers with skills.
Mr McNulty said: "The [new] Immigration, Asylum and Nationality Bill puts in place measures to strengthen the UK's border controls and new civil penalties for employers found to be employing illegal immigrants of up to £2,000, custodial sentences of up to two years and unlimited fines for those found knowingly to use or exploit illegal workers."
Sir Andrew Green of pressure group Migrationwatch UK, attacked the proposal as wrong.
"We think it's a crazy suggestion. We cannot see how giving three quarters of a million people full access to the welfare state can possibly save money."