different groups, determining the extent to which the addition of an individual would change expenditures or revenues, holding fixed the fiscal position of those already in the population. Once this is done for the current period, though, we must take several additional steps and make many more assumptions to complete the calculation. These additional steps include projecting future taxes and expenditures, discounting these future flows, and defining the nature of an immigrant "experiment."

Projecting Future Taxes and Expenditures

Because the dynamic calculation is forward-looking, it requires estimating the trajectory of taxes and expenditures far into the future. These estimates affect the calculation in potentially important ways, since we are calculating the present value of the difference between taxes and expenditures at each age that immigrants pass through. If the government runs a large deficit in future years, then expenditures will exceed taxes for everyone on average, including immigrants. If taxes are raised in the future to balance the budget, or if expenditures are reduced, the negative impact of immigrants will decline, or the impact will become more positive.

The rules governing taxes and expenditures change every year, and it is impossible to predict precisely how they will evolve over the relevant future. Over the long run, however, any government faces an overall constraint on its ability to use deficit finance, which narrows the range of possible outcomes. 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. To reflect this, it is necessary to assume that the ratio of debt to GDP stabilizes at some point. From this assumption comes the overall changes in taxes net of expenditures necessary in each year, relative to current policy.

To see why it is necessary to make some assumptions about a future fiscal adjustment, consider for a moment what would happen if we simply let taxes and expenditures follow a pattern that adheres to current rules. We initially projected taxes and expenditures each year, assuming a particular rate of economic growth, a particular pattern of immigration, and maintenance of current fiscal rules (except those already slated to change, like Social Security provisions). The results of that projection for the pattern of national debt is displayed in Figure 7.1. This figure depicts the time path of the national debt that will emerge given the present U.S. fiscal picture. Current tax and expenditure policies will cause the debt to explode over time (Auerbach, 1994; Congressional Budget Office, 1996). We can consider a variety of changes in taxes and expenditures that will bring the path of national debt into line with the particular assumption about how it will be stabilized, and measure the incidence for each scenario. For example, we might assume that the debt/GDP ratio is stabilized immediately at its current value; that



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement