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    Economics

    Review of Economic Policy

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    Review of Economic Policy


     Oxford Review of Economic Policy, Volume 24,

    Number 3, 2008, pp.560–580 The fiscal impact of immigration on the advanced economies Robert Rowthorn∗ Abstract This paper is concerned with the advanced economies. It begins with a discussion of the demo- graphic issues that have played such a large role in the debate on immigration. This is followed by a section on the main problems involved in estimating the fiscal impact of immigration and then a summary of the international evidence on this topic, mostly from Europe and America. Separate sections on the UK and on low-fertility countries follow. The main conclusions are as follows. Highly skilled migrants normally make a large fiscal contribution, whereas unskilled migrants are likely to impose a net cost on native taxpayers if they settle in the receiving country. However, even unskilled migrants may be net contributors if they eventually depart and make few claims on government expenditure while in the country. Most empirical studies find that the fiscal contribution of the immigrant population as a whole is quite small. The positive contribution of some migrants is largely or wholly offset by the negative contribution of others. This finding holds across a variety of countries and methodologies. Estimates of the net fiscal contribution of immigration normally lie within the range

    1 per cent of GDP. There are a few exceptions, but these refer to countries experiencing demographic collaps±e and they are based on unrealistic assumptions about the inter-generational allocation of future taxes and government expenditure. With more realistic assumptions, the overall fiscal benefit of immigration is quite small, even in these countries. These findings suggest that, in general, there is no strong fiscal case for or against sustained large-scale immigration. The desirability or otherwise of large-scale immigration should be decided on other grounds. Keywords: migration, taxation, ageing, generational accounting JEL classification: F22, H69, J11 I. Introduction Many advanced economies have experienced an upsurge in immigration over the past 40 years. The scale of this inflow has led to popular unease about its long-run implica- tions. It has also stimulated a debate about the costs and benefits of immigration for local taxpayers. In this debate, those who are worried about immigration have tended to emphasize its negative implications, such as welfare dependency among certain types of immigrant, es- pecially those from poorer countries. Conversely, the supporters of immigration have stressed ∗King’s College, Cambridge, e-mail: rer3@econ.cam.ac.uk doi: 10.1093/oxrep/grn025 C The Author 2008. Published by Oxford University Press. For permissions please e-mail: journals.

    depart at the agreed time.

    There would be leakages as supposedly temporary migrants found ways to settle permanently in the country, by marrying locals or by using human-rights law to obstruct enforcement of the rules. In some cases, temporary migration is a spontaneous process that occurs without any formal programme, in which case the issue of enforcement does not arise. For example, many Polish migrants are now voluntarily returning home after spending a year or two in the UK. The fiscal impact of temporary migration depends on a variety of factors in addition to its impact on the age structure. These include the skills of the migrants, their ability to find work without displacing local workers, the taxes which they and their employers pay, and the entitlements of migrants and their dependants to welfare benefits and government services. A government seeking to maximize the fiscal benefit from temporary migration would severely restrict entitlements and impose special levies on migrants or their employers. Dependants might be denied welfare benefits or be made to pay over the odds for public services that are normally free or heavily subsidized. Migrants leaving the country might be denied public pensions to which they have contributed through taxation. Migrants (or their employers) could be forced to purchase permits for entry into the country. There are clearly limits to the application of such methods. Inward migration is mostly voluntary and if the fiscal regime is too harsh, potential migrants will either stay at home or go to another country. Even so, global income disparities are so great that there is a large pool of potential migrants who would be willing to accept a harsh fiscal regime as the price of finding work in such rich areas as Europe or North America. Many people in liberal democracies would regard such an approach to migrant labour as unacceptable. They would regard it as a breach of human rights for governments to discriminate so blatantly by imposing much harsher fiscal conditions on migrants than those faced by native workers. The fact remains, however, that the more generously migrants are treated by the receiving country the less incentive there is to allow them entry. This is part of a wider discourse on migrant rights which is beyond the scope of this paper to explore. For a general discussion of this topic the reader is referred to Ruhs and Martin (2008).

    (iii) Fertility Another alternative to permanent immigration is a higher birth rate. This also leads to a larger and younger population.

    UN projections for the period 2005–50 imply that, for each 1 per cent extra population owing to higher fertility, the old-age dependency ratio falls by 0.64 per cent 3 in Western Europe and 0.75 per cent in the USA by 2050. The fiscal implications of higher fertility are broadly similar to those of permanent immi- gration, although there are differences which might be important under certain conditions. For example, newly born children will take many years before they start to pay taxes and in the meantime will be a net burden on government finances. In contrast, immigrants are mostly of working age when they arrive, and provided they can find work without displacing natives they will soon make a fiscal contribution. However, many of the immigrants will have a rel- atively short working life in the receiving country and their cumulative tax contribution will be less than that of an equivalent native. Consider, for example, an immigrant who arrives at the age of 25 and works continuously until 60. This represents 35 years of working life in the 3 These estimates are derived by comparing the low- and high-fertility variant projections in WorldPopulation Prospects, 20The fiscal impact of immigration on the advanced economies 565 congenial. Both of these effects may be fiscally beneficial to natives who remain behind. The young immigrants may generate a fiscal surplus because they have a long working life ahead of them, whereas the departure of older people may reduce the demand for public expenditure on expensive items such as health and elder care. Although potentially important, the causal link between immigration and emigration is normally ignored in the literature on the fiscal impact of migration.

    (ii) Native displacement Empirical studies of fiscal impact normally assume that native employment is unaffected by the inflow of immigrant workers.

    The evidence in support of this assumption is mixed. Many empirical studies find that the employment effects of immigration are small or of very 4 short duration, and this has become the conventional wisdom in academic circles. However, there are also reputable studies which find that the impact may be large and/or of quite long duration. In their analysis of unemployment in the European Union, Angrist and Kugler (2003) estimate that, for each 100 male immigrants, there is a loss of between 35 and 83 male native jobs. These estimates are based on statistically significant coefficients. Using census data for the UK and the ‘difference in differences’ method, Dustmann etal. (2003) estimate that 23–60 5 native jobs are lost for each 100 immigrants. These estimates are also based on statistically significant coefficients. However, using data from the Labour Force Survey,

    Dustmann et al. (2003, 2005) find smaller and less significant effects.

    The issue of duration is explicitly addressed in an OECD working paper by Jean and Jime´nez (2007). They find that immigration has no permanent effect on native employment, but it may have a large transitory effect lasting for some years. Their exact words are as follows: Our estimates do not find any permanent effect of immigration, measured as the share of immigrants in the labour force, upon natives’ unemployment. An immigration inflow leaving unchanged the share of immigrants in the labour force does not even influence unemployment in the short run. Still, we find significant evidence of a transitory and delayed impact on unemployment of changes in the share of immigrants. The impact is weak when measured at the skill level: natives with skills most similar to those of immigrants do not suffer from a strong rise in their unemployment rate relative to other categories of natives. At the aggregate level, however, the transitory impact may be substantial; itsmagnitude and duration largely depends on the persistence of unemployment shocks,and itmay lastbetweenfiveand tenyears. (paragraph 37, italics added) Five to ten years is a long time and it refers to a once-and-for-all rise in the share of immigrants in the national labour force. The share of immigrants in many European countries is currently rising and is likely to rise for some decades. If Jean and Jime´nez are correct, this will have07Revision (UN, 2007). Downloaded from https://acadeThe fiscal impact of immigration on the advanced economies 569 Using a similar framework, Lee and Miller (1998) estimate the net fiscal contribution of all existing immigrants and their concurrent descendants in the USA in 1994. This group constituted 15.5 per cent of the national population, and between them they provided a fiscal surplus equal to $23.5 billion, or 0.35 per cent of GDP. This estimate is based on the favourable assumption that none of the cost of debt interest and ‘public goods’ is allocated to the immigrant community. Public goods are defined as national defence, expenditures on veterans, and research on health, science, space, and technology. If this assumption is substantially modified, the immigrant contribution becomes negative. In a later paper Lee and Miller (2000) estimate the effect of raising net immigration into the United States by 100,000 per year while maintaining the age and skill composition of the current stream. Taking federal, state, and local taxes and expenditure into account, the overall fiscal impact is initially negative but gradually becomes positive after about 20 years as the children of immigrants enter the labour market. However, the beneficial effect is never more than 0.4 per cent of total tax revenue. The authors conclude that ‘the overall fiscal consequences of altering the volume of immigration would be quite small and should not be a consideration for policy’ (Lee and Miller, 2000, p. 353). Auerbach and Oreopoulos (2000) use a dynamic model to estimate the fiscal impact of halting all further immigration into the United States. The answer depends on a number of factors, of which the most important are the treatment of defence expenditure and the allocation of the fiscal burden across generations. On one set of assumptions, the ending of immigration would produce a bonus equivalent to an immediate proportionate reduction in all 8 taxes of 3.8 per cent and a similar increase in all transfers. On another set of assumptions, the ending of immigration would mean an additional burden in the form of a 1.9 per cent increase in the taxes paid by future generations and a similar reduction in transfers. These amounts are equivalent to a gain equal to

    1.5 per cent and 0.8 per cent of GDP respectively. The above estimates refer to im+migration as a wh−ole. There are also a number of estimates referring to the impact of particular types of immigration. Smith and Edmonston (1997, ch. 6, Tables 6.3 and 6.4) estimate that the average native-headed household in California in 1996 paid $3,611 more in taxes than it received in government expenditure. This fiscal surplus includes all local, state, and federal taxes and expenditure except for defence. For households headed by an immigrant from Latin America the figure was $7,206 and for all other identified immigrant groups it was positive. The study also provi−des estimates for

    New Jersey that are broadly similar. Smith and Edmonston

    (1997, ch. 7, Table 7.5) use a dynamic model to estimate the impact of future immigration by education level. The NPV of the average immigrant is equal to $80,000. The corresponding figures by educational level are as follows: less than high school, $13,000; high school, $51,000; more than high school, $198,000. A striking feature of −these results is the distinction between first-generation immigrants and their descendants. In all cases, the descendants generate a large fiscal surplus, but in the lower categories the first-generation immigrants pay less in tax than they absorb in government expenditure. For example, first-generation immigrants without a high-school education have an NPV equalmic.oup.com/oxrep/article-abstract/24/3/560/365230 by Western Sydney University Library user on 05 November 2017

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