Deck 10: Fiscal Effects

Question 1

What are the fiscal costs and benefits of immigration? At what level of government (federal, state or local) do they occur?

Answer 1

Costs of immigration for the government can entail cash and in-kind transfers in addition to publicly provided services. Cash transfers include cash welfare and government-funded retirement benefit programs (like Social Security in the United States), while in-kind transfers include public education, subsidized health insurance, food stamps and public housing. In the United States, public schools are required to provide K-12 education and medical providers to provide emergency medical care regardless of people's legal status. These costs occur at all three levels of government (federal, state and local), but tend to be disproportionately felt at the state and local level. In particular, public education and emergency medical care tend to be funded at the state and local level.
The fiscal benefits of immigration are tax revenues from immigrants. These tax revenues are received by all levels of government via income, payroll, retail sales and property taxes.
Other less obvious costs and benefits pertain to the provision of public goods. On the one hand, immigrants lower the per capita costs of pure public goods, such as national defense and interest on government debt. Meanwhile, they can increase congestion costs on public goods such as roads, sewers, law enforcement, libraries, and airports. Pure public goods tend to be provided by the federal government, while congestible public goods tend to be provided by state and local governments.

Question 2

What is the difference between attributing public goods as average costs versus marginal costs in the accounting of the fiscal costs of immigrants?

Answer 2

It is important to distinguish between types of public goods in terms of calculating marginal and average costs. For pure public goods, like national defense and interest on government debt, the marginal cost of adding an immigrant is zero since this type of public good can be used by an unlimited number of residents. The average cost of pure public goods is positive, but it actually decreases per capita as immigration increases since these fixed costs are then spread over a larger population.
This is not the case for congestible public goods. Congestible public goods need to be provided in greater amounts at some point as the size of the population increases-these goods become congested as more people use them, so the government may need to provide more of them as immigration increases. Such goods include roads and other infrastructure, law enforcement, education, health care and labor market programs. Immigration can cause the average cost of congestible public goods to increase or decrease depending on the change in the population relative to the change in costs. The marginal cost of congestible public goods from adding an immigrant may be zero or positive. It is positive when immigrants cause the society to hit the congestion point when it has to provide more of the public good.

Question 3

How does the net fiscal cost of immigrants change with future generations? Why is the fiscal impact of recent U.S. immigrants larger than of all U.S. immigrants?

Answer 3

Most U.S. states incur net fiscal shortages from first-generation immigrant-headed households. First-generation immigrants tend to be younger, have lower incomes and have more dependents than later immigrant generations, on average. However, there is considerable variation among first-generation immigrant households across states due to differences in immigrant demographics and state policies regarding taxation and government programs.
Many of the states where costs exceed benefits are relatively new destination states for immigrants, such as Colorado, Minnesota, Utah and Washington, and may be more likely to have young families with children in school. Nine states have net fiscal benefits, including some with small immigrant populations, such as Mississippi, Montana, North Dakota, West Virginia and Wyoming. Much of the state level variation is likely due to the number of dependents per household and the average household size.
By the second generation, education costs become a positive return on investment and the vast majority of states have second-generation immigrant-headed households paying more in taxes than they receive in public services. Second-generation immigrants experience intergenerational mobility, become more successful than their parents and often more successful than third-plus generation households.
The fiscal impact of recent U.S. immigrants is larger than all U.S. immigrants because there are more highly educated immigrants in recent cohorts, so the fiscal impact of recent immigrants is a larger positive number than for all immigrants. Second, fiscal benefits are larger for immigrants with more education, who rely less on social programs and pay more in taxes.

Question 4

Explain the difference between static and dynamic methods in estimating fiscal impacts. Which one is more likely to indicate that immigrants are a fiscal cost if immigrants arrive at age 5? At age 25? At age 65? Why the differences?

Question 5

How does the long-run net fiscal impacts of immigrants vary across education? Using this information, how could government set policy if maximizing fiscal benefits was its primary goal?

Question 6

What does the $726 indicate in Table 10.1? That is, interpret this number. Is this surprising to you?

Question 7

Why might unauthorized immigration be a net fiscal contributor to the U.S. Social Security system?

Question 8

Do immigrants strain the welfare system in the United States? In Europe? Why or why not?

Question 9

What policies have countries implemented to reduce the fiscal costs associated with low-skilled immigrants? What other policies could they implement?

Question 10

Suppose a country reduces income tax rates in the future. What impact would that have on the net fiscal contribution of immigrants over their lifetimes, assuming nothing else changed?

Question 11

What would be the fiscal impacts if a country administered a major amnesty program that legalized millions of undocumented immigrants? Discuss the various effects on tax revenues and specific types of government expenditures.