Low-skilled immigrants have low wages and therefore do not pay much in taxes, but they use some government services, including education for their children. What is the net budgetary impact? The National Academy of Sciences carried out a detailed scenario analysis by examining the impact over 75 years, therefore including the second and third generations. Overall, the ENA concluded that the net fiscal impact of the average immigrant was positive. The impact, however, was negative for immigrants with only a high school diploma and even more so for immigrants without a high school diploma.
Two recent articles qualify this conclusion. The NAS study estimated the direct fiscal effects of an immigrant: what do they pay in taxes and what do they get in services? Immigration, however, has indirect effects on the native-born population. In the The case for eliminating borders I wrote:
The immigrant who mows the nuclear physicist’s lawn indirectly contributes to unlocking the secrets of the universe.
More prosaically, low-skilled immigrants can complement the higher-skilled local workforce, thereby increasing local productivity. Go to any good restaurant in Washington, DC, for example, and you’ll usually see a native born in the front of the house and a Mexican born in the back of the house. As Tyler recently joked over lunch, all restaurants in the United States are Mexican restaurants, only the type of food they make changes. The ability to hire Mexican cooks increases the number of restaurants as well as opportunities and wages for the native-born. Higher native wages mean higher taxes, so there is a beneficial indirect fiscal effect of low-skilled immigration.
A recent article from Colas and Sachs, The indirect benefits of low-skilled immigration finds that, under plausible assumptions, the indirect effects are large enough to make the net effects of immigration positive for almost all U.S. immigrants.
My excellent colleague Michael Clemens does another similar point on capital. When a profit-maximizing firm hires more labor, it also hires more capital. Capital pays taxes. Thus, immigration increases taxes paid on capital and when we add this indirect effect to the calculation, it also shows that the net fiscal impacts of low-skilled immigration are plausibly positive.
The tax advantages of low-skilled immigration are not a major reason to support low-skilled immigration, but the new literature on indirect effects should allay one concern.
It is important to recognize that tax benefits arise from low-skilled immigrants being in paid employment. The United States excels at integrating people into the job market. We need to keep this in mind when thinking about labor policy, including minimum wage, professional licensing, e-verification, access to banking, education and driver’s licenses, etc. . We could easily turn tax benefits into tax costs by making it harder for immigrants (and workers in general) to employ themselves. Employing immigrants benefits both them and native citizens. The opening of American markets plays a central role in this success. Let’s continue like this.
