The Economic and Fiscal Consequences of Immigration (2017) / Chapter Skim
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7 Estimating the Fiscal Impacts of Immigration - Conceptual Issues
7 Estimating the Fiscal Impacts of Immigration - Conceptual Issues
Pages 323-358
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From page 323... ...
, immigration may create taxpayer inequities across states and local areas; specifically, regions that receive disproportionate shares of immigrants may incur higher short-run fiscal burdens if the new arrivals initially contribute less in revenues than they receive in public services. Second, projections of the consumption of public services and payment of taxes over time are essential in order to predict "the full consequences of admitting additional immigrants into the United States." This chapter discusses the conceptual issues that arise when estimating the fiscal impacts of immigration, recognizing that it is a complex calculation dependent to a significant degree on what the questions of interest are, how they are framed, and what assumptions are built into the accounting exercise.
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From page 324... ...
, and Vargas-Silva (2013) , significantly advanced the conceptual framework for thinking about fiscal impacts, making the task much easier now than it was at the time that The New Americans was written.1 The first-order net fiscal impact of immigration is the difference between the various tax contributions immigrants make to public finances and the government expenditures on public benefits and services they receive.
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From page 325... ...
However, later in the life cycle, working and tax-paying adults typically become net contributors to public finances. A full accounting of the fiscal effects of immigration therefore requires information about "the additional or lower taxes paid by native-born households as a consequence of the difference between tax revenues paid and government benefits received by immigrant households over both the short and the long term" (Smith, 2014a, p.
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From page 326... ...
may adequately address these observed fiscal costs and benefit differences across origin countries.2 Even so, due to this heterogeneity, it is impossible to reach generalizable conclusions about the fiscal impact of immigration because each country's or state's case is driven by a rich set of contextual factors. Impacts vary over time as laws and economic conditions change (e.g., pre- and post-financial crisis)
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From page 327... ...
Relationships between immigrant characteristics and fiscal impact were quantified by Dustmann and Frattini (2014) for the UK case, where immigration patterns have been quite different from the patterns in California and New Jersey during the 1990s and from the U.S.
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From page 328... ...
. The net fiscal impact that immigrants impart depends on the characteristics that they bring -- their mix of skills and education, age distribution and family composition, health status, fertility patterns -- and whether their relocation is temporary, permanent, or circular.
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From page 329... ...
In a single-year static analysis, public education for the school age population will appear as an accounting cost; likewise, for the older working-age taxpaying population, the cost of education incurred in previous periods will not be captured as part of the net calculation. Beyond public education, a large number of other goods, services, and programs generate public costs at various levels of government:5 Medicare and Medicaid, Social Security and other protections, housing, prisons and courts, police services, and others -- are financed through tax payments by 4 According to the U.S.
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From page 330... ...
Ideally, models estimating fiscal impacts of immigration should distinguish between citizens and noncitizens and then, for the latter, authorized and unauthorized individuals. All subgroups make contributions to government finances (pay various kinds of taxes)
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From page 331... ...
Even the microdata sources from national surveys do not contain enough detail or population coverage to make these distinctions accurately for all programs, and assumptions must be embedded in the estimates about numbers of unauthorized citizens and about their impact on program usage. 7.3 STATIC AND DYNAMIC ACCOUNTING APPROACHES New immigrants affect governments' fiscal balances almost immediately upon arrival -- by paying sales, income, and other kinds of taxes and 8 According to the National Conference on State Legislatures, 18 states have passed legislation since 2001 extending in-state tuition rates to undocumented students who meet a set of requirements.
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From page 332... ...
This is done by computing the net present value of tax contributions and government expenditures attributable to immigrants -- and in some analyses, their descendants -- projected over their life cycles. Dynamic analyses involve modeling the impact of an additional immigrant on future public budgets and are useful for addressing questions such as, "over the next 50 years, what will be the impact on fiscal balances if x immigrants with a given set of characteristics y enter the country?
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From page 333... ...
. Because the analysis is retrospective, data on actual tax payments and public expenditures can be used to estimate the fiscal impact of a cohort of individuals from the start of residency onward to the present in a way that minimizes dependency on underlying assumptions.
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From page 334... ...
In contrast to static fiscal impact estimates, dynamic analyses are designed to project future contributions to public finances and costs of public benefits programs. Such models attempt to account for: (1)
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From page 335... ...
Over the period immediately after the policy shift, from 2000 to 2008, the unemployment gap between native-born in Denmark and immigrants narrowed and public finances improved. More generous social safety net benefits in Denmark were also shown to lead to more negative fiscal impact than in the United Kingdom for low-skilled immigrants (Dustmann and Frattini, 2014)
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From page 336... ...
: • A forward-looking perspective providing a projection of the fiscal impacts of immigration in a life-cycle framework that captures net positive expenditures for younger and older individuals on educa 14 This topic is discussed in Chapter 6.
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From page 337... ...
256) , "dynamic fiscal accounting requires specification of a social rate of discount, so that future tax revenues and spending needs can be compared in terms of current dollars." The literature has identified a range of policy-relevant questions for which fiscal impact studies are required: For example, what is the marginal impact of an incremental increase in immigration (i.e., the impact of one additional immigrant)
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From page 338... ...
For dynamic analyses, the household unit of analysis is problematic because families' living arrangements change over time through marriage, divorce, the departure of grown children, the arrival of additional family members from abroad, return migrations to the country of origin, and deaths. Dynamic fiscal accounting based on households becomes exceedingly difficult "as (often arbitrary)
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From page 339... ...
and entering the labor market. If not accounted for, this biases estimates of the net fiscal contributions of immigrants in a negative direction.
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From page 340... ...
were highly dependent on educational attainment. Immigrants with education beyond high school were projected to add positively to net present value while those with lower levels of education caused a net fiscal loss.
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From page 341... ...
Yet they may enroll in pension systems and begin contributing income and payroll taxes immediately. If immigrants are temporary and do not claim pensions or other post-retirement benefits from the destination country, their net fiscal contribution is likely to be very positive.
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From page 342... ...
Indirect/Secondary Fiscal Impacts Most intergenerational fiscal projections are limited by a partial equilibrium perspective. That is, they focus on first-order tax revenue and program spending effects -- those discussed above -- while assuming that no market or behavioral changes take place in response to new immigrants.
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From page 343... ...
The fiscal impacts literature has generally concluded that these kinds of impacts are minor relative to overall economic activity. However, even if overall (nationwide)
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From page 344... ...
For some services, such as education and health care, data may reveal that the total cost of provision is roughly proportional to the number of recipients. This argues for assigning costs on a pro rata, or per capita average cost, basis in the accounting exercise (Dustmann and Frattini, 2013)
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From page 345... ...
Similarly, the marginal cost calculus will be quite different when considering the marginal addition of one immigrant at a point in time versus the addition of many thousand immigrants over a period of time. "Pure" public goods -- goods defined by the trait that their value and availability is not diminished by additional users -- also enter fiscal estimates.
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From page 346... ...
Since public good items such as national defense represent a large part of the federal budget, the difference between allocating expenditures on them pro rata or at a zero marginal cost will have a very large impact on fiscal estimates. In fact, such assumptions are likely to swamp the impact of most of the other assumptions and data issues that arise in fiscal impact analyses.
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From page 347... ...
Replicating this analysis -- but changing the allocation assumption to one in which the marginal cost of providing public services to immigrants is set equal to the average cost -- Borjas (1994) reestimated the net annual fiscal impact associated with immigration in the United States to be about −$16 billion.
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From page 348... ...
[and] return migration by undocumented migrants dropped in response to the massive increase in border enforcement." Return migration of documented migrants was unaffected (Massey et al., 2015, p.
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From page 349... ...
net tax payments made by current and future generations cover the present value of future government expenditures and help to pay the debt can have a large impact on the estimates of fiscal impacts. In The New Americans, this assumption was handled as follows: A government "cannot let its debt grow without limit relative to the economy, as measured by gross domestic product (GDP)
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From page 350... ...
Fiscal balance also plays a role in static analyses. For the average individual in the population, the net fiscal contribution must be negative if the country is running a deficit for the year of analysis.
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From page 351... ...
When interest rates of 6 and 8 percent are used to reflect "the uncertainty of future tax revenues," the net present value of the average fiscal impact of an additional immigrant falls to +$15,000 and +$8,000 respectively.24 One discount rate that has been used in fiscal impact analyses is the real rate of interest at which the U.S. Treasury can borrow.
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From page 352... ...
Because immigrants are not distributed uniformly across the country (and because people frequently find jobs in locations other than where they were educated) , inequalities in fiscal impacts attributable to their arrival can occur across areas.
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From page 353... ...
-- states tend to incur the more immediate costs of new immigrants.26 Furthermore, only a portion of the fiscal benefit of immigrants -- the taxes they pay -- accrue to state and local governments, with a substantial share going to the federal government. This means that, even if the arrival of immigrants creates a neutral net fiscal impact in the long run, some subnational areas will incur net costs, while others and the federal government may incur net benefits.
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From page 354... ...
7.6 SUMMARY AND KEY POINTS Estimating the fiscal impacts of immigration is complex. How the exercise is framed and what assumptions are built into the model depend to a significant degree on the questions of interest.
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From page 355... ...
Legal status is often central to determining what services immigrants qualify for and tend to use and what taxes they are required pay. There are two basic accounting approaches to estimating fiscal impacts, one static and the other dynamic.
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From page 356... ...
Assumptions must also be made about how to treat fiscal impacts generated by the children of immigrants. In forward-looking projections, the logic for including second generation effects is straightforward: Even if children of immigrants are native-born citizens, the costs and benefits that they generate would not have been realized without the initial addition to the population of the immigrant parent(s)
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From page 357... ...
For services such as education and health care, where the total cost of provision is roughly proportional to the number of recipients, expenditures should be assigned on a pro rata basis, or per capita average cost basis, in the accounting exercise. A practical starting place for treating crime and law enforcement is to assign costs on a pro rata, or per capita average cost basis as well.
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From page 358... ...
The CBO uses 1.7 percent for the discount rate from 2014 to 2039 and 2.2 percent thereafter for real returns, but 2.5 percent for debt held by the Social Security and Medicare Trust Funds. The choice of discount rate has a large impact on estimated net present value of future fiscal impacts of an additional immigrant.
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