In the second of three publications aimed at setting a "liberal" immigration agenda before the next general election, think-tank CentreForum argues politicians must restore confidence in the immigration system without abandoning key principles such as freedom and tolerance.
As well as a National Insurance proposal, which would apply to non-EU economic migrants only, CentreForum's report contains plans to extend the period before EU migrants can claim out of work benefits to 12 months.
It also joins calls to scrap the Conservative party's policy of reducing net migration to "the tens of thousands", describing the target as "perverse".
The report comes as the Immigration Bill returns to the House of Commons.
Alasdair Murray, report author, said: "Politicians are engaged in an arms race around immigration policy which appears to have more to do with looking tough than genuinely addressing people's concerns with practical policy.
"It is possible to restore confidence in the immigration system by making it more transparent, ending the perception that migrants can access the benefits system without first contributing and developing a target that reflects the real social and economic needs of the country."
CentreForum's National Insurance proposal would see £2,000 paid upon entry to the UK by non-EU economic migrants only and refunded once they had made sufficient tax contributions, or left the country without claiming welfare.
The report said politicians cannot ignore angst over immigrant numbers but adds the net migration target is "unfulfillable" and "is perversely leading the Government to clampdown on students and highly skilled migrants to whom the public is most well disposed and who provide the clearest economic benefits".
CentreForum has recommended a broader migration and population change target should be set at the beginning of each parliament.
Governments would then be required to set out how they intend to mitigate the impact of population change on housing and public services and be held to account for it.