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The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration (1998)

Chapter: 2 An Economic Framework for Assessing the Fiscal Impacts of Immigration

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Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

2

An Economic Framework for Assessing the Fiscal Impacts of Immigration

Thomas MaCurdy, Thomas Nechyba, and Jay Bhattacharya

INTRODUCTION

By 1994, almost 1 in 11 U.S. residents were foreign born. More than 9 million of these 23 million immigrants entered the United States in the past decade alone. As the immigration level rises, concerns are growing over the extra burden immigrants place on the government through their use of services such as welfare, health care, and schools. In reaction, states and the federal government have moved to limit the availability of services to both legal and illegal immigrants. The new welfare reform is the latest example. This legislation bars illegal immigrants from virtually all public benefits. It also bars or permits states to bar legal immigrants from major federal programs including cash welfare, food stamps, Medicaid, and Supplemental Security Income, although these provisions are currently under challenge.

Such anti-immigrant measures have been fueled in part by a growing number of studies that attempt to quantify the fiscal impact of immigration. Closely linked to literature on rates of immigrant participation in welfare and other social services, these studies try to carefully account for the taxes contributed and benefits received by immigrants at the federal, state, or local level. The exact items included vary widely. For example, most studies account for use of social services, health care, and schools, but others also consider services such as libraries, highways, community colleges, and parks. Similarly, most count immigrant payments to income taxes and often sales taxes, but others also include contributions to excise taxes, motor vehicle fees, even lottery revenues. Finally, the techniques for assigning the dollar amounts are quite different, such as assigning

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

average service use and average tax versus tracking actual use through administrative records. Not surprisingly, the resulting calculations reach quite different conclusions, some finding net costs of immigrants, others finding net benefits. In the absence of a systematic methodology, it is difficult to evaluate the competing claims.

In this chapter we propose a basic economic framework for evaluating the fiscal impact of immigrants, addressing the complicated issues of demographic characteristics, skill levels, multiple levels of government, and the dynamic effects of a changing population. Although immigrants are the principal example for this framework, it has application beyond the immigration debate. In reality, immigration is merely population growth with particular population characteristics. The model seeks to separate these two aspects: expanding population and the change in population characteristics. The same framework could be used to model other population changes such as a baby boom. Immigration is a special case primarily because it can be influenced more easily by policy choices.

In the second section we set out our basic economic framework for assessing the fiscal impacts of population growth. The third section begins with the specification of a ''neutrality proposition" that identifies an economic environment that makes population growth fiscally neutral. In that section we explore the factors that are relevant in evaluating the consequences of different patterns of growth, distinguishing between population increases arising from uniform shifts in all groups and disproportionate increases in particular groups, such as the elderly or the unskilled. In the fourth section we look at the particular nature of U.S. population growth due to immigration, applying the results of the third section to unveil the types of fiscal costs and benefits likely to accompany immigration. Finally, in the fifth section we review how the existing literature fits into our framework, permitting us to surmise the costs and benefits improperly assessed or missed in these various studies.

ECONOMIC FRAMEWORK

In this section we develop an elementary economic model for analyzing population growth in general and immigration in particular. Although our proposed model may at first appear more complex than necessary, we believe it is the simplest possible framework that can address the basic issues faced by researchers attempting to conduct fiscal impact studies of immigration. For reasons detailed below, we conclude that at a minimum the model must include the following features:

  1. multiple periods,

  2. three generations,

  3. workers distinguished by high and low skills,

  4. two consumption goods categorized by the level of sales tax,

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×
  1. an underlying model of production and consumption, and

  2. a government sector detailed enough to capture the major categories of spending and taxation.

In the following three subsections we provide the reasons for introducing these complexities and explain the role of these six features within the basic structure of the model. In the fourth subsection we explore some special concerns in using this general framework for fiscal impact studies of immigration relating fiscal trade-offs across periods and different levels of government.

Multiple Generations and the Composition of the Work Force

The first three elements of the model involve the composition of the population across time. There are three generations of agents living simultaneously in each period: the young (J), the middle aged (M), and the elderly (E). The work force is composed exclusively of the middle aged, and they are divided into high-skilled (h) and low-skilled ( ) workers. In conjunction with capital (K), the workers in the M generation produce current income (through the process described in the following subsection). Generation M consumes part of its labor earning and saves the remainder for consumption in the next period. The middle aged also provide for the young generation's consumption. The elderly consume from their holdings of capital (and government transfers). After every period, each generation advances, with E exiting the model and a new generation of J entering the model.

Income, Production, and Consumption

Aggregate income (Y) is produced through a production function ƒ which takes the two types of labor as well as capital as its arguments; that is,

Throughout most of this chapter, we assume that this production function is constant returns to scale. Each type of M (high skilled and low skilled) is endowed with one unit of labor that is sold at the market wage. Wage rates are equal to the marginal product of labor, and the sum of wages is denoted by W. Similarly, the rental rate r is equal to the marginal product of capital. Income from capital is thus rK.

Total consumption (C) by agents in the model is divided into two categories: Co (which is taxed at the normal sales tax rate) and Ce (which is subject to an additional excise tax), so that

C=Co+Ce.

Generation J does not earn income; it is sustained by generation M. The remain-

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

der of generation M's after-tax income is savings invested to provide for income in the next period. Generation E's consumption is funded by reductions in its capital holdings.

Let total tax revenues be equal to T (which is divided into its components in the following subsection). By definition,

Y = W + rK = C + ΔK + T.

Government Sector

We now more fully incorporate the government sector into the model. To start, we treat this sector as one unit. In the fourth subsection, we consider the additional complications arising from the federal structure particular to the United States. The government sector taxes the various aspects of economic activity (consumption, wages, rental income) and spends resources on the production of "public" goods and on direct transfer payments to individuals in the economy. Our model considers each of these areas of government activity—public goods spending (Gp), spending on transfer payments (Gx), and collection of tax revenues (Gt)—by focusing on the characteristics of these activities that are relevant for thinking about the fiscal impact of population growth and immigration on government finances and on current taxpayers. To complete the model and to ensure that the accounting identifies hold, we then add a fourth government activity, the management of public debt (G d), that includes both making current interest payments and issuing sufficient bonds to cover any shortfall in current revenues. The various aspects of the government sector are summarized in Table 2-1.

Gp: Spending on Public Goods

In studying the fiscal impact of population growth and immigration, two characteristics of government spending on public goods are particularly relevant. First, relatively few of the goods produced by the government sector are pure public goods, in the sense that the cost of providing the same level of the good is invariant to the size of the population. Broadly speaking, we can therefore divide government expenditures on public goods into two stylized categories: pure public goods (Pp) that we define as goods subject to little or no crowding (e.g., national defense) and impure public goods or public services (Ps) that we define as goods that are subject to a substantial amount of crowding (public safety, education). This distinction is important in the analysis of the fiscal impact of population growth (through immigration or other means), because population growth entails additional spending only on public services. It should be kept in mind that crowding in public services can be nonanonymous, in which case not only the total number but the characteristics of those consuming the service

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-1 Government Sector = (Gp, Gx, Gt, Gd)

Government Activity

Subcategory

Examples

Role in Fiscal Impact Study

Gp - "Public" Goods Production

PP - Pure Public Goods

National Defense

Not Relevant

 

PS - Public Services

   
 

PC - Public Cons.

Waste Disposal, Corrections

ΔPC from Increased Pop.

 

Pl - Public Invest.

Education, Infrastructure

ΔPl minus Future Benefit

Note: Crowding may be non-anonymous, and population externalities may be a factor.

Gx - Transfers

XY - Income Based T.

Welfare, Medicaid

ΔXY (Single Period Analysis)

 

XNY - Age Based T.

Social Security, Medicare

ΔXNY (Multiple Period)

Gt - Tax Revenues

τwW - Wage Tax

Payroll Tax, Pers. Income T.

Assumptions about tax incidence are important for taxpayer perspective; effect on tax bases matters for govt finance perspective

 

τKrK - Capital Tax

Pers. Income T., Prop. Tax

 
 

τCC - Consumption Tax

General Sales Tax

 
 

τeCe - Excise Tax

Tobacco, Gas, Alcohol, Housing

 

Gd - Debt Management

rD - Interest Expense

 

Not Relevant

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

matter. For example, some school children require more resources than others. Also, population externalities of new population groups may be negative or positive, causing previous levels of services to become more or less expensive for the original population. (In public schools, for example, peer effects are thought to play an important role in school outcomes. Thus, the introduction of a "bad" peer group requires additional resources to keep the quality of schooling the same for the original population.)

Second, studies on the fiscal impact of immigration must recognize that some public services are investments from the government's and the native taxpayer's perspectives in the sense that current expenditures on these services increase future tax receipts from the immigrant populations. Based on the degree of investment involved, we subdivide the category of public services into public consumption services (PC) and public investment services (Pl). Spending on public education, for example, can be thought of as an input in the production process that provides skills to the current J generation which then has implications for the distribution of skill levels in the future M generation work force. A higher-skilled labor force in the future implies higher incomes and consumption levels as well as increased savings and capital accumulation, all of which are taxed by the government. Spending on education therefore entails current costs and future benefits for the government sector, which implies that the long-run net fiscal impact of this type of spending differs from its instantaneous short-run impact on current government budgets. Other types of public services, such as most municipal services, serve primarily as current consumption and contain little or no investment.

Government spending on public goods (Gp) is therefore divided (on the basis of crowding) into spending on pure public goods (Pp) and spending on public services (Ps), and public services are further divided (on the basis of the degree of investment) into public consumption (PC) and investment (Pl) services. Although the degree and kind of crowding (and the resulting distinction between pure public goods and public services) have implications regarding which types of government expenditures to consider in calculating costs of immigration, the degree of investment in public service activity (and the resulting distinction between PC and Pl) have implications regarding how such costs must enter the analysis.

Gx: Spending on Transfers

Much of today's government activity, however, has little to do with providing public goods and services and merely involves transfers from one population group to another. Transfer payments can be in the form of cash payments (Social Security, welfare), in-kind programs (Medicare, Medicaid, food stamps), or implicit tax exemptions (home mortgage deductions). In general, they fall into one of two broad categories: income-based transfers (XY) and non-income-based

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

transfers (XNY. Income-based transfers include general assistance programs for the poor (Medicaid, food stamps) but may also include transfers to middle-class taxpayers in the form of such tax expenditures as the home mortgage deduction. Non-income-based transfers, on the other hand, include mainly programs that transfer resources based on age (such as Social Security and Medicare). The distinction between these two categories of transfers will become particularly relevant when we discuss the difference between general population growth and selective population growth through immigration.

Gt: Tax Revenues

Our model includes four broad categories of taxes: taxes on wages (W), rents (rK), general sales or consumption (C), and consumption of specific goods (Ce). Each of these activities is taxed at a specific rate (τ W, τk, τs, and τe, respectively), yielding total tax revenues

T = τwW + τkrK + τsC + τeCe.

In the United States, most tax revenues come from personal income taxes, payroll taxes, corporate income taxes, general sales taxes, excise taxes, and property taxes, each of which can be viewed as a combination of the taxes introduced above. Personal income taxes are generally assumed to fall on W and K, payroll taxes on W, and corporate income taxes on K (i.e., on all capital, not just corporate capital). General sales taxes are borne by consumers in proportion to their total expenditures on C, whereas excise taxes are borne by those consumers who consume Ce. (See Pechman, 1985, for a detailed discussion of assumptions leading to these tax incidence implications.) Finally, the property tax is borne by K, C, and W (see Mieszkowski and Zodrow, 1983; Aaron, 1975; Hamilton, 1975).

Gd: Closing the Government Sector with Public Debt Management

For the accounting identities to hold, we also include interest payments on current debt (r&273B;D where D is the value of outstanding government debt) as one of the expenditures incurred by the government sector. Furthermore, deficit financing (ΔD) covers any shortfall between current government revenues and expenses. Thus, total government revenues are equal to (T+ΔD), whereas total government expenditures are equal to (PP + Pl + PC + XY + XNY + rD). By definition.

T+ΔD = PP + Pl + PC + XY + XNY + rD.

For simplicity, from now on we assume that the government budget is balanced (ΔD = 0) in each period, although we allow for the existence of debt (D>0) and interest payments (rD>0).

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×
The Role of Costs and Benefits in Fiscal Impact Studies of Population Growth

To determine the net fiscal impact of immigration (or any type of population change) within the context of the model presented above, three important elements must be explicitly addressed: (1) the definition of "costs" and "benefits," (2) the role of multiple periods in the analysis, and (3) the perspectives of different levels of governments in a federal system. Some conclusions regarding the first two issues are summarized in the last column of Table 2-1; those relating to the federal nature of the U.S. government sector are summarized below in Table 2-5.

Definition of Costs and Benefits

Our task in this chapter is to describe the fiscal consequences of changing population sizes and characteristics. The first critical step in this endeavor involves explicitly defining both the benefits and the costs of population changes. Fiscal impact studies have implicitly used different combinations of benefit and cost definitions, resulting in impact estimates that differ both in size and in interpretation. Costs, for example, have been defined as either

  1. the increase in total government expenditures resulting from the population change or

  2. the cost of government goods and services consumed by the new population,

whereas benefits have been defined as either

  1. the increase in total tax revenues resulting from the population change or

  2. the value of taxes paid by the new population group.

If all government expenditures were pure transfers (XY and XNY), definitions (1) and (2) would be identical; that is, the cost of the transfers to the new population group would be exactly equal to the increase in the total government budget. Suppose, however, that the government also produces pure public goods (PP). Then a population increase does not increase costs as defined by (1) but it does entail costs as defined by (2). Thus, some fiscal impact studies count part of national defense spending, for example, as a cost of immigration, whereas others do not. Similarly, the first definition of benefits ignores tax incidence and is concerned only with the impact on overall tax revenues (and thus the impact on tax bases), whereas the second definition concerns itself with the amount of taxes actually paid by the new population. Thus, the latter definition of benefits must be explicit about tax incidence assumptions.

Different combinations of these definitions not only lead to vastly different fiscal impact estimates, but they also view the problem from very different perspectives. Table 2-2 summarizes these perspectives. From a government finance

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-2 Summary of Perspectives

 

Revenues

 

Expenditures

Definition(1')

Definition(2')

Definition (1)

Government Finance Perspective

Native Taxpayer Perspective

Definition (2)

 

New Taxpayer Perspective

perspective, for example, the benefit of a population change is simply the increase in tax revenues resulting from this change, whereas the cost is the increase in government expenditures. Thus,

Net Benefit to Government = (1') − (1).

On the other hand, from the native taxpayers' point of view, the net benefit of a population change is the difference between after-tax income with and without the population change (assuming government services for the original population remain constant). This involves both the change in before-tax incomes and the change in taxes paid by the native population, where the latter is a function of the increase in government expenses due to the new population minus the tax revenues paid by that population. In the case of immigration, for example, the net benefit to native taxpayers involves both the effect of immigration on native incomes and the additional tax burden (which may be negative) incurred by natives to finance the net fiscal drain (which may similarly be negative) of immigrants on the government. Thus,

Net Benefit to Taxpayers = Δ(Native Before-Tax Incomes) + (2') − (1).

Finally, the fiscal impact on the new population could also be considered. In the case of immigration, this involves comparing incomes of immigrants in the United States with the incomes the immigrants would have earned in their native countries. More precisely, the fiscal impact of immigration from this perspective is equal to the change in the immigrants' before-tax income resulting from immigration plus the net benefit they receive from government services; that is,

Net Benefit to Immigrants = Δ(Immigrant Before-Tax Incomes) + (2) − (2').1

Because the stated purpose of most fiscal impact studies of immigration is to calculate the net fiscal impact of immigration on U.S. taxpayers or government finances, definition (1) is the appropriate definition of costs (as it appears in both the "Net Government Benefit" and the "Net Taxpayer Benefit" equations). This implies that pure public goods (PP) and interest on debt (rD) are not relevant to calculating the fiscal impact of immigration because the addition of further popu-

1  

This assumes that the immigrants would be obtaining zero net benefit from the tax/expenditure system in their country of origin.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

lation groups does not add to those government expenditures. Therefore, out of total government expenditures (PP+Pl+PC+XY +XNY +rD) only public services (Pl+PC) and transfers (XY+XNY) represent legitimate categories of government expenses to be counted as costs of population growth (and immigration).

Although the definition of costs is the same from either the taxpayer or the government finance perspective, the definition of benefits differs between the two. The first definition (1´) ignores tax incidence and focuses on total tax receipts, whereas the second definition (2´) ignores total tax receipts and focuses on tax incidence. Most fiscal studies of immigration attempt to ascertain the impact on taxpayers rather than on government finances, which implies that (2´) is usually the appropriate definition of benefits. Still, fiscal impact studies have also been commissioned by local and state governments that may be more interested in the final impact on balance sheets rather than the degree to which immigrants are actually paying for additional tax revenues. In the former case, assumptions about tax incidence matter, whereas in the latter case assumptions about behavioral changes leading to tax base changes matter.

The Need Multi-Period Analysis

It is inappropriate to view the fiscal impact of population changes and immigration in a static one-period model. The age of the new population group has important implications for its impact on the economy (and thus the income of the current population) as well as its net impact on government finances. The three age groups in our model (J, M, E) each play a different role in the economy. To calculate the benefits and costs of an increase in any one of these age groups, both the present and the future must be taken into account—unless the increase occurs among E (who have no future role in the economy) or there is an expectation that the increased population will ultimately leave the economy before it becomes part of E (by returning to their country of origin, for example). We consider the impact of population growth among the three age groups in some detail in the third section of this chapter. For now, we merely stress the necessity of a multi-period analysis on both the expenditure and the revenue sides, given populations of different ages.

Table 2-3 divides major areas of government expenditure into the broad categories defined in our model, indicating the age groups the spending programs mainly target. It is clear from the table that public consumption services are rarely age specific, whereas public investment services can be age specific, particularly education programs. Similarly, the bulk of income-based transfers—in terms of budgetary outlays, Medicaid—are not age specific, whereas the non-income-based transfer programs generally are age specific. In principle then, most of P C and XY could be analyzed within single periods. These expenditures are consumed today with few implications for the future (except that those con-

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-3 Public Expenditures by All Levels of Government

Government Activity

Specific to J

Specific to M

Specific to E

Not Age Specific

PP - Pure Public Goods

     

National Defense Int. Relations

PC - Public Consumption Services

     

Environment Govt. Administ. Judiciary, Corrections, Police, Fire, Municipal Services

Pl - Public Investment Services

Education Head Start Tuition Subsidies

Job Training

 

Infrastructure

XY - Income Based Transfers

AFDC Child Nutrition (Head Start) (Tuition Subsidies)

AFDC Job Training

 

SSI, Medicaid Food Stamps Housing Assistance

XNY - Non-Income Based Transfers

(Education)

Unemployment

Social Security Medicare Retirement Benefits

 

suming income-based transfers today may be more likely to also consume them tomorrow).

Non-income-based transfers (XNY), on the other hand, generally occur only in one specific period during the lifetime of an agent. In the case of Social Security, for example, if the growth in the population occurs in M, there is no Social Security expense today, but there will be an additional expense tomorrow when today's M becomes tomorrow's E. If new members of the M generation remain in the country as they become elderly, their expected future Social Security benefits must clearly be considered.

Similarly, public investment services (Pl involve expense today, but the government sector will receive additional tax revenues in the future as a direct result of the expense. Thus, spending on education for J, for example, costs today but produces higher incomes (and thus income tax revenues) in the future when today's J becomes tomorrow's M. The share of Pl to be counted as a cost of population growth in J must therefore be reduced by the expected (discounted) future payoff from this expense. Expenditures on both public investment services and non-income-based transfers thus require a multi-period perspective.

The need for this multi-period perspective becomes even clearer when revenues and expenditures are considered simultaneously. On the revenue side, Table 2-4 divides U.S. taxes into the categories in our model based on the genera-

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-4 Major Taxes for All Levels of Government

Government Activity

Specific to J

Specific to M

Specific to E

Not Age Specific

Wage (W) Tax

 

Personal Income Tax

   
   

Payroll Tax

   
   

(Property Tax)

   

Capital (K) Tax

 

Personal Income Tax

Personal Income Tax

 
   

Property Tax

Property Tax

 
   

Corporate Income Tax

Corporate Income Tax

 
     

Estate Tax

 

Consumption (C) Tax

     

General Sales Tax

       

(Property Tax)

Excise (Ce) Tax

 

Alcohol, Tobacco Products

Alcohol, Tobacco Products

Gasoline Tariffs

NOTE: Those publicly provided services that are funded directly through user fees can be left out of the analysis if neither the expense nor the user fee is counted. Examples include postal services, utilities, some public parks, etc.

tions that pay the taxes. Note that the J generation pays little tax although it consumes large categories of expenditures (education in particular). Yet it would clearly be unreasonable to argue that an increase in the J population carries with it only costs and no benefits for the current population. On the other hand, the M generation pays a large share of total taxes (payroll taxes in particular) while consuming few large budget expenditures. Finally, the E generation, although still paying a substantial amount in taxes, consumes the bulk of non-income-based transfers.

In general, tax payments from new populations and government expenditures caused by their presence are not well matched over time. The total tax benefit population growth in any particular generation involves the calculation of tax payments as the generation passes through all age groups, especially through M into E, parallel to the multi-period calculation on the expenditure side.

Finally, from the perspective of both the government and the native taxpayer, the fiscal impact of immigration is linked closely to the future path of current tax bases. From the government perspective, tax bases matter because changes in these bases change expected tax revenues. From the taxpayer perspective, changes in bases matter in the sense that they involve changes in the before-tax incomes of current residents. An increase in the J population today, for example, has implications concerning the path of consumption, savings, and incomes in the future. These considerations are by definition multi-period in nature and are discussed further in the third section of this chapter.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×
The View from Different Levels of Government in a Federal System

Until now, we have discussed government as one unitary sector. In the United States, of course, the government sector is divided among federal, state, and local branches, each of which has different expenditure priorities and revenue bases. Furthermore, a complex web of fiscal interaction among the different levels of government has evolved (and is continuing to evolve). Fiscal impact studies will therefore differ depending on whether they are undertaken from a local, state, or national perspective. For brevity and conceptual clarity, we distinguish here between only lower-level (local) and higher-level (national) governments. There are three fundamental aspects in which the analysis differs for these two levels of government. First, local governments are subject to migration pressures whereas higher-level governments are relatively immune to such forces. Second, intergovernmental transfers create additional costs and benefits for the different levels of government. Third, generally speaking, each level of government does not account for the impact its activities have on the other levels of government. Conclusions from this section are summarized in Table 2-5.

Migration. Migration (of individuals as well as capital) is the central issue studied by economists who focus on local public finance. For our purposes, internal migration is important for the calculation of both costs and benefits of

TABLE 2-5 The View from Different Levels of Government in a Federal System

 

Level of Government

 
 

Lower Level

Higher Level

Migration

Multi-period analysis for PI, XNY, and tax revenue becomes problematic as new populations may migrate in the future.

Multi-period analysis for PI, XNY, and tax revenue becomes problematic as new populations may exit the country in the future.

 

Migration of existing tax bases may exacerbate externalities

 

Intergovernmental Transfers

Additional revenue source for grants that are based on population sizes and characteristics

Additional cost for grants that are based on population sizes and characteristics

Intergovernmental Externalities

Discount PI by future tax benefits only to the extent that future local tax revenues rise as a result of PI

Discount PI by future tax benefits only to the extent that future national tax revenues rise as a result of PI

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

immigration to local governments and taxpayers. On the cost side, Pp, rD, PC, and XY are treated exactly as they have been up until now, but PI and XNY are now treated differently because of their multi-period nature. More precisely, PI may involve investments that yield future increases in tax payments, but, at the time that those future tax payments are made, the new population member may no longer reside in the local jurisdiction that incurred the expense. In that case, from the local perspective, PI then becomes a public consumption service (PC). Public education serves as a good example. A local school district may invest resources to educate an immigrant child. But by the time the child becomes an adult who pays more in taxes due to higher skills resulting from the education received, he will likely reside outside that school district. In fact, because mobility increases with education, the more the local government invests, the less likely it is to see a future tax benefit from this investment.

Similarly, some elements of XNY require a revised analysis because their multi-period nature affects the different levels of government differently. For example, if an immigrant arrives in the M generation and returns to his original country in the E generation, the national government's costs will be considerably less than it would have been had he or she not returned —there will be no outlays for Social Security or Medicare in his old age.

Similar issues arise on the benefit side. Generally, a multi-period calculation of expected tax revenues from the new population is appropriate, but local governments cannot as easily count on the new population remaining in its jurisdiction throughout the population's life cycle. In addition, the migration of current tax bases must be considered. An increase in a certain population group within one local jurisdiction may cause a native population group to leave for another jurisdiction or may attract new native populations into the jurisdiction. Such migrations of native populations may increase negative or positive externality (peer) effects. Consider the impact of the addition of ''low" peer group students into a local school district. This increases the cost of maintaining the same quality local public schooling and may cause some "high" peer group students to opt for different school districts or private schools. The exit of this peer group then worsens the initial negative externality of the population change.

Intergovernmental Transfers. The existence of intergovernmental transfers (typically from higher-to lower-level governments) creates additional revenue and cost sources not represented in the unitary government sector analysis (as in Table 2-1). Block grants that are invariant to population size clearly are unaffected by increases in population groups in certain geographic areas, but grants that are based on population size and characteristics (per pupil state aid, for example) may be affected by immigration. 2 With these intergovernmental transfers in the model, the

2  

A well-publicized debate concerning the extent to which certain types of support such as welfare should be provided to immigrants is currently ongoing.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

arrival of additional population groups creates additional revenues for local governments and additional costs for national (or state) governments. From a higher-level government perspective, these are real costs of immigration that must be included in the analysis, whereas from a local government perspective, they represent revenues that are just as real. Averaging over taxpayers, the two cancel out, and the unitary government approach is still appropriate.

Intergovernmental Externalities. Finally we return to the treatment of public investment services (PI). Even in the absence of migration effects, the treatment of PI from the perspective of any particular level of government is different from the treatment of PI from the perspective of an average taxpayer in the sense that each level of government will underestimate the investment impact of the public service. That is, even in the absence of migration, both the lowerand higher-level government perspectives dictate that the current expense of PI on the new population be discounted only to the extent that the investment generates future tax revenues for that level of government. An average taxpayer perspective, on the other hand, would count the investment impact on all levels of government.

FISCAL CONSEQUENCES OF POPULATION GROWTH

The model we provided in the second section sets up our framework for evaluating the consequences of population growth. We need to account for two distinct effects: the direct effects of population change on government expenditures and tax revenues and the indirect effects of population change on tax bases through its effects on wages, consumption, and savings. The indirect impact on tax bases is important from both the taxpayer and the government perspective (as was outlined above). From the perspective of native taxpayers, the underlying changes in wages, consumption, and savings alter the before-tax incomes of the native population. From the perspective of the government, the resulting tax base change alters the size of total tax revenues. We return in this discussion to the view of government as a unitary sector, with the understanding that the factors discussed above in the second section are important when considering the fiscal impact on particular levels of government.

We begin our evaluation of the fiscal impact of population growth with a benchmark case in which population growth is neutral, that is, it has no net fiscal impact. We derive six conditions for this neutrality result. In the remainder of this section we discuss the key role of each of these six conditions. Table 2-6 summarizes these results.

A Benchmark Case

Our model contains three different generations (J, M, and E) and two different types of workers (who make up the M generation). Altogether, the population

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-6 Impact on Per Capita Expenditures and Per Capita Revenues

 

Impact on Per Capita Expenditures

Impact on Per Capita Revenues

Condition Violated

Current Period

Future Period

Current Period

Future Period

Condition (1)

- PP>0 or rD>0

Decrease

Decrease

No Change

No Change

Condition (2)

- IRS

No Change

(or decrease)

No Change

(or increase)

Increase

Increase

- DRS

No change

(or increase)

No Change

(or increase)

Decrease

Decrease

Condition (3)

- MC of PS rising

Increase

Increase

No Change

No Change

- MC of PS falling

Decrease

Decrease

No Change

No Change

Condition (4)

- Higher Savings

No Change

Ambiguous

Decrease

Increase

- Lower Savings

No Change

Ambiguous

Increase

Decrease

Condition (5)

- High Skills

Decrease in XY

Ambiguous ΔPI

Decrease in XY,

Increase in XNY

Increase

Increase

- Low Skills

Increase in XY

Ambiguous ΔPI

Increase in XY,

Decrease in XNY

Decrease

Decrease

Condition (6)

- J - the young

Increase in PI, XY

Decrease in XNY

Decrease in PI

Decrease in XNY

Decrease

Increase

- M - the middle aged

Decrease in PI

Decrease in XNY

Decrease in PI

Increase in XNY

Increase

Ambiguous

- E - the elderly

Decrease in PI

Increase in XNY

No Change

Ambiguous

None

consists of four types: the young (J), unskilled middle-aged workers (l), skilled middle-aged workers (h), and the elderly (E). If all four population groups increase in the same proportion, and if the consumption and savings behavior of the new population is identical to that of the original population, then capital (K) will also increase by the same proportion as the population groups. (The new members of M have the same savings behavior, and the new members of E bring equivalent levels of K with them and draw on their savings in the same manner as the existing E generation.)

If the production function ( f ) is constant returns to scale, total income (Y) increases by the same proportion as the population, and, because capital per worker remains the same, wage income per worker (for both high- and low-skilled labor) remains constant. Therefore, W grows in the same proportion as the population, as does the capital income (rK).

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

With the consumption patterns of the new population identical to those of the original population, equal income implies identical consumption behavior. This in turn implies that C and Ce also rise in the same proportions as the population. Thus, when population growth is uniform and the new population shares the behavior patterns of the old, and when the aggregate production function has constant returns to scale, all tax bases stay the same in per capita terms.

If, in addition, the marginal cost of providing public consumption and investment services to additional agents is constant and equal to average cost, then PC, PI, XY, and XNY also rise in exact proportion to the population. Because PP and rD remain unaffected by increases in the population, uniform population growth then has the net fiscal benefit of helping to fund the "fixed cost" of pure public goods and payments on the debt. As spending on PP and rD goes to zero, this net fiscal benefit also goes to zero. We therefore arrive at the following observation:

Neutrality Proposition

If

(1)

spending on pure public goods and interest on the debt is zero;

 

(2)

the aggregate production function (f) has constant returns to scale;

 

(3)

the marginal cost of providing public services to additional agents of similar type (J, l, h, and E) is constant and equal to average cost;

 

(4)

the consumption and savings patterns of the new population are identical to those of the original population;

 

(5)

population growth of workers is uniform in l and h; and

 

(6)

population growth is uniform in J, M, and E, then the net fiscal benefit of population growth is zero.

In the remainder of this section, we investigate the consequences of relaxing each of the conditions above in the context of the model developed in the second section. We first maintain the assumption of completely uniform population growth [conditions (5) and (6)] and consider the impact of weakening the economic conditions, (1) through (4). This is the task in the following subsection. We then turn to the immigration case, investigating the consequences of weakening the uniform population growth assumptions. In particular, we consider in the subsection on "condition (5)" a nonuniform change in the skill distribution within the M generation, a violation of condition (5). Then in the subsection on "condition (6)" we analyze the impact of a nonuniform change in the age distribution, a violation of condition (6).

Uniform Increase in Population

In this subsection, we consider violations of the first four conditions of the neutrality proposition, still assuming uniform population growth across J, l, h, and E. As we consider each of the four violations in turn, we assume that the other three

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

conditions hold. First, we relax only the assumption of zero spending on pure public goods and on interest on debt. Second, we relax the assumption of constant returns to scale technology. Third, we allow for differences in the marginal cost of providing public services to the old and new populations. And finally, we allow for differences in the consumption and savings behavior of the old and new populations.

Condition (1): Expenditures on Pure Public Goods and Interest on the Debt

What is the fiscal effect of a new population group if the government has positive expenditures either on debt interest payments (rD) or on projects with a pure public good (PP) component [assuming neutrality conditions (2) through (6) continue to hold]? As already noted, because these government expenditures are not subject to crowding, they can be viewed as "fixed" expenditures. (Note that interest payments on the debt are, in this sense, identical to expenditures on pure public goods.) Given no change in the private side of the economy, uniform population growth then leaves per person tax revenues unchanged while per person government expenditures fall. These facts together imply that the introduction of a new population has a net fiscal benefit.

Condition (2): Returns to Scale

Now consider replacing the assumption of a constant returns to scale technology with one of an increasing returns to scale technology, leaving all other assumptions in place. As population growth increases the scale of production, productivity and thus real wages and rents increase. Income rises for both the M generation (earning W) and the E generation (receiving rK). Current consumption rises for E, as the elderly consume out of rents. Both current consumption and savings increase for M.

In this scenario, the tax base, consisting of W, rK, and C, grows faster than the population. (CO definitely increases whereas Ce increases unless these goods are inferior.) Because savings increase, future tax revenues from rK also increase. Therefore, from both the government and the original taxpayer perspective, increasing returns to scale technology means that uniform population growth will have a positive net fiscal impact in both the current and the future period. 3 The opposite is true for the case of decreasing returns to scale.

Condition (3): The Marginal Cost of Providing Public Services

Next we consider violating condition (3) again with all other neutrality conditions met. This condition could be violated either because of the presence of a

3  

An additional secondary effect is that the demand for certain government activities (such as income-based transfers) declines as incomes rise.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

fixed cost to providing the public service (in which case the average cost per person is declining even if the marginal cost is constant) or because the marginal cost is not constant. Any fixed-cost component to providing the public service is identical to a pure public goods component and can therefore be considered a violation of condition (1) (discussed above.) We therefore consider here violations of condition (3) that involve zero fixed costs; that is, we focus on cases in which the marginal cost of extending public services to new populations is not constant. Clearly, if marginal costs rise as populations increase, the net fiscal impact of population growth becomes negative, and if marginal costs fall as populations increase, the net fiscal impact of growth is positive (assuming that all other neutrality conditions hold).

Marginal costs may be nonconstant for many reasons. We consider here three cases in which this is true. First, the input cost schedules faced by local governments may be either increasing or decreasing. For example, suppose that a local government provides a service that requires inputs that it purchases from private providers that offer quantity discounts. Then the marginal cost of providing the service may decline as population increases because input prices fall as the population rises. Conversely, input prices may rise due to a scarcity of resources.

Second, the technology of producing the public service may be such that marginal costs are nonconstant even if input prices are constant. Suppose a school building in a local school district can accommodate additional students, but it becomes increasingly difficult as the student population increases. Then the marginal cost of extending services rises because of the nature (technology) of the public service. 4

In the previous two cases, population changes cause changes in marginal costs regardless of the particular characteristics of the populations themselves. In the third case, the new population groups may have characteristics that require greater or fewer expenditures. For example, consider a rise in per pupil costs of public education because the new population requires special services, such as bilingual education. Then the higher marginal costs are a direct result of the new population's characteristics (lack of native language skills). The role of such differential characteristics that impact the degree of crowding in public services is discussed in more detail in the fourth section of this chapter.5

4  

If, in addition, there is some critical threshold after which a new school must be built, the marginal cost of accommodating additional students in classrooms may drop before it rises again as the student population increases further. Thus, the marginal cost may rise until it drops sharply only to rise again. Threshold effects of this kind are discussed further in the fourth section of this chapter.

5  

If the new and old populations are distinguishable, it is feasible to treat them as different population types even if they are otherwise identical to the original population. In this case, political mandates may alter the marginal costs of providing services to the new population. For example, legislation such as California's Proposition 187 and recent welfare and immigration reforms prohibit certain immigrant groups (i.e., illegal immigrants) from using many public services. If enforced, such legislation could effectively reduce to zero the marginal cost of these public services for the new population group.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

Finally, we note that there are other examples of changing marginal costs that are not violations of condition (3). Condition (3) requires that the marginal cost of providing public services is constant for each population type (i.e., J, l, h, and E), which implies that the increase in the cost of providing public services as a whole remains constant so long as population growth is uniform. Nonuniform population growth will necessarily entail different changes in the overall cost of providing public services because some services are targeted specifically at certain generations (as, for example, education) (see Table 2-3). This, however, does not violate condition (3) but rather conditions (5) and (6).

Condition (4): Differing Consumption and Savings Patterns

Suppose again that all other neutrality conditions hold, but that the new population has different savings and consumption patterns from the native population—a violation of condition (4). This could manifest itself in three different ways: first, the new population may have either a higher or a lower propensity to save. Second, the new population may have higher or lower initial capital holdings. And third, the new population may engage in consumption (or savings) outside the national economy (for example, some immigrant groups send substantial funds to families in their original countries). In the last case, whereas taxes on W are unaffected, tax revenues on consumption (or capital) will be lower and the fiscal impact of the population growth will be negative. We concentrate here, however, on the first two cases and will assume for now that the new population consumes and saves exclusively in the domestic economy.

First, suppose that the new population has a higher propensity to save. Recall in our model that current income is divided between current consumption and savings which become next period's capital. Therefore, the dynamic nature of our model becomes important when condition (4) does not hold. In the first period, per capita consumption is lower as per capita savings rise. Because the current supplies of labor and capital are unaffected by this savings decision, there is no effect on wages or rents. Therefore, the current tax revenues, based on W, rK, and C, decline per capita and the new population appears to incur net fiscal costs. However, this decision also has a fiscal impact in the next period. K is now higher than it would have been. As long as the supply of labor is unchanged, the assumption of constant returns to scale technology (and perfect competition) means that production will rise, but the relative increase in K compared with L will lower rents (r) and raise wages (W). Overall, income and thus tax revenues will rise, although the original now-elderly generation will have lower income than they would have otherwise (because their contribution to K is unchanged but rents have fallen). Conversely, M generation workers will have higher incomes than they would have otherwise. In this way, total tax

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

revenues rise in the future period but the income shares and thus tax incidence change.6 Combining the effects for the two periods, the future increase in income tax (and sales tax) revenues should outweigh the current loss in sales taxes. The opposite conclusion holds if the new population has a higher propensity to consume. By the same logic, current sales tax revenues rise, but future production falls, the future elderly are better off, future workers are worse off, and future income and sales tax revenues are lowered by more than this period's gain.

Second, suppose that the new population holds more capital at the beginning of the period than the original population. Then effects in the current period will be similar to the effects described in the above paragraph for the next period. In other words, if per worker capital rises this period, wages (W) rise and rents (r) fall. Overall income and tax revenues rise in the current period, but the elderly among the original population will be worse off (because of lower rents), whereas workers in the M generation will be better off. The opposite clearly holds if the new population arrives with lower capital holdings than the original population.

Condition (5): Nonuniform Increase in Low- and High-Skilled Workers

Until now we have considered only uniform population growth. That is, we have assumed that the entering population is identical to the original population along all relevant dimensions. In the terms of our model, the relevant characteristics are age and skill mix. However, many concerns about immigration arise precisely out of the differences (in these dimensions) between the immigrant and the native populations. Here and in the following subsection we relax the uniform population growth assumptions in conditions (5) and (6), again maintaining all other neutrality conditions.

First, we evaluate the impact of population growth that is nonuniform in the skill levels of workers. Although population grows uniformly across generations, the proportion of generation M that has a high level of skills (h) grows faster than the proportion that has a low level of skills (l). We use this example throughout this subsection; however, the results are essentially symmetric if we reverse high skilled and low skilled.

High-skilled workers differ from low-skilled workers in one key way: they have higher marginal productivity and higher wages. In the current period, this means their income is higher and thus their consumption and savings are also likely to be higher. From a government perspective, they generate higher income

6  

The impact this has on government expenditures is ambigious. In the current period, little change in per capita expenditures will occur because wages and incomes remain constant. In the next period, however, the elderly are worse off whereas the middle aged are better off. This may either increase or decrease government spending per person depending on the relative magnitude of these effects.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

and sales tax revenues but they are ineligible for income-based transfers (XY). If they consume public services in equal proportion to the rest of the population, this implies that high-skilled workers are greater net contributors than the average taxpayer. This conclusion is even more certain if taxes are progressive. Therefore, a disproportionate increase in high-skilled workers is a net fiscal benefit in the current period so long as their use of public services is similar to the rest of the population.7

The impact of high-skilled workers, however, goes beyond their own income. To the degree that high-skilled workers are complements for low-skilled workers and for capital, the disproportionate increase in high-skilled workers will lower the wages of the native high-skilled workers, raise the wages of low-skilled workers, and raise the rents accruing to the elderly. This will have an additional benefit for tax revenues, tempered by the lower income of the native high-skilled population. Income inequality is also reduced.

Higher income today also has a number of impacts in the future. First, higher savings today increase future capital, which implies that an increase in the proportion of high-skilled workers increases future income for the elderly and for next period's workers (following the argument in "condition (4)" above). Today's M generation also provides for the consumption of the young. Because socioeconomic background is a crucial predictor of a child's success, we may also expect the children of high-skilled parents to be disproportionately likely to be high skilled themselves. If so, this factor augments the beneficial fiscal impact of today's high-skilled workers in future periods. Finally, to the extent that higher-income workers are entitled to higher Social Security benefits in the future, transfer payments to the elderly in the next period will increase by a greater proportion than current population growth.8

Condition (6): Nonuniform Increase Among Age Groups

Our model also permits population growth to be nonuniform across the three generations. Here we hold to conditions (1) through (5), but now relax the final condition and consider differential growth across J, M, and E. We first investi-

7  

The main public service that may be consumed in greater proportion by the high skilled is public education for their children. On the one hand, their children are likely to provide positive externalities due to their peer quality. This would mean that lower per pupil spending would yield similar quality education for the original population. On the other hand, high-skilled parents are likely to demand better schools and are thus likely to settle in high-spending school districts. This would imply that additional spending on public schools may increase in greater proportions than if population growth was uniform. Whether total spending on public services rises faster or slower than population growth is therefore ambiguous. For a more detailed discussion on problems in determining education expenditures due to immigration, see "Disproportionately Large Increases in J" below.

8  

The overall impact on the Social Security system, however, is likely to be positive because the increase in payroll taxes in the current period is likely to outweigh the increase in Social Security obligations in the next period. See, for example, Boskin et al. (1987).

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

gate the impact of higher growth rates in E, then consider higher growth rates in M and finally in J. We look in some detail at the special issues regarding the fiscal impact of education funding.

Disproportionately Large Increases in E

Suppose all population growth occurred among the elderly. Looking back at Tables 2-3 and 2-4, it is easy to see which expenditures and taxes are affected. On the tax side, the elderly pay taxes on capital (K) and consumption (C, Ce) but not on wages (W). Whether this implies an increase in overall tax revenues that is larger or smaller than the rate of population growth is unclear. It depends on the rise in capital that accompanies the increase in E as well as the consumption patterns of the new members of the E generation.9 Furthermore, the extent to which the inflow of additional K increases income and thus tax revenues from current residents similarly depends on the size of the increase in K (as discussed above).

On the expenditure side, the elderly use public consumption services in proportions similar to the rest of the population but crowd public investment services (particularly education services) significantly less. On the other hand, they receive disproportionately large transfers, especially the non-income-based transfers that are almost exclusively paid to E (Social Security, Medicare). An increase in E therefore implies disproportionately lower increases in spending on public services (in particular public investment services) and disproportionately higher spending on transfer payments. Overall, whether the net fiscal impact of a disproportionate increase in E is positive or negative is an empirical issue.

Disproportionately Large Increases in M

Now suppose instead that population growth occurred entirely in the M generation (and that the skill proportions in the population remain constant). Again, Tables 2-3 and 2-4 help us determine the immediate fiscal impact of disproportionate growth in M. On the revenue side, members of M pay taxes on the largest tax bases in the model, particular payroll taxes on W. On the expenditure side, whereas M is likely to crowd public consumption services in similar proportions to the rest of the population, members of M cause less crowding in public investment services (receiving no education). They also receive government transfers in significantly smaller proportions than people from other generations (because income-based transfers are relatively minor in size compared with the non-income-based transfers for E). Thus, in the current period, an increase in M requires proportionately fewer government expenditures, but disproportionately increasing government revenues.

9  

The relatively large role of payroll taxes, however, makes it likely that overall tax revenues from the elderly are substantially smaller than those from the M generation.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

In the next period, however, the M generation becomes the E generation, and all the issues discussed for the elderly apply. In particular, an increase in the M generation today implies a disproportionately large increase in E in the future. This brings with it a disproportionately large increase in non-income-based transfer payments (Social Security, Medicare) in the next period as well as a likely decline in revenues (as the generation ceases earning wages and paying taxes on W).

In addition to the direct effects considered above, however, there may be significant indirect effects of disproportionate population growth in the M generation. In particular, although we have assumed throughout most of this chapter that M begins with no capital holdings and generates growth in capital through its savings, population growth in M (through selective immigration) may increase K as the immigrant group brings capital with them. In the former scenario in which the new M population starts without any capital holdings, the growth in the M generation increases the labor supply unaccompanied by an increase in K. As discussed under ''condition (4)" above, the marginal product of labor falls and the wages of the original population are depressed. This causes declines in the (per person) tax base W (important for the government perspective) and declines in the incomes of native M residents (important for the taxpayer perspective), although it increases the rents received by E. In the latter scenario in which the new M population brings new capital holdings, however, a growth in M may be accompanied by substantial growth in K, which may mitigate or offset these effects. The growth in capital that accompanies the growth in the labor force M is therefore of potential importance.

Disproportionately Large Increases in J

Finally, suppose that the entire population growth occurs in J. Because the only taxes on the young are based on their consumption, tax revenues in the current period will grow less than the population growth rate. On the expenditure side, the young crowd public consumption services in similar proportions to the rest of the population. However, as the main recipients of public investment services (i.e., education), disproportionate growth in J clearly causes crowding in PI. (We discuss this issue in detail below.) The young also consume a disproportionately large share of income-based transfers, although they consume little in the way of non-income-based transfers. A disproportionately large increase in J therefore implies a disproportionately large increase in government expenditures and a disproportionately small increase in government revenues in the current period.

In the future, however, the young become workers and eventually become the elderly. Thus, an increase in J today implies an increase in M in the next period and an increase in E two periods hence. Thus, in the next period the considerations suggested above in "Disproportionately Large Increases in M" become applicable, and in the period after that, the considerations above in

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

"Disproportionately Large Increases in E" play a role. These multi-period effects all need to be taken into account in a fiscal impact study that attempts to find the present discounted fiscal benefits of population growth in J.

The Special Case of Education. Probably the most difficult task facing those conducting fiscal impact studies of population growth in general and growth of generation J in particular is to adequately treat expenditures on education. The difficulties arise from a lack of agreement in the education literature on the nature of the education production process as well as the presence of diverse and complicated public funding mechanisms. More precisely, researchers face three obstacles. First, varying estimates of the value added by education spending make it difficult to measure the expected future fiscal payoff from expanding educational services to the new population. Second, whether education is viewed as investment or consumption, crowding costs are difficult to estimate because of uncertainty regarding both the value added by spending and by peer quality. Third, because the financing of public education is shared by all levels of government (in ways that depend on the state or locality under consideration), cost estimates will vary depending on which government perspective is taken.

Overcoming the first two obstacles depends critically on an accurate measurement of the value added by public school spending. The degree to which current spending affects future wages is the key to any future fiscal benefits from educational expenditures. Furthermore, this measurement is crucial in determining the extent of additional resources needed when J increases to keep education quality constant for the original population.10 For example, if class sizes were irrelevant in producing quality education, population growth in J could occur without the need for additional expenditures on teacher salaries. On the other hand, if class size mattered greatly, additional population growth would require hiring more faculty. Unfortunately, scholars studying primary and secondary education remain deeply divided regarding the role of financial resources in creating quality public education.11

10  

Strictly speaking, what is required to overcome the first obstacle differs from what is required to overcome the second. In particular, the actual value added by spending on public education is needed for the first obstacle, whereas parental perceptions regarding this quantity are needed for the second. That is, the extent to which additional spending on public education takes place (through the political process) clearly depends on parental perceptions regarding the value of public education spending. The extent to which this spending has future payoffs, on the other hand, depends on actual value added, not parental perceptions. We implicitly assume here that parental perceptions and actual value added coincide.

11  

Hanushek (1986) surveys the literature linking test scores to educational inputs and finds little evidence that public resources spent on primary and secondary education contribute significantly to educational outcomes. Parental socioeconomic status and education level seem to dominate. Card and Krueger (1992), on the other hand, find significant returns to public school spending in labor markets (which would imply higher income and consumption tax revenues in the future). Their conclusions, however, have been questioned in work by Betts (1995) and Heckman et al. (1996).

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

The likely existence of population externalities (peer effects) in education creates additional complexities. To estimate accurately the increase in current expenditures on education resulting from an increase in J, researchers must estimate the additional cost of public education holding constant the quality of education received by the original population. Even if financial inputs play a minor role, peer effects are widely speculated to be a significant input into the education production process. (Coleman, 1966, first highlighted this effect.) Thus, population growth in J may alter the inputs in the public school system simply because peer quality is one of those inputs. If, for example, population growth within J entailed positive externalities, then this population growth would reduce the cost of providing a given quality of education to the original population. Similarly, negative population externalities imply increasing per person expenditures to maintain the same quality. These externalities are generally thought to be positive for high-ability children (who come in disproportionate numbers from high-income households) and negative for low-ability children (who come in disproportionate numbers from low-income households), but the empirical literature is still far from agreement on the magnitude of these effects.12

Thus, although the role of both financial resources and peer quality in the education production process is controversial, assumptions in these areas are key in obtaining cost estimates for fiscal impact studies. To estimate the cost of extending public education to particular immigrant groups, these studies must explicitly or implicitly take a position on both peer effects and financial inputs. Given the unresolved state of the education debate, completeness may require studies to consider the fiscal impacts under several different assumptions about the role of both financial resources and peer effects in the education production process.13

Additional complications for fiscal impact studies arise out of the complex government interaction that produces public education in the United States. Different states have different degrees of centralization, with some financing education primarily at the local level and others financing all marginal expenses at the

12  

Summers and Wolfe (1977), for example, find evidence that less able students benefit from more able peers whereas high-ability students are not nearly as affected by the presence of low-ability students. Henderson et al. (1978), on the other hand, find empirical support for peer effects that are equally present for both high- and low-ability groups. The whole enterprise of measuring peer effects, however, has not been well developed and faces many econometric hurdles [see, for example, Evans et al. (1992) and Manski (1993)].

13  

Additional complications particular to population growth from immigration involve such issues as bilingual and bicultural education (which may be required by state supreme courts for certain types of immigrant children). Furthermore, crowding may involve threshold effects (for general population growth as well as growth through immigration); that is, public education may involve little or no additional costs for one more student, but it may involve substantial costs if large population growth is concentrated in small areas. Finally, children with special needs (such as the disabled) clearly require additional resources. These issues are dealt with in more detail in the fourth section of this chapter.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

state level. As we discussed in the second section, the difficulty for evaluation depends on which government's perspective the fiscal impact study takes. For example, determining the future fiscal benefit of providing public education to the new population becomes less of an issue when the study takes a local government perspective, because, from that perspective, it is likely that most future tax benefits will accrue to other districts due to migration of future workers.

The basic empirical question regarding the impact of finances and peer effects in education remains, however, because of the second obstacle discussed above. At the same time, this local perspective leaves out important national taxpayer benefits that a more national perspective would wish to take into account. Similarly, the complex state and federal grant programs that support public education in local communities create revenues from a local perspective and costs from a state and national perspective whenever the total level of the grant is based (at least in part) on the total student population within a locality. Finally, if population growth is localized, threshold effects may play an important role; that is, a modest amount of growth may require no additional school buildings, whereas more vigorous growth may well call for such fixed expenditures. Thus, the marginal cost of small increases in local populations (of J) may be small, whereas the marginal cost of larger increases in these populations may be significantly more than proportionately larger.

CHARACTERISTICS OF IMMIGRANTS

As developed above, our model provides a framework for evaluating the fiscal impact of population growth. This section considers in some detail how this model can be used to think about the fiscal impact of U.S. immigration. More precisely, we analyze the ways in which U.S. population growth through immigration violates the crucial neutrality conditions (3) through (6).14 Each violation deals with a particular set of characteristics of immigrant populations that differs in some critical way from those assumed in the neutrality proposition, as well as from those of U.S. natives. Violations of condition (6), for example, involve the characteristics of the age distribution of immigrants versus those of natives, whereas violations of (5) pertain to the distribution of skill levels among immigrant workers versus native workers. Violations of (4) deal with the differences in consumption and savings behavior between natives and immigrants, and violations of condition (3) relate to the specific characteristics of immigrants that cause the marginal cost of providing public services to be nonconstant or different from the marginal cost of extending the same services to natives. We consider these violations in descending order [i.e., starting with violations of condition (6) and ending with violations of condition (3)].

14  

Conditions (1) and (2) have nothing to do with population growth per se. Condition (1) is clearly violated as both public goods spending and interest on the debt are positive.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

As we work through these four cases, we discuss not only the relevant characteristics of immigrants, but also the implication of these characteristics for major categories of government expenditures. Where available, we present data on the crucial differences between U.S. natives and immigrants to the United States. Our list is not comprehensive, but it surely contains many of the characteristics critical to calculating the fiscal impacts of immigration on various levels of government and taxpayers in the United States. We largely focus on differences between newly arrived immigrant cohorts and natives rather than on immigrants as a whole, because most politically feasible immigration policy reforms focus on the former group.

Not surprisingly, our analysis suggests that immigration is unlikely to be fiscally neutral because the immigrant population violates all the assumptions in our neutrality proposition. Furthermore, our analysis indicates that much of the data and calculations necessary to make a thorough accounting of the fiscal impacts are not yet available in the literature.

Violations of Condition (6): Age Composition of Immigrants

The age distribution of immigrants is an important determinant of the net fiscal impact of immigration at all levels of government. The evidence summarized below indicates that the age composition of immigrants living in the United States differs significantly from that of natives. We rely on the analysis of the second and third sections in this chapter to highlight some of the likely fiscal consequences of this age shift for major public expenditure programs targeted at specific age groups, in particular education and Social Security benefits (see Table 2-3). We also present some evidence from the literature on how immigrants compare with natives in their use of public services and receipt of age-targeted transfer payments. Finally, we conclude with a discussion of the impact of family composition, a characteristic that is closely related to age distribution. In particular, the family composition of immigrant populations has important implications for income-based transfer programs and tax benefits.

The Age Distribution of Arriving Cohorts

There are three main reasons for the difference in the age distribution of immigrants and natives. First, the age distribution of newly arrived immigrants does not reproduce the native age distribution. This distribution is extremely sensitive to both immigration policy and conditions in other countries that determine the worldwide "supply" of immigrants. Second, immigrants have different mortality rates from natives.15 The mortality rate will depend on, among other

15  

Also, immigrants have different fertility rates from natives. Although this factor is clearly important, we ignore the impact of fertility rates in the remainder of our analysis because the children born in this country to immigrant parents are native citizens of the United States and therefore are included in the age distribution for natives.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-7 Distribution of 1994 Native Ages Versus Immigrant Ages (1994 arrival cohort)

 

% of Population

Gender

Age Range

Immigrant

Native

Male

0–9 yrs

12.19

14.41

 

10–19 yrs

20.84

13.57

 

20–29 yrs

22.02

13.93

 

30–39 yrs

19.13

16.09

 

40–49 yrs

10.75

12.73

 

50–59 yrs

7.99

8.64

 

60–69 yrs

4.59

6.72

 

70–79 yrs

2.10

12.00

 

80+ yrs

0.39

1.92

Female

0–9 yrs

9.93

13.92

 

10–19 yrs

17.52

12.70

 

20–29 yrs

24.18

13.92

 

30–39 yrs

20.44

16.97

 

40–49 yrs

11.21

13.68

 

50–59 yrs

7.36

10.38

 

60–69 yrs

5.84

8.79

 

70–79 yrs

2.69

6.72

 

80+ yrs

0.82

2.93

SOURCE: U.S. Immigration and Naturalization Service (1996).

things, the country of origin and race distribution of the immigrant cohort, as well as the dietary and health habits of its members, none of which need match the characteristics of natives. Third, return or remigration is common in the immigrant community, whereas emigration is rare among natives.16

Table 2-7 presents the age density by sex of natives and the immigrant cohort that arrived in 1994. The newly arrived immigrants are generally younger than natives, with 55 percent of the males and 52 percent of the females less than 30 years of age, compared with 42 and 41 percent for native males and females, respectively. Seven percent of the newly arrived immigrant group is over 60 years old compared with 21 percent of the native population. Forty-six percent of the cohort is male, which is consistent with historical standards (U.S. Immigration and Naturalization Service, 1996:22).

16  

The age distribution also helps determine other immigrant characteristics of interest, as well as being determined by them. For example, the age density for the immigrant population is linked mechanically to the family composition (size, number of children, marital status) of the newly arrived immigrant cohort. In turn, the immigrant family composition helps determine remigration probabilities, which is itself in the equation for the age distribution of the remaining immigrants. To give a concrete example, immigrant groups consisting of single young men are far more likely to return to their country of origin (Sowell, 1981).

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-8 Age Distribution of Immigrant by Arrival Cohort (1985–1994)

 

% of Arrival Cohort

Age

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

0–9 yrs

12.4

12.2

11.7

10.8

7.2

5.6

4.7

9.9

11.3

11.6

10–19 yrs

17.3

17.2

16.9

15.9

16.9

14.4

9.6

17.3

19.2

19.2

20–29 yrs

30.7

29.1

28.6

27.1

25.8

29.6

40.3

27.4

24.2

23.5

30–39 yrs

19.4

20.0

20.3

21.5

26.8

27.7

25.1

21.9

20.8

20.0

40–49 yrs

8.4

8.7

9.6

11.1

12.1

12.0

10.9

10.8

10.8

11.0

50–59 yrs

5.8

6.2

6.4

7.00

6.3

6.0

5.4

6.4

6.6

6.9

60–69 yrs

4.1

4.5

4.5

4.7

3.6

3.4

2.9

4.4

4.9

5.2

70–79 yrs

1.6

1.8

1.7

1.7

1.3

1.1

0.93

1.6

1.8

2.1

80+ yrs

0.32

0.38

0.33

0.36

0.26

0.27

0.20

0.37

0.43

0.52

SOURCE: U.S. Immigration and Naturalization Service (1996).

Table 2-8 shows how the age density of newly arrived immigrant cohorts has changed from 1985 to 1994. The 1994 and 1993 cohorts were slightly older than cohorts arriving prior to 1989, with a slightly higher percentage of middle-aged and elderly immigrants.17 Relative to the native population, the new immigrant cohorts have a higher proportion of young (J) and middle aged (M).

Although new cohorts of immigrants tend to be younger than the native population, the set of all immigrants in the United States is not as young as one might believe looking at just the cohort-specific age profiles. Using data from the 1980 Census, Borjas (1990) reports that 27.3 and 11.2 percent of natives and immigrants, respectively, were under the age of 17. The percent over 64 years of age was 10.6 and 21.2 of natives and immigrants, respectively. This discrepancy with the cohort profiles arises because, at the time of the 1980 Census, the set of all immigrants consisted largely of those who had arrived earlier in the century (Blau, 1986). Since then, immigration reform has significantly increased the size of the more recent cohorts. Therefore, one would expect the age distribution of all immigrants to be younger than before.

Mortality and Remigration Rates

As highlighted in the third section of this chapter, fiscal impact calculations need to follow these new immigrants through the life cycle, unless the immigrants leave due to mortality or return migration . Unfortunately, there are few data on remigration rates, especially for recent immigrant waves, available in the

17  

1989–1991 are anomalous years. In these years, many of the "newly arrived" immigrants were in fact newly legalized immigrants who had been in the United States illegally since at least 1982. These immigrants, legalized under the 1986 Immigration Reform and Control Act, included a lower percentage of children, more 20–39 year olds, and fewer 60+ year olds than any of the other years in the series. In 1991, 66.4 percent of the new immigrant cohort was male (U.S. Immigration and Naturalization Service, 1996:22).

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

literature (Borjas, 1994). Recent studies focus only on particular ethnic groups rather than all immigrants (e.g., Ramos, 1992). In an older study, Warren and Peck (1980) report that one third of all immigrants return to their home country within ten years of arrival. Similarly, there are few data on immigrant mortality rates (Simon, 1989:86). The absence of these important data makes any attempt at estimating the long-term fiscal impacts of immigration problematic, as immigrants are likely to differ from natives significantly in both respects. In addition to determining the age distribution of immigrants, these data influence the calculation of the fiscal impact of immigration in other ways. For example, ignoring selective return migration of immigrants who do poorly in the U.S. economy (and thus contribute little in taxes while using income-based transfers) would negatively bias the estimate of the net long-term fiscal impact of an immigrant cohort.

Implications for Public Services and Age-Based Transfer Payments

As discussed in the third section and illustrated in Table 2-3, the main age-based expenditure programs are public education for generation J and Social Security (and Medicare) for generation E.18 Neither of these is means tested, which means that expenditures are driven mainly by the age distribution of the population.

As shown above, although the new cohorts of immigrants are much younger than the native population, the set of immigrants as a whole is older in the 1980 Census (due to immigration earlier in the century). Thus, it is not surprising to find that immigrant families received proportionally more than natives from social insurance programs (mainly Social Security, but also unemployment insurance and worker's compensation) in 1975. Table 2-9, taken from Blau (1984), demonstrates this finding. Furthermore, Table 2-10, taken from Simon (1984), shows that each cohort of immigrants receives less money from Social Security than do natives, although older cohorts receive more. Of course, part of this lower participation rate by later cohorts arises because a larger percentage are not old enough to retire.

The tendency for the most recent cohorts to be slightly older than the cohorts arriving in the 1980s has interesting implications for both the burden to and the support of Social Security now and in the future. A greater influx of middle-aged immigrants (M) means a greater tax base to fund Social Security now. At the same time, it means larger obligations on the system in the future. A larger intake of elderly immigrants (E) does nothing to assist in funding Social Security, and it strictly enlarges the program's obligations in the near future—assuming these elderly immigrants are able to meet employment qualifications.

18  

For a discussion of how differential mortality rates affect the lifetime incidence of Social Security, see Garrett (1995).

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-9 Receipt of Transfers per Household in 1975, Immigrants and Natives

 

Male Heads

Female Heads

Type of Program

Natives

Immigrants

Natives

Immigrants

Average payments (all families)

Welfare

$73

$93

$416

$295

Social Insurance

$979

$1505

$1095

$1411

Percent participating

Welfare

4.6%

5.5%

21.1%

14.7%

Social Insurance

36.5%

45.6%

44.9%

57.5%

Average payments

(program participants only)

Welfare

$1585

$1684

$1974

$2002

Social Insurance

$2680

$3301

$2437

$2454

SOURCE: Blau (1984, Table 1) - Calculated from the 1975 Survey ofIncome and Education (U.S. Bureau of the Census). Welfare includes public assistance, AFDC, and SSI. Social insurance includes Social Security, railroad retirement program, unemployment insurance, workers'compensation, and veterans' programs.

As with Social Security, government expenditures on education for any particular group depend critically on the age distribution of that group. The expenditures on public schooling for immigrants depend on three factors: the number of immigrants less than 18 years of age, their probability of attending publicly funded schools, and the average or marginal expenditures per immigrant child who does attend. Newly arrived immigrant cohorts have a higher percentage of young, whereas the set of all immigrants has a lower percentage of young than does the native population. The relative probability of attending public school presumably can be calculated from available data, but we were unable to find it in the published literature.

TABLE 2-10 Receipt of Social Security Dollars Per Capita in 1975 by Natives and Immigrant Cohorts

Arrival Cohort

Social Security Receipts

Natives

$735

1974

$3

1973

$49

1972

$127

1971

$5

1970

$34

1965–69

$152

1960–64

$326

1950–59

$424

SOURCE: Adapted from Simon (1984, Table 1). Calculated from the 1975Survey of Income and Education (U.S. Bureau of the Census).

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

The marginal expenditures per immigrant student typically are assumed to be the same as for native children in the fiscal impact studies we reviewed, either explicitly or implicitly (see, for example Clark et al., 1994, and Garvey and Espenshade, 1996). However, this assumption is likely to be incorrect, given the costs of bilingual education and the crowding and peer group externalities that may be generated by having concentrated immigrant populations.

The Impact of Family Composition on Income-Based Transfers and Tax Benefits

Family structure and composition, although closely related to the age distribution, are of particular interest when examining the fiscal impacts of population growth, partially because of tax and transfer program rules and partially because family structure relates to other important behaviors. Of course, family composition is influenced by policy—family reunification has been at the heart of U.S. immigration rules since 1965.

From the tax side, family composition determines the contribution of immigrants to the various revenue sources. Both earned incomes and tax rules are dependent on family size. For example, married men earn higher wages than comparable single men, perhaps due to productivity differences between the two groups (see, for example, Kermit, 1992, or Neumark and Korenman, 1988). Family composition, especially the presence of children, is also an important eligibility criterion most income-based transfer programs. In the specific case of immigrants, family composition also affects remigration rates, changing the age distribution and eventual use of non-income-based transfers. These are just a few examples of the mechanisms through which fiscal impacts may change due to the composition of immigrant families.

Unfortunately, the main literature on the role of family composition on the fiscal impacts of immigrants focuses solely on immigrant use of social services, of the type discussed below under "Violation of Condition (5)." We do know that most immigrants have family members already in the United States: 465,000 of 687,907 immigrant visas issued in 1987 were issued on the basis of family reunification, not including immediate relatives of adult U.S. citizens. Based on Immigration and Naturalization Services (INS) data, most adult immigrants are married. Table 2-11 presents the marital status of the 1987 and 1994 arrival cohorts by sex reported by the INS (U.S. Immigration and Naturalization Service, 1996). In these cohorts, just over half of all immigrants are married. Because 20–30 percent of these immigrants are under the age of 20 and therefore most likely single, this means that the large majority of the adults in these two cohorts are married. The publicly reported INS data do not indicate how many of the married immigrants arrived with their spouses. Using data from the 1970 and 1980 censuses, Borjas and Bronars (1991) estimate that 71.8 percent of U.S. couples with at least one immigrant spouse migrated together. (The remainder

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-11 Marital Status of 1987 and 1994 Immigrant Cohorts

   

% of Arrival Cohort

 

Marital Status

1987

1994

All Immigrants

Single

43.00

44.11

 

Married

52.79

52.03

 

Widowed

2.52

2.27

 

Divorced

1.57

1.37

 

Separated

0.12

0.21

Male Immigrants

Single

46.07

49.81

 

Married

51.76

48.28

 

Widowed

0.75

0.70

 

Divorced

1.33

1.03

 

Separated

0.08

0.19

Female Immigrants

Single

39.93

39.20

 

Married

53.81

55.28

 

Widowed

4.28

3.62

 

Divorced

1.82

1.67

 

Separated

0.16

0.24

SOURCE: U.S. Immigration and Naturalization Service (1987, 1996).

were married after the arrival of the immigrant or the other spouse migrated at least five years after the initial immigrant.) In addition, they report that about 60–70 percent of immigrants in these censuses migrated within a five-year interval of a relative. Canadian, German, and Irish immigrants are more likely to have migrated alone than Mexicans, Koreans, or Filipinos.

Violations of Condition (5): Differences in Human Capital

In the third section we consider the factors relevant in assessing the fiscal impact when the new population differs in skill level or human capital, suggesting how these factors might be potentially significant. Here we draw on findings in the literature demonstrating that immigrants to the United States do in fact differ from natives both in the human capital they bring with them and in their propensity to invest in human capital once here. Not only does this factor alter the income distribution of the overall population, producing all of the consequences on the tax base outlined in our discussion above, but it also influences the amounts paid out in income-based transfers.

Educational Attainment of Immigrants

Human capital differences include such important attributes as education (quality and quantity), job market experience, occupational choice, industry-specific skills, English language skills, and occasionally other special abilities

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

and talents. As with the immigrant age distribution, the human capital mix of immigrants has been changing over time for two reasons. First, newly arrived immigrants have changed on this dimension over time, and second, immigrants differ from natives in their subsequent acquisition of various types of human capital. The literature on the human capital of immigrants is extensive and has been reviewed elsewhere (Borjas, 1994). We summarize below some of the main facts from this literature that are pertinent to the fiscal impact of immigration.

Table 2-12, based on data from Funkhouser and Trejo (1995), presents the distribution of years of schooling by age for native and immigrant males between 18 and 61 years old, calculated from linked Current Population Survey (CPS) data sets from 1979 to 1989. Immigrants are considered collectively and by arrival cohort. In general, immigrants are less educated than natives. By 1989, the least educated immigrants were those cohorts that had arrived in the early 1980s, with more recent cohorts appearing somewhat more educated. Although years of education can only increase for individuals over time, no immigrant cohort, except those from 1987 to 1989, has monotonically increasing years of education over time, an artifact perhaps of sampling error or remigration. Educational attainment in the year of arrival, as well as propensity to acquire education once in the United States, varies significantly by national origin. With some exceptions, European, African, and Asian immigrants, for example, tend to have more education than South American immigrants (see Borjas, 1994:Table 2-8). Of course, years of education do not take into account the quality of schooling relative to schooling in the United States. Even if the quality abroad is on a par with U.S. schools, education abroad may not be equally remunerative in the U.S.

TABLE 2-12 Mean Years of Schooling of Natives and Immigrants by Arrival Cohort (1979–1989)

 

CPS Survey Year

 

1979

1983

1986

1988

1989

Natives

12.5

12.71

12.86

12.97

13.03

All immigrants

11.36

11.86

11.38

11.64

11.69

Immigrant Cohort

pre-1960

11.99

12.67

12.29

12.66

12.46

1960–64

11.85

11.63

12.29

12.29

12.94

1965–69

11.43

12.28

11.95

12.71

11.93

1970–74

11.03

11.44

11.28

11.49

11.72

1975–79

10.67

11.63

11.16

11.47

11.49

1980–81

11.62

10.53

10.49

11.04

1982–84

11.35

11.34

11.53

11.00

1985–86

10.43

11.75

11.32

1987–89

11.09

11.92

SOURCE: Funkhouser and Trejo (1995). Males aged 18–61 from Nov. 1979, April 1983, June 1986, and Nov. 1989 CPS tapes.Sampling weights were used.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

labor market. Nevertheless, education is an important indicator of labor market outcomes.

Another important skill for the U.S. labor market is the ability to speak English fluently. Table 2-13 (derived from Chiswick, 1992) shows by country of origin the percent of immigrants in the 1980 Census who spoke fluent English. Although we commonly accept that English is a necessary job skill, there is no study directly examining how much investment in English language education in the United States improves labor market outcomes for all non-English-speaking immigrant groups. McManus (1985) shows that Hispanic men who do not speak English well earn 31.8 percent less than Hispanic men who speak it fluently, although this penalty decreases when it is adjusted for other variables. We reproduce his results in Table 2-14. Of course, lack of English fluency affects the fiscal impact calculation not only through the job market, but also through the need to provide bilingual education for young immigrants, although there is debate regarding whether such special educational treatment is beneficial (see Chavez, 1992:297–298).

Labor Market Outcomes for Immigrants

For fiscal studies, the most relevant measure of labor productivity is the hourly wage. This is also one of the most studied aspects of immigrant-native differences. As reported by Borjas (1994), the consensus in the literature is that, based on wages, the 1980s saw a large decrease in the labor market skills (''quality") of the immigrants relative to immigrants in the 1970s or 1960s. Table 2-15, taken from Borjas (1994), shows the wage of successive cohorts of newly arrived immigrants relative to native workers by age over time, calculated from 1970,

TABLE 2-13 Percent of Immigrant Group Fluent in English, 1980 Census

Birthplace

% Fluent

Europe

87.54

Asia

Vietnam

70.75

Philippines

95.09

China

75.56

South Asia

98.11

Other Asia

80.83

America

Mexico

48.30

Cuba

64.71

Other America

75.62

Africa

97.31

SOURCE: Chiswick (1992). Fluency is defined by whether English is spoken at home or, if not, whether English is spoken well or very well.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-14 Weekly Wages of Hispanic Men by English Proficiency as a Percentage of Weekly Wages of English-Fluent Hispanic Men, 1975

English Proficiency

Relative Weekly Wage

Fluent Reference Group

100%

Very Well

90

Well

83

Not Well

68

SOURCE: McManus (1985).

1980, and 1990 census data. There has been a significant shift down in the wage of successive cohorts over time (although we note that the self-employed are excluded from these figures). For example, the cohort arriving between 1970 and 1974 who were between ages 25 and 34 in 1980 made 11 percent less than contemporary natives, whereas the cohort aged 25–34 in 1980–1984 made 18.6 percent less.

TABLE 2-15 Percentage Wage Differential Between Immigrant and Native Men by Age Group and Arrival Cohort (1970–1990)

   

Year

   

Cohort

Age Group

1970

1980

1990

All Immigrants

 

0.9

-9.2

-15.2

1985–89 Arrivals

25–34 in 1990

-23

 

35–44 in 1990

-28.6

 

45–54 in 1990

-36.2

1980–84 Arrivals

25–34 in 1990

-18.6

 

35–44 in 1990

-25.3

 

45–54 in 1990

-34

1975–79 Arrivals

25–34 in 1980

-21.3

-15.5

 

35–44 in 1980

-24.9

-24.1

 

45–54 in 1980

-29.8

-26.3

1970–74 Arrivals

25–34 in 1980

-11.4

-11.8

 

35–44 in 1980

-17.7

-16.4

 

45–54 in 1980

-26

-20.7

1965–69 Arrivals

15–24 in 1970

-4.6

-6.9

 

25–34 in 1970

-12

-5.9

-2.5

 

35–44 in 1970

-15.9

-15.3

-8.8

 

45–54 in 1970

-22.5

-21.1

1960–64 Arrivals

15–24 in 1970

1.1

4.2

 

25–34 in 1970

3.1

-0.3

-0.2

 

35–44 in 1970

-6

-6.7

1.1

 

45–54 in 1970

11.1

-10.8

SOURCE: Calculations based on Borjas (1994)—Subsample of Census 1970, 1980, and 1990 of men aged 25–64 who work in the civilian sector, are not self-employed, and do not reside in group quarters.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

Using more recent data, Funkhouser and Trejo (1995) link CPS data sets to measure how the wages of newer immigrant cohorts changed over the 1980s relative to natives. Table 2-16, taken from their paper, shows the difference between mean log hourly wages of immigrants and natives by arrival cohort and time. For newly arrived cohorts, this difference moved toward zero over the 1980s. In 1983, for those who arrived in 1982 or 1983, the difference was -0.395, whereas in 1986, for those arriving in 1985 or 1986 it was -0.371. By 1988, the 1987 and 1988 arrival cohorts had the smallest (absolute) value of this difference in the 1980s, -0.341. In other words, cohorts arriving in the late 1980s did better relative to natives than did the early 1980s cohorts.

There are important limitations to the use of relative hourly wages to track labor market skills of immigrant cohorts. It ignores, for example, self-employment. This is especially important in fiscal impact studies because the self-employed face different tax rates than do wage and salary workers, and they are likely to have different demographic and behavioral characteristics. The focus on hourly wages similarly ignores other important labor market characteristics such as labor force participation and hours of work. As Sowell (1981) notes, the history of immigration is replete with examples of newly arrived immigrant cohorts who start out at low wages, but work long hours to earn their living.

Finally, Table 2-17 shows the distribution of occupations of newly arrived immigrant cohorts of all ages in 1987 and 1994. The large percentage of immigrants not reporting an occupation is explained partly by the presence of children in the cohort; in 1987 29 percent of the arrival cohort was under age 20, whereas in 1994 there were 31 percent under age 20. Accounting for this fact implies that 7 percent more of the 1994 cohort report an occupation than the 1987 cohort. We

TABLE 2-16 Mean Log Hourly Earnings of Immigrant Cohort Relative to Natives by Cohort and CPS Survey Year

 

CPS Survey Year

Cohort

1979

1983

1986

1988

1989

All Immigrants

-0.096

-0.04

-0.134

-0.13

-0.12

pre-1960

0.137

0.263

0.228

0.165

0.228

1960–64

0.037

0.099

0.161

0.105

0.163

1965–69

-0.079

0.063

0.047

0.057

0.071

1970–74

-0.205

-0.11

-0.09

-0.06

0

1975–79

-0.354

-0.19

-0.222

-0.21

-0.17

1980–81

-0.33

-0.366

-0.31

-0.28

1982–84

-0.4

-0.432

-0.25

-0.33

1985–86

-0.371

-0.29

-0.35

1987–89

-0.34

-0.26

SOURCE: Funkhouser and Trejo (1995). Sample includes male wage andsalary workers aged 18–61 for whom earnings data are available. Hoursearnings are computed as the ratio of usual weekly earnings to usualweekly hours of work. Sampling weights are used in the calculation.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-17 Occupational Distribution of 1987 and 1994 Immigrant Arrival Cohorts

 

% of Arrival Cohort

Occupation

1987

1994

Professional/Technical Specialty

8.4

7.0

Executive, Administrative, and Managerial

3.4

3.6

Sales

1.6

2.1

Administrative Support

2.7

3.5

Precision Production, Craft, and Repair

3.1

4.5

Operator, Fabricator, and Laborer

8.4

9.2

Farming, Forestry, and Fishing

1.9

2.0

Service

6.3

8.3

No occupation or not reported

64.3

59.8

SOURCE: U.S. Immigration and Naturalization Service (1987, 1996).

see from the table that there are proportionately more service workers and laborers in the 1994 cohort, whereas there are more professional workers in the 1987 cohort. This supports other evidence in the literature that the more recent immigrants work in the lower-skilled occupations.

Together, these findings suggest that recent immigrant groups more negatively impact the fiscal balance sheet than previous immigrant groups did, relative to natives. They have lower earnings and their children are likely to require more public education services. Their skill level, measured by hourly wages, is less relative to natives than it was before the 1960s, although it rose over the 1980s. Years of education for recent immigrant groups lag behind natives, although there was an increase in this figure in the late 1980s. There is apparently a significant economic incentive for non-English-speaking immigrants to acquire English language instruction, although there remains a significant proportion of immigrants who arrive without this ability.

U.S. Immigration Policy and Human Capital

The skill level of immigrants is, of course, partially determined by U.S. immigration policy. Although most immigrants enter the United States based on the principle of family reunification, approximately 140,000 people per year are admitted based on "employment-based preferences." Table 2-18 shows the immigration limits set by law in 1994 for those entering under employment-based preferences, as well as the actual number that were admitted. Priority workers have first preference and include executives of corporations and researchers of outstanding ability and their family members. The second preference is reserved for professionals with advanced degrees or extraordinary ability (as defined by the INS). The third preference includes Chinese students entering under the

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-18 Employment-Based Preference Limits in U.S. Immigration Law and Actual Number of Immigrants Admitted by Preference Category, 1994 Arrival Cohort

Preference

Description

1994 Limits

# immigrants admitted

First

Priority Workers

40,918

21,053

Second

Professionals

40,918

14,432

Third

Skilled and Unskilled Workers

40,918

76,956

Fourth

Special Immigrants

10,230

10,406

Fifth

Investors

10,229

444

SOURCE: U.S. Immigration and Naturalization Service (1996). Unfilledvisas from higher categories can be used for lower preferences.

Chinese Student Protection Act, as well as other skilled and unskilled workers. The fourth preference category, "special immigrants," consists mostly of religious workers. Very few people entered under the fifth preference category of "investors" (U.S. Immigration and Naturalization Service, 1996).19

Implications for Income-Based Transfers

As noted in the third section, differential skill levels among workers have implications for income-based transfers that are typically consumed only by low-skilled workers and their families. Immigration policy has featured prominently in recent debates on welfare reform.

Borjas (1990) reports that 9.1 percent of all immigrants in the 1980 Census received welfare, whereas 8.0 percent of all natives did. He defines a family as receiving welfare if at least one member participated in a cash program: AFDC, old-age assistance, general assistance, or Supplemental Security Income (non-income-based, social insurance programs such as Medicare and unemployment insurance are excluded). Table 2-19, taken from Borjas and Trejo (1991), shows immigrant participation in welfare in the 1970 and 1980 censuses broken down by arrival cohort, age, and sex of household head. Female-headed immigrant households tend to participate less in welfare, and male-headed immigrant households tend to participate slightly more than do analogous native households. Welfare participation by both natives and immigrants rose from 1970 to 1980. Borjas and Trejo (1991) stress the fact that younger cohorts of immigrants tend to use public services more than do older cohorts, holding years since migration constant.

Borjas and Hilton (1996), using the Survey of Income and Program Participation find that the gap between immigrant and native families in the probability of welfare use grew only slightly over the 1980s. The gap in participation in

19  

An additional 1,586 special agricultural workers immigrated to the United States in 1994.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-19 Native and Immigrant Welfare Participation Rates by Age, Cohort, and Sex of Household Head

     

% in Migration Years

Age Group/Census Year

% Natives

% All Immigrants

1965–69

1960–64

1950–59

Before 1950

All Households

18–34 in 1970

5.2

3.9

3.2

4.3

4.8

3.5

28–34 in 1980

6.5

6.9

7.5

7.3

5.8

6.6

35–49 in 1970

4.5

4.5

5.8

5.4

4.1

3.8

45–59 in 1980

7.2

7.3

10.1

8.8

6.2

6.4

50+ in 1970

7.5

6.8

12.2

13.3

6.5

6.5

60+ in 1980

10.8

11.0

27.1

19.5

11.0

10.0

Male-Headed Households

18–34 in 1970

2.5

2.6

2.4

2.9

2.8

2.4

28–34 in 1980

3.3

4.2

4.8

4.6

3.3

3.5

35–49 in 1970

2.8

3.4

4.6

4.5

3.0

2.5

45–59 in 1980

4.8

5.6

8.2

6.8

4.5

4.6

50+ in 1970

5.3

5.4

10.8

10.7

5.2

5.0

60+ in 1980

7.9

9.1

21.7

14.7

8.4

8.3

Female-Headed Households

18–34 in 1970

20.3

11.5

8.1

12.2

16.0

9.7

28–34 in 1980

18.4

16.7

17.6

16.9

15.0

17.5

35–49 in 1970

15.9

11.1

13.1

11.0

11.0

10.3

45–59 in 1980

15.7

12.9

16.1

15.5

11.7

11.3

50+ in 1970

12.9

10.8

17.9

22.3

11.6

9.7

60+ in 1980

14.9

13.8

37.7

29.0

16.4

12.3

SOURCE: Borjas and Trejo (1991, Table 2). Calculated from the 1970& 1980 U.S. Census.

noncash programs (such as Medicaid, food stamps, and housing assistance) has grown as well, although not by much in any particular program. They report that when welfare use is defined as participation in either cash or noncash programs, the immigrant-native gap grew by about 4 percentage points from 1984 to 1991.

Table 2-20, taken from Simon (1984), reports per capita receipts from welfare for natives and immigrants by arrival cohort. He calculates these figures from the 1975 Survey of Income and Education. He finds that most immigrant cohorts receive less welfare money per capita than do natives, except for the newest cohorts. Blau (1984), using the same data source, calculates the average payout per family for immigrants and natives and finds that male-headed immigrant families use slightly more, and female-headed immigrant families use significantly less than do natives. We note, however, that female-headed families receive between three and four times as much money per family than do male-headed families. When Blau (1984) looks at payouts per family, given welfare program participation, she finds that immigrants tend to receive slightly more than do natives. Table 2-9 shows these figures from Blau (1984). These dif-

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-20 Amount of Transfer Payments Received Per Capita in 1975 by Natives and Immigrant Arrival Cohorts

Arrival Cohort

Public Welfare

Supplemental Security

AFDC

Food Stamps

Natives

$108

$46

$45

$11

1974

$131

$91

$91

$15

1973

$47

$63

$6

$7

1972

$85

$38

$164

$12

1971

$189

$16

$13

$17

1970

$100

$50

$11

$16

1965–69

$191

$86

$18

$12

1960–64

$91

$69

$18

$12

1950–59

$122

$31

$50

$11

SOURCE: Adapted from Simon (1984, Table 1). Calculated from the 1975Survey of Income and Education (U.S. Bureau of the Census).

ferences disappear after she controls for various demographic and economic variables.

The balance of evidence seems to indicate that immigrant participation in welfare programs is slightly higher than native participation and that the gap has grown with the newer cohorts. Because welfare programs are funded by federal, state, and local governments, this outcome has critical consequences on how immigration alters the fiscal circumstances of governments at different levels.

Violations of Condition (4): Consumption and Savings Behavior

In the third section we describe the fundamental role of consumption and savings behavior by immigrant groups. Immigrants to the United States are likely to differ substantially from natives in their consumption and savings patterns. They bring from their home countries cultural habits and tastes that persist, often over generations (Sowell, 1994). Behaviors arise from an interaction of these cultural habits with the incentives generated by institutions in the United States. Thus, although immigrants' consumption and savings patterns may change in the United States relative to their countrymen in their homeland, there is little reason to expect that they will reproduce native patterns.

Nevertheless, little work has been done exploring immigrant savings and consumption patterns. For example, Simon (1989:87) reflects on the fiscal impacts of immigrant savings behavior, but he reports that "this research has not yet been done." Because immigrants are younger than natives, Simon speculates that life-cycle considerations would lead them to save more than natives. On the other hand, he recognizes that wealth and human capital differences may work in the opposite direction. Family size and bequest motives may represent yet another source of divergence in savings rates of natives and immigrants.

In the absence of research in this area, most fiscal impact studies ignore

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

likely differences between immigrants and natives in consumption when calculating sales taxes paid by immigrants. Diverse studies of both illegal and legal immigrants, several of which are reviewed in the final section of this chapter, all assume that immigrants consume in the same proportions as natives in the same income category. This assumption, although understandable given the lack of data, is untenable given cultural differences between natives and immigrants. For example, immigrants commonly send a significant part of their earnings back to family members in their country of origin. These remittance payments contribute to neither sales tax revenues nor to U.S. savings or investments. (They may however contribute to the wealth or human capital of future immigrants.) As already noted, calculations of immigrant contributions to both current and future tax revenues critically depend on a better understanding of these behavioral traits.

Violations of Condition (3): Characteristics Impacting Expenditures and Taxes

Our discussion in the third section suggest that the characteristics of the new population groups may cause the marginal costs of extending public services to be higher or lower than average expenditures for the native population. This subsection explores two characteristics of immigrant populations that may in fact contribute to such higher marginal costs (and have important implications elsewhere). We highlight the role of parental education and socioeconomic status in public education crowding, and we discuss the problems for researchers that have been raised by the location choices of immigrant groups.

Parental Education, Socioeconomic Status, and Cultural Factors in Education

Immigrants' skills and education levels play an important role in the provision of education for their children. The best predictor of educational outcomes for children is parental education and socioeconomic status. Thus, parental characteristics play a crucial role in the amount of crowding and externality effects experienced by public schools from increases in the student population. Separately, low parental education levels and low fluency in English among immigrant parents induce greater funds to be spent on bilingual and bicultural education.20 As revealed in Table 2-13, immigrant groups from different countries of origin have substantially different fluency rates and thus cause substantially different levels of crowding in public schools. Finally, cultural factors stressing such values as work and individual achievement differ greatly among immigrants

20  

Although there is a debate regarding the effectiveness of various forms of bilingual education, some form of bilingual (and sometimes bicultural) education is required in many states by state supreme courts.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

from different countries (Sowell, 1994). Borjas (1992) finds empirical support in the National Longitudinal Survey of Youth for the notion that "ethnic capital" plays an important role in the labor market and education outcomes of immigrant children, separately from the effect of parental human capital mentioned above. The role of culture, socioeconomic status, and parental human capital in determining differential rates of crowding in public schools, as well as in the use of other public services, are clearly significant and should play a prominent part in any fiscal impact study.

Location Choice of Immigrants

Immigrants do not locate themselves uniformly across the United States. The concentration of immigrants in certain geographic sectors may give rise to important threshold effects that would not appear if population growth were uniform. Although immigrant children might be absorbed easily into public schools if they were spread uniformly across the United States, this is clearly not the case when immigrant groups concentrate in a select number of states and their school districts are faced with massive fixed expenditures to accommodate those students.

Past waves of U.S. immigrants often stayed in the first port where they arrived. For example, Irish, Italian, Jewish, and Puerto Ricans concentrated in New York and other port cities of arrival in successive waves over the nineteenth and twentieth centuries (Sowell, 1981). Today, the top four immigrant recipient states—California, New York, Florida, and Texas—receive nearly 60 percent of all new immigrants. Table 2-21, based on INS data, shows the state of intended residence of the 1987 and 1994 arrival cohorts. During this seven-year period, the top five states' share of new immigrants declined slightly, from 67 to 64 percent.

Once immigrants arrive in the United States, they tend to migrate across state lines more frequently than do natives of the same age and ethnicity (see Bartel,

TABLE 2-21 Intended Location of 1987 and 1994 Immigrant Arrival Cohorts

 

% of Arrival Cohort

State

1987

1994

California

26.79

25.92

New York

18.98

17.95

Florida

9.09

7.22

Texas

7.04

6.98

New Jersey

5.13

5.48

Illinois

4.32

5.27

Other States

28.65

31.18

SOURCE: U.S. Immigration and Naturalization Service (1987, 1996).

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

1989:Table 7). Bartel (1989) also finds that it is the more highly educated immigrants who are more likely to move away from cities with a high concentration of immigrants of the same nationality. Finally, she finds that immigrants are more likely than natives to live in standard metropolitan statistical areas (SMSAs), and that whereas immigrants may move, they tend to move to other SMSAs.

As we noted above in several different contexts, residential choice and probability of migration are important in determining current and future impacts of immigration. Congestion and externalities in the use of public goods will also be more serious concerns where immigrants are concentrated. It is not accidental that it is the states and localities that absorb the highest volume of immigrants, and especially illegal immigrants, that have commissioned reports calculating the net fiscal impacts of immigration on their appropriate level of government. (In the next section, we briefly review the recent fiscal impact reports commissioned by Los Angeles and San Diego counties, California, and Texas.) The location of the new immigrants and the consequent congestion problems are dependent on many of the characteristics of immigrants that we discussed above, including education level and national origin mix, and are likely to change over time, further necessitating a dynamic framework when evaluating the fiscal impact of immigration.

CONCLUSION

In this section, we review a number of recent fiscal impact studies through the lens of the economic framework developed in this chapter. This is not intended to be a comprehensive examination of the literature; Rothman and Espenshade (1992) already offer an extensive survey of the cost-benefit studies of immigration. Instead, we use this section to illustrate some of the shortfalls of analyses done without a comprehensive theoretical structure.

Table 2-22 presents a summary of seven recent studies of the fiscal impact of immigration. The four sections of the table compare and contrast the studies, based on the population considered, the revenue sources and expenditure categories counted and their final "bottom-line" estimate. Using very different accounting strategies, most of the studies reach the conclusion that the immigrant groups considered are a net fiscal drain on the government.

These seven studies define their targeted immigrant populations based on differing legal definitions and geographical areas. Most include illegal immigrants; two consider solely this group. Others add in recent immigrants, amnesty immigrants (Immigration Reform and Control Act legalized), and the citizen children of illegal immigrants in some combination. One considers all legal immigrants. Because many of these studies were sponsored by agencies at various levels of government, the geographical areas run the gamut from counties (Los Angeles County and San Diego County) to states (California, Texas, New Jersey among others) to the entire United States. As we discussed above, the

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

TABLE 2-22 Summary of Fiscal Impact Studies

Study

Stewart, et al. (1992)

Parker & Rea (1993)

Huddle (1994)

Romero, Chang & Parker (1994)

Garvey & Espenshade (1996)

Clark, et al (1994)

Huddle (1993)

Population

Illegal Immigrants

Yes

Yes

Yes

Yes

Unspecified

Yes

Yes

Legal Immigrants

post-1980 amnesty aliens, children of illegals

No

Post-1970 immigrants amnesty aliens

citizen children of illegals

Yes

No

post-1970 immigrants & amnesty aliens

Scope

LA County

SD County

Texas

California

New Jersey

CA,FL,TX,NY,IL,AZ,& NJ

U.S.

Population Size

2.3 Million

220 K

1.9 Million

1.7 Million

39 K

Various7

19.3 Million

Revenue Sources

Fed. Income Tax

Yes1

No

Yes

Yes

No

No

Yes2

State Income Tax

Yes1

Yes

Yes

Yes

Yes

Yes

Yes2

Sales Taxes

Yes1

Yes

?

Yes

Yes

Yes

Yes2

Property Taxes

Yes1

No

?

Yes

Yes

Yes

Yes2

Excise Taxes

Yes1

Yes4

Yes3

?

Yes

No

Yes2

Payroll Taxes

Yes1

Yes

No

No

?

No

No

Immigrant-owned business Taxes

No

No

No

No

No

No

No

Expenditures

Medicaid & county health

Yes

Yes4

Yes

Yes1

Yes1

Yes5

Yes

Social Services & Welfare

Yes

Yes

Yes

Yes

Yes1

No

Yes

Educational costs

Yes1

Yes

Yes6

Yes1

Yes1

Yes1

Yes1

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

Public housing

No

No

Yes

No

?

No

Yes

Costs of criminal courts

Yes

Yes

Yes

No

?

No

Yes

Incarceration costs

No

Yes

Yes

Yes1

?

Yes

Yes

Local public goods - parks, etc.

No

No

No

Yes1

Yes

No

No

Bilingual Education

No

No

Yes

No

No

No

Yes

Local ''environmental costs"

No

No

No

Yes

?

No

No

Student Aid

No

No

Yes

No

No

No

Yes

Social Security

No

No

No

No

No

No

No

Medicare

No

No

No

No

No

No

No

Earned Income Tax Credit

No

No

Yes

No

No

No

No

Fiscal costs associated with native job displacement

No

Yes

Yes

No

No

No

Yes

Final Estimates

Revenues (Billions)

$0.1410

$0.06

$1.47

$0.74

See note 8

See note 9

$283

Costs (Billions)

$0.9510

$0.30

$6.15

$3.4

See note 8

See note 9

$952

1 Estimates rely on comparisons with observably similar demographic groups. (Comparison group varies by study).

2 Extrapolated from LA County tax receipts, and multiplied by an arbitrary "adjustment factor."

3 Assumes immigrants and natives consume these services at the same rate.

4 Assumes immigrants and natives consume these services at the same rate for some of the services in the category.

5 Emergency services only.

6 Unclear/ difficult to ascertain from description of methodology in paper.

7 Several different population size estimates are calculated and compared in this study. They vary depending on assumptions and data sources.

8 Final results are broken down by demographic groups and level of government - no single figure is presented. Net fiscal impact per immigrant household at state level varies between -$1000 and -$3000.

9 Varies by state and different demographic/behavioral assumptions used.

10 The study reports revenues and costs for other levels of government as well.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

choice of government perspective will change the conclusions of the study; the characteristics of the specific new population considered will also change the outcomes.

Our first condition for population growth to be fiscally neutral is that expenditures on pure public goods and on public debt be zero. If these expenditures are positive, we conclude that population growth has a positive fiscal impact, all else being equal. Of course, these expenditures are positive. The studies in Table 2-22 treat these "fixed" public expenditures in one of two ways. They either ignore fixed public expenditures altogether, implicitly assigning zero benefit from immigration for these categories and thus biasing downward the impact estimate. Or they assign the per capita expenditures on these items as costs rather than benefits, which leads to an even larger negative bias. None of the studies attempt to calculate the benefit derived from immigration in "diluting" the base of payment for these pure public goods, even for major categories of expenditures as the debt, national defense, current Social Security transfers, 21 science research, and so on. How these benefits ought to be dealt with depends on which perspective the researcher takes and the level of government considered. It is obviously legitimate for a study on the county-level fiscal impacts of immigration to exclude the "dilution" benefit from federal programs. Nevertheless, some attempt should be made to estimate to what extent the goods and services provided by the county are pure public goods and count the effects appropriately. Some of the confusion would be eliminated if studies used marginal costs rather than average costs. The studies uniformly prefer the former, perhaps in order to maintain tractability.

Although they do not explicitly consider returns to scale (our second neutrality condition), these studies focus exclusively on the direct effects of immigration on government finances, ignoring the indirect effects, especially the impact of immigrants on the income of the original population. Huddle's two studies (1993, 1994) are the exception. He estimates the number of native workers "displaced" by immigrants from their jobs and then calculates how much this unemployment would negatively impact government finances.22 All of the studies, including Huddle's, ignore the possibility that immigration might expand the job opportunities for natives in the long run, perhaps by new business creation, increased specialization, or a demand effect. In effect, they ignore the possibility that increasing returns to scale might hold. Of course, the empirical question of whether there are positive scale economies present in the American economy that can be exploited with immigration, or negative scale economies that suffer with

21  

Because U.S. residents must work 40 quarters to qualify for Social Security benefits, the current costs of Social Security are "fixed" from the perspective of newly arrived immigrants (see Simon, 1989).

22  

Passel (1994) vehemently attacks Huddle for ignoring or misreading the literature on the effects of immigration on native workers.

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

the increased population, is unresolved. Nevertheless, as our framework suggests, these effects are likely to be important in the calculation of fiscal impact.

Our neutrality proposition is also violated if the new and old populations have differing consumption and savings patterns. These seven studies attempt to estimate the effect of differing consumption patterns, but none discuss savings behavior. Remittances are discussed as a loss of sales and excise tax revenue. Taxes on immigrant-owned businesses are completely ignored. Although these studies do try to distinguish immigrant and native consumption patterns, they are less careful about distinguishing between immigrant groups. Several of the studies on illegal immigration assume that immigrants consume their income in the same way as other, more easily observable, legal immigrant demographic groups. Parker and Rea (1993), however, conducted a small-scale survey of illegal immigrants in San Diego County that includes questions about their consumption patterns. Unfortunately, because the illegal immigrants are identified mainly through their workplace, the sample chosen by Parker and Rea is not likely to be representative. Without better data, future fiscal impact studies of illegal immigration are likely to find this problematic as well.

All the studies, in at least some of their calculations, assume that immigrants and demographically similar elements of the native population share the same propensity to use government services. This is particularly true when calculating immigrants' share of the costs of public schools, where per pupil costs are generally assumed to be the same as for natives. Rothman and Espenshade (1992) find the same assumption in all of the fiscal impact studies that they review. The only exceptions are again Huddle's two studies, which include the costs of bilingual education. None attempt to estimate crowding externalities induced by large influxes of immigrants on the use of these public services. It seems reasonable to guess that including the correct marginal costs and allowing for crowding externalities would increase the estimate of the fiscal costs. However, this omission could bias the results in either direction and may depend on the precise immigrant group being considered (due to language, culture, and socioeconomic differences).

Ultimately, a serious shortcoming of these studies is the static model used for calculation. All existing studies ignore some critical intertemporal effects that impinge on how certain taxes and transfers should be counted. As our framework demonstrates, the current and future period effects could have opposing impacts on the fiscal costs and benefits of immigration. Many of the elements discussed in our synthesis have a dynamic component that should not be ignored. For example, education expenditures on immigrant children are invariably counted as a cost in the accounting schemes of the various papers. However, they are also an investment designed to make the young generation more productive in the future. Thus, the extra education expenditures result in future higher fiscal inflows that should be counted in the analysis at an appropriate discount rate. Another prominent example is payroll taxes, such as FICA, which is used to finance Social

Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
×

Security, that are left completely out of most of the studies. If these taxes are viewed as forced savings for retirement, then their omission from the analysis is justified. Alternatively, if, as we argue, they are intergenerational transfers from the middle-aged generation to the elderly generation, then the effect of the new population on these fiscal revenues and expenditures should be accounted for in some manner. Finally, the focus on consumption ignores the role of savings and its potential impact on future revenues, especially if they help the economy to grow in the future.

Clearly, there is much work left to be done to acquire accurate estimates of the fiscal impacts of immigration at any level of government. Many gaps exist in our basic knowledge of the economic behavior of immigrants, both legal and illegal. This chapter seeks to improve our understanding of the theoretical underpinnings of fiscal impact calculations. In doing so, it potentially provides a road map of the necessary future steps for empirical research.

ACKNOWLEDGMENTS

This project was undertaken at the request of the Commission on Behavioral and Social Sciences and Education of the National Research Council (NRC). We gratefully acknowledge support from National Institutes of Health (NIH) grant HD32055-02. Opinions stated in this document are those of the authors and do not necessarily represent any official position or policy. We benefited greatly from Margaret O'Brien-Strain who helped us extensively with both the ideas and the editing of this chapter. Selen Opcin also provided editing assistance.

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Suggested Citation:"2 An Economic Framework for Assessing the Fiscal Impacts of Immigration." National Research Council. 1998. The Immigration Debate: Studies on the Economic, Demographic, and Fiscal Effects of Immigration. Washington, DC: The National Academies Press. doi: 10.17226/5985.
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The New Americans (NRC 1997) presents an analysis of the economic gains and losses from immigration--for the nation, states, and local areas--providing a scientific foundation for public discussion and policymaking. This companion book of systematic research presents nine original and synthesis papers with detailed data and analysis that support and extend the work in the first book and point the way for future work. The Immigration Debate includes case studies of the fiscal effects of immigration in New Jersey and California, studies of the impact of immigration on population redistribution and on crime in the United States, and much more.

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