The indirect fiscal great things about low-skilled immigration
You will find a widespread perception that low-skilled immigration is a fiscal burden for society. This column incorporates indirect fiscal ramifications of immigration that arise generally equilibrium into various models which were emphasised in the empirical immigration literature. It finds that the indirect fiscal effect is actually positive, with one low-skilled immigrant in america adding between $700 to $2,100 to the general public finances through this channel every year.
What’s the fiscal impact of low-skilled immigration? A widespread perception is that this is a fiscal burden for society. In his widely read blog, Nobel Laureate Paul Krugman (2006) figured “the fiscal burden of low-wage immigrants can be pretty clear. I believe that you’d be challenged to find any group of assumptions under which Mexican immigrants certainly are a net fiscal plus.”
More recently, a written report by the National Academy of Sciences (NAS) also studied the fiscal impact of immigration in america (National Academy of Sciences 2017). The report targets immigrants’ direct fiscal effects – taxes paid by the immigrants minus charges for benefits and services they receive. The authors consider various scenarios and for a lot of them find that low-skilled immigrants indeed have unwanted effects on public finances. George Borjas, an associate of the NAS panel, summarises the report’s findings on low-skilled immigration thus: “(r)egardless which scenario, it really is obvious that low-skill immigrants impose a fiscal burden over time. ” (Borjas 2016a: 14). The NAS report was also politically influential and cited by President Trump in his first address to Congress in 2017, where he stated: “(a)ccording to the National Academy of Sciences, our current immigration system costs America’s taxpayers many vast amounts of dollars a year.”
In a fresh paper (Colas and Sachs 2020), we challenge this perception of low-skilled immigrants as a fiscal burden. We enrich the debate by considering indirect fiscal effects that occur generally equilibrium through changes in native wages and native labour supply induced by low-skilled immigration. We show that one low-skilled immigrant in america adds between $700 to $2,100 to public finances every year through this indirect fiscal effect. This outweighs the direct fiscal charges for the more optimistic scenarios of the NAS report and significantly reduces the responsibility in the other scenarios. It will therefore be accounted for when calculating the fiscal ramifications of immigration.
To attain this conclusion, we derive formulas because of this indirect fiscal effect for various models which were emphasised in the empirical immigration literature. The benchmark model we consider may be the so-called ‘canonical model’ of the labour market (Acemoglu and Autor 2011) where high-school (low-skilled) and college-educated (high-skilled) labour are imperfectly substitutable inputs in production and people with different productivity levels are perfect substitutes within these skill levels. We model labour supply responses of natives along both extensive participation margin and the intensive effort or hours of work margin and invite for labour supply elasticities to differ with income, gender, and family status.
Formalising and quantifying the fiscal aftereffect of a low-skilled immigrant in that model is complex: the low-skilled immigrant increase the share of low-skilled workers, that will trigger a rise in high-skilled wages and a reduction in low-skilled wages. These wage changes, subsequently, affect labour supply decisions of natives which, subsequently, creates another round of wage changes etc etc, creating a fixed-point problem. We follow Sachs et al. (2020) and formalise this fixed-point problem with regards to integral equations. We then get yourself a closed-form expression for the indirect fiscal aftereffect of a low-skilled immigrant that includes the next estimable statistics:
1. Own-wage elasticities for both skill groups
2. Income-weighted average of labour supply elasticities for both skill groups
3. Income-weighted averages of marginal tax rates for both skills groups
4. Income-weighted averages of the merchandise of marginal tax rates (participation tax rates) and intensive (extensive) margin elasticities for both skill groups.
Intuitively, the own-wage elasticities give a measure for just how much relative wages of natives change because of immigration. Second, labour supply elasticities matter because the labour supply responses of natives mitigate the original wage shock – for instance, the reduction in low-skilled wages because of low-skilled immigration is mitigated if low-skilled natives lower their labour supply as a reply to the immigration influx. The 3rd and the fourth component then measure how these changes in wages and labour supply result in tax revenue. The 3rd element captures the extent to which wages, and therefore tax payments, of high-skilled natives increase and the ones of low-skilled workers decrease therefore. If the tax system is progressive in the sense that the income-weighted marginal tax rate of high-skilled individuals is bigger than that of low-skilled individuals, tax revenue increases through this mechanism. The fourth term captures that changes in labour way to obtain natives also affect tax revenue. We show that if the increase in labour way to obtain high-skilled individuals fiscally outweighs the reduction in labour way to obtain low-skilled boils right down to the merchandise of marginal (participation) tax rates and intensive (extensive) margin elasticities. While these formulas give useful intuition from a theory perspective, their relevance can only just be assessed through quantification.
To quantify the model, we primarily need information on (1) cross-sectional distributions of earnings depending on skill, (2) the distribution of intensive and extensive margin elasticities in the populace of natives, (3) own-wage elasticities and – perhaps most challengingly – (4) we are in need of an extremely careful calibration of the united states tax-transfer system. Our baseline dataset may be the American Community Survey, that we are able to calibrate (1). With regards to the elasticities, we build on a big empirical literature. We look at a scenario with uniform elasticities predicated on Chetty (2012) and on a scenario with elasticities that differ by income, family status and gender that’s predicated on Bargain et al. (2012). Regarding (3), we make assumptions on the elasticity of substitution predicated on Card (2009), that may then be transformed into own-wage elasticities.
For (4), we conduct our very own empirical quantification of the united states tax-transfer system. We first utilize the NBER’s TAXSIM to assign tax rates to all or any individuals inside our American Community Survey data. However, TAXSIM will not take into account the effective tax rates that are implied by welfare-transfer programmes. Programmes just like the Supplementary Nutrition Assistance Program or Temporary Assistance for Needy Families imply a rise in effective tax rates since transfers are eliminated as income increases. To take into account this, we use data from the Survey of Income and Program Participation to estimate effective transfer phase-out rates of the welfare programs. Another important detail that’s not captured in TAXSIM is that higher earnings imply higher Social Security benefits after retirement. Because of this, we combine Social Security formulas with estimates of life-cycle earnings paths that people estimate from the NLSY79. Our quantification of how average marginal and participation tax rates vary over the income distribution of displayed in Figure 1.
Figure 1 Marginal and participation tax rates by individual earnings
Notes: The very best panel provides marginal effective tax rates implied by taxes, the social security system, and transfer programs. Underneath panel reports the corresponding participation tax rates. Taxes receive by the sum of state and federal taxes, social security is thought as payroll taxes without the discounted sum of future social security benefits, and transfer payments will be the sum of TANF and SNAP phase outs.
We combine our closed-form expressions with this quantification to judge the indirect fiscal ramifications of low-skilled immigration beneath the selection of assumptions on parameters of the production function and magnitude of labour supply elasticities. The email address details are summarised in Table 1. Over the scenarios we find that the indirect fiscal aftereffect of one low-skilled immigrant is between $770 and $1,470 each year.
Table 1 Indirect fiscal effects
Notes: The three columns show the indirect fiscal effect under different assumptions of the elasticity of substitution, which range from 1.5 to 2.5. Each row displays the indirect fiscal effect for different assumptions about the labour supply elasticity.
To compare these indirect fiscal effects to the direct fiscal effect, we calculate an annualised direct fiscal cost connected with low-skilled immigrants using results from the 2017 NAS report. These annualised direct fiscal costs under different scenarios which vary the marginal cost of public goods and the training of an immigrant are displayed in Table 2. In virtually all cases, the direct fiscal effect is negative and of an identical magnitude to the indirect fiscal effects we calculated. In a few of the scenarios that people consider, accounting for the indirect fiscal costs of an immigrant turns the full total fiscal effect from a fiscal burden to a fiscal surplus and significantly reduces the fiscal burden in the other scenarios.
Table 2 Annuitised direct fiscal aftereffect of a low-skilled immigrant
Notes: Thus giving the direct fiscal aftereffect of an immigrant that finds age 23 and dies at age 79. We use a discount rate of 1%. Only direct fiscal contributions are accounted for and depend on Figure 8-21 of National Academy of Sciences (2017). We calculate the annuity value for the time of 23 until 65 (age of retirement).
There is some controversy in the literature over the correct model to analyse and estimate the wage ramifications of immigration. An all natural concern is that the indirect fiscal effects are also sensitive to these modelling choices. As such, we extend our model to permit for a number of different production functions and labour supply responses which were emphasised in the immigration literature. These extensions and the associated indirect fiscal effects are summarised in Table 3. Whether we enable (i) imperfectly substitutable workers within skill levels and a finer stratification of skill (Borjas 2003), (ii) immigrant-native complementarity in production (Ottaviano and Peri 2012), (iii) alternative definitions of skills (Dustmann et al. 2013), or (iv) endogenous occupation choice (Peri and Sparber 2009), email address details are rather similar. We find indirect fiscal ramifications of low-skilled immigrants in the number of $1,000 to $2,100.
Table 3 Estimates of annual indirect fiscal aftereffect of one low-skilled immigrant under different model specifications
Notes: Estimates of annual indirect fiscal aftereffect of one low-skilled immigrant under different model specifications. For the ‘Simple Textbook Model‘ and the ‘Canonical Model‘ we use our results connected with an elasticity of substitution between high-skilled and low-skilled workers of 2, the central value we use inside our quantification. For the ‘Canonical Model’ with labour supply adjustments, we display our results with common labour supply elasticities. For all specifications, we show the indirect effect for the common low-skilled immigrant.
Whether low-skilled immigrants ‘pay their fair share’ has turned into a hot-button issue in US politics. Our analysis challenges the commonly held belief of low-skilled immigrants as a fiscal burden and highlights the need for accounting for indirect fiscal effects when contemplating the fiscal impacts of immigration.
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Borjas, G J (2003), “The Labour Demand Curve Is Downward Sloping: Reexamining the Impact of Immigration on the Labour Market”, The Quarterly Journal of Economics 118: 1335-1374.
Card, D (2009), “Immigration and Inequality”, American Economic Review 99: 1-21.
Chetty, R (2012), “Bounds on Elasticities with Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labour Supply”, Econometrica 80: 969-1018.
Colas, M and D Sachs (2020), “The Indirect Fiscal Great things about Low-Skilled Immigration”, CEPR Discussion Paper No. 15325.
Dustmann, C, T Frattini and I P Preston (2013), “THE RESULT of Immigration Along the Distribution of Wages”, The Overview of Economic Studies 80: 145-173.
Krugman, P (2006) “Notes on Immigration”, NY Times op-ed.
National Academy of Sciences, U S (2017), The Economic and Fiscal Consequences of Immigration, National Academies Press.
Ottaviano, G I and G Peri (2012), “Rethinking the result of Immigration on Wages”, Journal of the European Economic Association 10: 152-197.
Peri, G and C Sparber (2009), “Task Specialization, Immigration, and Wages”, American Economic Journal: Applied Economics 1: 135-69.
Sachs, D, A Tsyvinski and N Werquin (2020), “Nonlinear Tax Incidence and Optimal Taxation generally Equilibrium”, Econometrica 88: 469-493.