The New Americans Economic, Demographic, and Fiscal Effects of Immigration (1997) / Chapter Skim
Currently Skimming:
7 The Future Fiscal Impacts of Current Immigrants
7 The Future Fiscal Impacts of Current Immigrants
Pages 297-362
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From page 297... ...
It therefore gives an inaccurate picture of the impact of any particular generation of immigrants. If, for example, elderly immigrants generally have had a higher level of income than younger, more recent immigrants, then the ratio of their Social Security benefits (which are based on their past incomes)
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From page 298... ...
For example, education spending relates primarily to the school-age population, and income tax payments relate to the working-age population. Consequently, increasing cohort size will overstate the cost of educational expenditures relative to the revenue from income taxes when these children enter the labor market.
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From page 299... ...
In particular, it cannot let its debt grow without limit relative to the economy, as measured by gross domestic product (GDP) , without losing credibility in its ability to repay and may eventually face default.
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From page 300... ...
current policy remains in place for 10 years, after which the ratio is stabilized; or that current policy remains in place until the debt/GDP ratio hits 1.0. For each of these scenarios, we can consider the impact of adjustment in income taxes, in transfer payments, in defense spending, or in any combination of these and other components of the budget.
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From page 301... ...
as the sum of the net increase in income from labor market effects plus the net fiscal impact in that year. Thinking of the labor and fiscal effects as completely independent seems problematic at first glance, because the increase in income from the labor market effects would presumably lead to additional tax payments, which one would think ought to be considered in doing the fiscal calculation.
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From page 302... ...
We will briefly discuss these two categories of impacts. Fiscal Impacts Relatively Independent of Immigrant Characteristics Any increment to the population, holding all else equal, will have fiscal effects.
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From page 303... ...
, and use an annual flow of services plus depreciation of this capital, while omitting the capital outlays from expenditures on congestibles.3 These two methods yield nearly identical results. Sensitivity of Fiscal Impacts to Immigrant Characteristics Apart from their simple numbers, the specific characteristics of immigrants influence their fiscal impacts.
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From page 304... ...
To put these various fiscal impacts into perspective, it is useful to consider how important the programs involved are in current federal expenditures. In 1995, for example, expenditures on what we have categorized as public goods accounted for 23.7 percent of total federal outlays.
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From page 305... ...
When we do these calculations at the national level, we can simply group together all the state and local expenditures. One drawback, however, is that we can easily lose sight of the fact that immigrants and their state and local fiscal impacts are very heavily concentrated in a few states, rather than evenly spread across the nation.
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From page 306... ...
Presumably, illegal immigrants both pay less in taxes and receive less in benefits than other immigrants do.6 THE HETEROGENEITY OF IMMIGRANTS AND INTRA- AND INTERGENERATIONAL MOBILITY The fiscal impacts of immigrants vary greatly depending on a number of their characteristics. The benefits received by immigrants in the United States average taxes and receive average benefits for people of the ages in the family, and these amounts may be out of line with their exact circumstances.
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From page 307... ...
The duration variable will be misleading for such people, and this creates problems for estimates of the costs of elderly first-time immigrants, and for calculating the effects of the 1996 welfare reform legislation on the costs of elderly immigrants. In addition, some elderly first-time immigrants are refugees, who qualify for certain benefits despite their short durations of residence in the United states and lack of u.s.
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From page 308... ...
THE AGE PROFILES OF TAXES AND BENEFITS We begin by discussing the estimated age profiles of taxes and benefits for 1993-94, which are important building blocks for the later longitudinal calculations. We have used the merged 1994 and 1995 CPS, and occasionally other data sources, to estimate age profiles for 25 different state, local, and federal programs, most of which are disaggregated by educational level, immigrant generation, and, for immigrants, time since arrival.9 It should be borne in mind that the benefits and taxes estimated from these data will reflect the fact that the U.S.
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From page 309... ...
These are discussed later. Age Profiles for Illustrative Individual Program Benefits Figure 7.2 shows the Social Security and Medicare benefits (OASDHI)
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From page 310... ...
Data have been smoothed on a moving window of 1,000 observations using a local regression smoother. _ First generation 4,000 3,000 ~g o Hi 2,000 1,000 Second generation - - - - - - - - - Third generation O- 1 ~,;1 1 1 0 10 20 30 40 50 60 70 Age in 1994 80 90 FIGURE 7.3 Estimated age profiles of benefits received from Medicaid by immigrant generation.
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From page 311... ...
One important lesson to draw from this brief discussion of the age profiles .
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From page 312... ...
Data have been smoothed on a moving window of 1,000 observations using a local regression smoother. 6,000 5,000 c~ of: -First generation 4,000 3,000 2,000 1,000 l O 1 let 1 1 1 1 1 1 Second generation - - - - - - - - - Third generation i T i 40 50 60 70 80 90 0 10 20 30 Age in 1994 FIGURE 7.5 Estimated age profiles of benefits received from public education by immigrant generation.
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From page 313... ...
_ First generation 20,000 1 5,000 o Ct |
From page 314... ...
The main reason the second generation pays higher taxes than the third is that it tends to live in states with higher incomes, as does the first generation. _ First generation 20,000 ~g o (5 10,000 TIC 5,000 1,' ~ I, ~ I,' ~ Second generation - - - - - - - - - Third generation J /r/~ ~ "A O- 1 ~1 1 1 1 1 1 1 0 1020 30 40 50 60 70 80 90 Age in 1994 FIGURE 7.8 Estimated age profiles of taxes paid by immigrant generation.
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From page 315... ...
The CPS imputes tax payments for individuals for federal income tax, FICA, state income taxes, and property taxes. We allocate 70 percent of property tax to renters and 30 percent to the owners of rental properties (for a discussion of the incidence of various kinds of taxes, see Chapter 6~.
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From page 316... ...
Our actual estimates are based on data disaggregated by the education of the immigrant, and use estimated educational transition rates to project the education of the children and grandchildren of immigrants, depending on their own education. AGGREGATE CROSS-SECTIONAL FISCAL IMPACTS OF IMMIGRANTS AND THEIR CHILDREN Although our ultimate goal in this chapter is to estimate the long-term costs of immigrants and their descendants, the benefit and tax profiles just described can also be used to carry out the more common estimate of the net costs or contributions of the foreign-born and their young children in a given calendar year essentially, the population living in households headed by immigrants.
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From page 318... ...
Thus, tax payments to pay for public goods and debt servicing will tend to make federal fiscal impacts, as measured in Table 7.1, positive. At the same time, the federal budget was in deficit for the relevant years, which will tend to make the measured federal fiscal impact of all people negative.
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From page 319... ...
Most people would find this figure misleading, however, because it does not include the fiscal impacts of the immigrants' young children born in the United States (second generation)
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From page 320... ...
.l6 We group together immigrants with their children under age 20 16Nor did we use state-specific data for sales tax rates, congestibles, value of public housing, value of Medicare and Medicaid services, and other taxes and expenditures not reported in the CPS. Instead we use national averages for these items.
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From page 321... ...
Based on New Jersey and California, a national range of -$17.95 to -$23.34 billion was reported, in contrast with -$28.5 billion based on the national analysis (with adjustment of age profiles to the aggregate state and local totals reported in the NIPA)
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From page 322... ...
However, it turns out that this is not an adequate control, as illustrated by the following figures for federal income taxes paid by ethnic groups in California and in all other states combined: Immigrant Ethnic Group California Other States White $1,938 $1,706 Asian 1,533 2,132 Hispanic 435 630 It is also possible to calculate the net fiscal impact by state from the data at hand, and the results are quite striking, as shown in Table 7.4. Whereas the average immigrant, plus her U.S.-born young children, has a negative impact of $369 for the United States as a whole, the total impact is actually substantially positive for New Jersey and is essentially zero for the immigrants in all other states besides California and New Jersey combined.
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From page 323... ...
. Fiscal impacts, at both the federal and the state and local level, are substantially more negative or less positive in California than in the rest of the country, and, overall, California accounts for the entire negative net impact of immigrants and their young U.S.-born children in the country; in other regions taken together, immigrants and their children have an overall positive impact.
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From page 324... ...
Real costs per enrollee are projected to rise at 5.8 percent per year initially, with the rate falling to 2.1 percent by 2005, and to 1.2 percent by 2020; thereafter, it is assumed to rise at the rate of labor productivity, or 1 percent per year, as for all the other age profiles. These projected increases in real costs per enrollee are then used to shift the age profiles for the use of Medicare and Medicaid.
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From page 325... ...
We assume that these same age profiles, shifted upward as described, also describe the tax payments and benefits received by descendants of immigrants. The descendants are projected based on the fertility of immigrants, which is assumed to converge in two generations to that of the general population, following the assumptions described in Chapter 3.
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From page 326... ...
· Immigrants continue to receive benefits as they do in 1994-95, for which we have CPS data. (Alternatively, they do not receive SSI, AFDC, Medicaid, food stamps, rent subsidies, energy assistance, public housing, or earned income tax credits during their first five years in the United States, in accord with the welfare reform legislation of 1996 and assuming they become citizens after five years)
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From page 327... ...
according to the educational attainment of their parents. When the first method is used, the NPV age profiles are smooth with no discontinuities.
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From page 328... ...
328 350 00 250 o o co co o s A ___ ,, 150- , ' 50 -50 -150 -250 o B 35o I` 250 o o co `o _50 _ so 150 50 -150 -250 C 350 250 o 150 o co so ~ -150 50 -50 -250 THE NEW AMERICANS < High school , ~ , ~ , ~ \ High school - - - - - - - - - > High school \ ~\ - ,~ 10 20 30 40 50 60 70 Age at arrival 80 90 100 -I 0 10 20 30 40 50 60 70 80 90 100 Age at arrival ~ " 0 10 20 30 40 50 60 Age at arrival 70 80 90 100 FIGURE 7.10 Net present value of total fiscal impact: A, Generation 1 by age at arrival and education status, self and descendants; B Generation 1 by age at arrival and education status, own lifetime; C, Generation 1 by age at arrival and education status, descendants.
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From page 329... ...
An immigrant who arrives after age 40 or so will not have U.S.-born children, and so for ages above 40, the NPV for descendants drops to zero.23 From this we can infer that the NPV for the immigrant's own lifetime is going to be less positive or more negative than the total NPV figures of Panel A, an influence that is borne out by Panel B That panel shows that if we focus on the fiscal effects from the lifetime of the immigrant, the NPVs are substantially negative for those with less than high school education, whatever their age at arrival, and for almost all of those with a high school education.
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From page 330... ...
For the federal government, immigrants with all levels of education arriving early in life say, before age 30 to 50, depending on education have a substantial positive fiscal impact as measured by NPV. After these ages, however, they have a substantially negative impact, since the federal government provides entitlements for the elderly, most notably Social Security pensions and Medicare.
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From page 331... ...
To paint the larger picture, we have calculated various kinds of weighted averages of the NPVs across age and education categories, in which the weights are the frequencies of immigrants with these characteristics
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From page 332... ...
,~ 0 10 20 30 40 50 60 70 80 90 100 Age at arrival FIGURE 7.12 A, Net present value of total fiscal impact: Less than high school education by generation at age at arrival; B High school education by generation at age at arrival; C, More than high school education by generation at age at arrival.
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From page 333... ...
Our estimates in this chapter show how net fiscal impacts vary with the characteristics of immigrants, but because our simulations contain no feedbacks through the general economy (as explained in the introduction) , they do not reflect diminishing returns to immigrants as a result of their hypothetically increasing numbers, and so could not be used to identify the point at which the net fiscal contribution of an incremental immigrant becomes zero.
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From page 334... ...
(Note that much of the impact of descendants is actually experienced during the lifetime of the immigrant.) We see that the impacts of the immigrants themselves vary widely by level of education and are substantially negative for all those with less than high school education.
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From page 335... ...
However, it is a simple matter to constitute families by summing these estimates across the ages of family members at arrival for any desired family configuration. Looking at Figure 7.13 from another perspective, we see that a family with parents of any age at least up to the early forties, with younger children, would have a positive net fiscal impact.
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From page 336... ...
ALTERNATIVE SCENARIOS Earlier, we described variations on the baseline scenario. The voluminous results of these alternative calculations are presented in Appendix 7.B in tables 7.B 1, 7.B2, and 7.B3, which present results for immigrants in each of the education categories.
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From page 337... ...
Here we consider two alternative scenarios: fixing the debt/GDP ratio starting immediately (which gives very similar results to fixing it starting in 2016) , and not adjusting the budget at all, but rather continuing with the status quo, in which tax payments are assumed to grow at the rate of productivity growth, 1 percent
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From page 338... ...
This scenario clearly leads to unrealistic debt levels. We believe that the baseline scenario, or perhaps the immediate-adjustment scenario, offers the most realistic basis for assessing the fiscal impacts of immigrants.
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From page 339... ...
339 Increase in NPV Due to Welfare Reform Legislation of 1996 Age at Arrival Education O 20 21 40 70 < High school $5,000 High school 6,000 > High school 5,000 $5,000 $5,000$21,000 $15,000 6,000 6,0009,000 24,000 4,000 2,0006,000 3 1,000 We take these means-tested programs to include SSI, AFDC, food stamps, nonemergency Medicaid, energy assistance, rent subsidies, and public housing. Since legal immigrants can become citizens after five years of residence, we have implemented the provisions of this act by assuming that immigrants receive no benefits from the programs just listed during their first five years in the country, and at longer stays receive benefits according to our estimates, as reflected in the baseline scenario.
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From page 340... ...
For this reason, we have also done an estimate in which the CPS time-since-arrival tax profiles are used for stays longer than 10 years, instead of the procedure described above. This new assumption substantially raises the positive fiscal impact of immigrants because of higher tax payments.
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From page 341... ...
a) cat -1 ,000 -2,OOO O ,' `` ~ Total · Federal · State 2000 2050 2100 2150 Year 2200 2250 2300 FIGURE 7.14 Present value of annual fiscal impacts: One immigrant arriving in 1994 (discounted at 3%)
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From page 342... ...
The immigrants themselves more quickly have a positive fiscal impact at the state and local level; for example, by the 25th year, immigrants have a positive impact of +$910. However, they have also borne children who themselves have had children, and these descendants impose costs of more than $1,660 at the state and local level in the 25th year, so the total impact is still negative, at more than $700.
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From page 343... ...
Rather than discounting this stream at 3 percent, as was done above, the figure instead shows the stream discounted at 1.57 percent, which is the long-term growth rate of GDP. Thus, the figure offers a visual sense of the importance of the fiscal impacts relative to the growing GDP.
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From page 344... ...
' 'I ~ 2000 2050 2100 2150 Year 2200 2250 2300 FIGURE 7.15 Undiscounted annual fiscal impacts of incremental stream of one immigrant per year, expressed relative to gross domestic product. of the immigration stream have changed substantially over the course of this century, but immigrants who arrived early in the century, or before, still exert an influence on current public budgets through their descendants if not through their own old age.
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From page 345... ...
An alternate way is to use the NPV at age O for immigrants, since all natives arrive at age 0. The effects of population aging and rising health care costs are assessed simply by comparing the scenario in which there are no adjustments in taxes or benefits with the one in which these are adjusted immediately, on the grounds that population aging and rising health costs are the only reason that the budget projections show unsustainability in the future.
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From page 346... ...
The fact that immigrants will pay taxes that go in part to make interest payments on the national debt contributes a sizable $49,000 to their positive average NPV. We have adhered closely to the assumptions made by the CBO in projecting federal expenditures.
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From page 347... ...
How do immigrants and natives differ? We see that the relatively lower education of immigrants makes their fiscal impacts less positive, and their age distribution does the opposite.
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From page 348... ...
. Although the positive fiscal impacts of incremental immigrants are evenly shared by the entire population, the state and local negative impacts are restricted to states that receive immigrants.
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From page 349... ...
Figure 7.16 also shows the average state and local effect for the six states of high immigration, and it is more than twice the national average, for obvious reasons. SUMMARY The most striking difference between immigrants and natives is not in benefits received, but rather in taxes paid.
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From page 350... ...
To show the overall implications of these estimates, we derive summary measures by averaging fiscal impacts (NPVs) across all ages, weighting by the actual age distribution of recent immigrants in each education category.
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From page 351... ...
At the state and local level, the average NPVis -$25,000, and at the federal level it is +$105,000. Ages of arrival at which immigrants generate the most positive fiscal impacts at the federal level are the very ages at which they generate the most negative impacts at the state and local level.
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From page 352... ...
However, they do not include the working-age native-born children of immigrants, who typically have a positive fiscal impact. For this reason, cross-sectional or current fiscal impacts estimated for immigrant-headed households are biased toward negative numbers.
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From page 353... ...
of an immigrant with less than a high school education is -$13,000, and that for an immigrant with more than a high school education is +$198,000. Similarly, older immigrants impose significant fiscal burdens, and younger immigrants produce fiscal surpluses.
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From page 354... ...
It will be more negative if discount rates are higher, and if budgetary imbalances are addressed by reducing benefits rather than by raising taxes. · Although the average long-term fiscal impacts of immigration are generally found to be positive under most scenarios that we teed, the overall annual fiscal impact of an increase in the annual flow of immigrants would be negative for a couple of decades before it turned positive.
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From page 355... ...
Our controls for educational attainment may be insufficient to capture these changes. As a further control, we estimated separate transition matrices by ethnic origin group for Hispanics, Asians and all others, by immigrant generation and education group.
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From page 356... ...
However, educational mobility for children of the second-generation immigrants is much lower than that found in the general population. It would not be right to use the transition matrix estimated for U.S.-born children of immigrants to project the educational attainment of all the foreignborn children of immigrants, since they will have different English language skills and educational backgrounds.
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From page 357... ...
Currently, about 52 percent of the total U.S. population aged 25 to 34 years has more than a high school education (U.S.
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From page 358... ...
TABLE 7.B1 Less Than High School Education Immigrant Age at Arrival Scenario 0 20 21 40 70 u Native (3~ Baseline 60337 -141 -166 92 2% discount 298228181 -192 -181 362 4% discount -9-12-29 -104 -154 12 6% discount -43-27-36 -59 -133 -32 8% discount -44-24-29 -35 -117 -39 100% taxes 875223 -160 -167 124 100% benefits 3315-8 -123 -166 61 Balance budget now 5125-0 -140 -161 83 Never balance budget -56-109-129 -164 -167 -41 Never balance budget ~ welfare reform -50- 105- 123 - 143 - 152 -41 Duration 10+ taxes 996737 -119 -166 92 Duration 5-9 benefits 62369 -142 -166 92 Welfare reform act 653812 -120 -151 92 Elderly immigration with zero OASDHI 60337 -141 -73 92 No emigration 2nd gen 725023 -141 -166 92 Lower emigration 1034714 -174 -189 92 Lower bilingual education 65358 -143 -168 92
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From page 359... ...
THE FUTURE FISCAL IMPACTS OF CURRENT IMMIGRANTS 359 Native (3rd + Generation) Current Age Difference 0 20 21 40 700 20 21 40 70 92 234 -54 -134 -223-33 -200 61 -8 57 362 487 85 -190 -245 -64 -259 96 -2 65 12 147 -72 -92 -204 -21 -159 43 -12 50 -32 79 -60 -42 -173 -11 -106 24 -16 39 -39 51 -46 -17 -148 -6 -75 17 -18 31 124 266 -47 -155 -224 -37 -213 70 -5 57 61 202 -61 -112 -222 -28 -187 53 -11 56 83 229 -58 -129 -213 -32 -203 58 -10 53 -41 82 -183 -164 -225 -15 -191 55 -0 57 -41 82 -183 -164 -225 -9 -187 60 21 72 92 234 -54 -134 -223 7 -167 91 15 57 92 234 -54 -134 -223 -30 -198 63 -9 57 92 234 -54 -134 -223 -27 -196 66 13 72 92 234 -54 -134 -223 -33 -200 61 -8 150 92 234 -54 -134 -223 -21 -184 77 -8 57 92 234 -54 -134 -223 11 -186 68 -40 34 92 234 -54 -134 -223 -27 -199 62 -9 55
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From page 360... ...
Welfare reform act98152 132 -23 -20117] Elderly immigration with zero OASDHI92146 126 -32 -142171 No emigration 2nd gen104164 142 -31 -225171 Lower emigration145185 159 -44 -261171 Lower bilingual education97149 128 -31 -227171 TABLE 7.B3 More Than High School Education Immigrant Age at Arrival Native (3 Scenario 0 20 21 40 70 0 Baseline 117 288 333 132 -149 245 2% discount 395 594 641 116 -163 621 4% discount 26 174 211 140 -137 106 6% discount -28 80 107 140 -116 9 8% discount -37 44 64 131 -101 -18 100% taxes 152 332 379 119 -150 298 100% benefits 82 245 287 144 -148 192 Balance budget now 108 281 326 138 -142 234 Never balance budget -4 127 173 101 -150 95 Never balance budget ~ welfare reform 1 130 176 107 -119 95 Duration 10+ taxes 162 352 407 200 -149 245 Duration 5-9 Benefits 120 294 343 147 -149 245 Welfare reform act 122 292 335 138 -118 245 Elderly immigration with zero OASDHI 117 288 333 132 -54 245 No emigration 2nd gen 129 307 351 132 -149 245 Lower emigration 177 364 418 149 -170 245 Lower bilingual education 123 293 338 134 -150 245
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From page 361... ...
THE FUTURE FISCAL IMPACTS OF CURRENT IMMIGRANTS 36 Native (3rd + Generation) Current Age o 20 342 182 637 394 228 115 130 67 85 47 383 205 300 158 336 177 182 44 Difference 70 0 20 21 40 70 -209 -79 -195 -56 -49 -16 -230 -142 -246 -43 -49 -18 -190 -51 -158 -57 -49 -15 -160 -24 -108 -51 -47 -12 -136 -13 -77 -42 -44 -10 -210 -91 -208 -54 -47 -16 -208 -68 -183 -58 -52 -16 -197 -78 -198 -59 -52 -19 -210 -57 -184 -60 -40 -16 171 495 61 -10 -28 214 129 161 31 18 -19 43 68 75 -1 37 23 -16 31 182 44 -16 -210 -51 -178 -54 -317 171 342 182 18 -209 -38 -157 -21 -18-16 171 342 182 18 -209 -78 -203 -65 -62-16 171 342 182 18 -209 -74 -190 -50 -41~ 171 342 182 18 -209 -79 -195 -56 -4967 171 342 182 18 -209 -67 -178 -40 -49-16 171 342 182 18 -209 -26 -156 -23 -62-52 171 342 182 18 -209 -74 -194 -54 -50-18 245 621 106 9 -18 298 192 234 95 Native (3rd + Generation)
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From page 362... ...
Census of Population, the Survey of Income and Program Participation (SIPP) , or the Current Population Survey (CPS)
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