In my latest TaxBytes column for the Dallas-based Institute for Policy Innovation, titled “Higher Immigration Will Reduce the Federal Deficit,” posted on February 28, I wrote:
Almost all the news is bad. But there’s one little bit of good news in the CBO’s February report. The CBO’s economists estimate that because of higher immigration, growth of real GDP will be higher. Specifically, says the CBO:
Most of the increase in the projected population reflects larger net immigration. That greater immigration is projected to boost the growth rate of the nation’s real gross domestic product (GDP) by an average of 0.2 percentage points a year from 2024 to 2034, leaving real GDP roughly 2 percent larger in 2034 than it would be otherwise.
This higher real GDP generates more tax revenues than otherwise. How much more?
Here’s what I wrote:
With higher growth, of course, come higher tax revenues, although reading the CBO’s report is like looking at the output of a black box. CBO Director Phill Swagel elaborated on the effect of immigration earlier this month. He stated:
The labor force in 2033 is larger by 5.2 million people, mostly because of higher net immigration. As a result of those changes in the labor force, we estimate that, from 2023 to 2034, GDP will be greater by about $7 trillion and revenues will be greater by about $1 trillion than they would have been otherwise. We are continuing to assess the implications of immigration for revenues and spending.
I took Swagel’s word for it, but it’s hard to believe that an additional $7 trillion in output yields only an additional $1 trillion in federal revenues. My back-of-the envelope calculations suggest a much higher effect on federal revenues.
Here’s my thinking.
The marginal federal tax rate on that higher GDP is probably about 40 percent. If that sounds high, remember that we have not just federal income taxes, but also payroll taxes of 15.3 percent on most earned income and a corporate income tax rate of 21 percent. So 40 percent sounds plausible. And certainly 30 percent is on the low end. So the added tax revenue should be at least 30 percent of $7 trillion, which is $2.1 trillion.
You might say that more immigrants mean more government spending and that could well be true. But the CBO is saying that revenues will be $1 trillion higher.
READER COMMENTS
Oscar Cunningham
Mar 1 2024 at 8:04am
One weird thing is that it’s possible for RGDP per capita to fall even if both the immigrants and the natives are more productive than they would be without the migration. This is because immigrants typically earn less than natives, so you get an instance of Simpson’s Paradox.
Vivian Darkbloom
Mar 1 2024 at 9:01am
“You might say that more immigrants mean more government spending and that could well be true. But the CBO is saying that revenues will be $1 trillion higher.”
Good of you to put that in there. The revenue estimate is, as is usual for the CBO, restricted to a 10-year window. Isn’t most federal spending for those new entries to the workforce outside the 10-year window?
Also, the historical data seems much closer to the CBO estimate than your estimate:
https://fred.stlouisfed.org/series/FYFRGDA188S
That series shows that the historical average has been recently hovering between 16 and 17 percent. I calculate the CBO estimate at about 14.3 percent of GDP.
Thomas L Hutcheson
Mar 1 2024 at 9:57am
We should be thinking on the margin, not the average.
Vivian Darkbloom
Mar 2 2024 at 5:55am
Thomas,
See my response to David, below, which addresses this issue.
Again, the US economy does not have a “marginal tax rate”. The economy is made up of millions of individual and corporate entities that *are* subject to a marginal tax rate. One may compute a country’s *average* marginal tax rate, but this being the average of each individual player in the economy–the country, as such, is not itself subject to one so we can only speak of collective averages.
If you want to think “on the margin”, and you should, then I think the proper marginal analysis is to view each new immigrant as adding at “the margin”. Then, ask yourself, what effect do these new immigrants have, individually and collectively on revenues using *their estimated marginal rates”. If you wish, you can also use this to compute the country’s average marginal tax (rate) and marginal spending.
If we add large numbers of immigrants, particularly those flooding (jaywalking!) the southern border illegally, their *individual, and collectively marginal*, tax rate will almost certainly be lower than the existing population. This brings a country’s average marginal tax rate lower, not higher, in the only sensible way to look at it. That is, I believe, the serious flaw in Henderson’s “back of the envelope” marginal tax estimate on revenues.
I’m not going to get emotional and accuse you of discounting the inherent humanity of immigrants (even those who break the law to enter and remain in the country–that would be intellectually dishonest and besides the point, and, dare I say, “beneath contempt”). Rather, I understood your comment below to refer to the “value” in the sense of the net contribution to the economy (revenues minus spending). The subject of this post was, after all, the effect of increased immigration on the federal debt, not the inherent humanity of individual immigrants. As it stands, even with the existing population, the majority of that population, on net, are adding to the debt. Simply indiscriminately adding more immigrants isn’t going to solve that *structural* problem, but make it worse. What I think you were hinting at, and please correct me if needed, is absent correcting that, the only way to improve this calculus is to select for the most productive immigrants. That can only be done in a legal and enforceable immigration system, not one that is de facto “open borders”.
steve
Mar 1 2024 at 11:21am
Agreed. Those were the numbers I was thinking. Just as an example corporate income tax now amounts to about 1.6% of GDP (actual tax rate paid is about 9%) and is projected to drop to 1.4% of GDP by 2033. IIRC income tax is about 9% of GDP and payroll tax is about 6% of GDP.
https://www.pgpf.org/blog/2023/04/six-charts-that-show-how-low-corporate-tax-revenues-are-in-the-united-states-right-now
Steve
Vivian Darkbloom
Mar 1 2024 at 12:49pm
Yes. For a variety of reasons, total US gross income, much less net taxable income, for federal income tax purposes does not come close to US GDP. To cite another reason as regards to wages, federal employer contributions to social security and medicare are deductible for corporate income tax purposes. Then we have re-invested “income”, which reduces *taxable income* to a great extent, but investments are included in GDP. Add to that the fact that a large portion of wages (legally) escape federal income tax altogether (time to dust off that JCT “tax expenditures” report!). If you assume the marginal tax rate on all these levels on *gross accounting income*, your estimate is bound to be pretty far off, particularly for new immigrants who tend to be at the lower end of the income scale. Finally, what about the tax gap?
A standard letter envelope is not sufficient for this—what you need is a large catalog envelope (at least). The CBO seems to have a pretty good stock of them…
TMC
Mar 1 2024 at 1:41pm
“Isn’t most federal spending for those new entries to the workforce outside the 10-year window?”
<p>Much of it is not. First example is public school. A family with 2 kids will cost taxpayers $25k a year for each of those 10 years. And no, there is no way that family is paying that much in local taxes to pay for that. Most of the immigration we have today, legal + illegal combined, will never pay for themselves.</p>
Vivian Darkbloom
Mar 1 2024 at 8:46pm
That may be true for the state and local government budgets, but Henderson was talking about the *federal* debt. The largest cost for those immigrants would be for Medicare and Social Security (both big net lifetime budget busters at the echelon of new taxpayers), although I concede that they may well cost a lot currently due to the federal part of Medicaid, etc.
David Henderson
Mar 1 2024 at 6:48pm
You write:
That’s an average. My discussion is of the marginal. Big difference.
Vivian Darkbloom
Mar 1 2024 at 8:42pm
David,
The country as a whole does not have a marginal tax rate. Individual taxpayers and, to a lesser extent, corporate taxpayers do. (Please point me to the place in the tax code where that rate can be found). If we bring in lots of immigrants whose individual marginal tax rates are lower than the existing average for the country, the so-called average tax rate for the country would tend to go *down* rather than up, even though total receipts would rise. That could explain why the CBO’s estimate is slightly lower than the recent average.
This is just simple arithmetic and to some extent common sense. If you look at the history of US population growth and the growth of GDP over the last few decades you will see that the tax take as an percent of GDP has been amazingly constant. If you idea that a country has a marginal tax rate would be correct, one would see a very large increase in the *average* rate of tax because the marginal rate would be steadily increasing. Why have we not seen that?
So, somehow, the CBO got this all wrong?
See, below, the comment of Thomas Hutchinson. I think he understands the basic principle here.
Vivian Darkbloom
Mar 1 2024 at 8:51pm
The problem the US has is not the lack of a growing population (the US has one). The problem is structural. Unless one is willing to cut structural entitlements and other spending, or massively raise taxes for *everyone* each new immigrant at the low end or even the middle of the totem pole will exacerbate the problem, particularly in the medium and long-term rather than help it.
Monte
Mar 2 2024 at 12:37am
A recent report by Heritage Foundation’s Robert Rector appears to support this view. In part:
Any tax revenues realized resulting from GDP growth due to higher immigration will be offset significantly by these costs.
Source: The Net Fiscal Costs of Low-skilled and Illegal Immigration for the U.S. Taxpayer
Disclaimer: I’m taking this report’s figures at face value, as I cannot attest to the quality of the research.
Thomas L Hutcheson
Mar 1 2024 at 10:01am
Think how much GREATER the RGDP and revenue effects would be if we were recruiting the most valuable immigrants. [Yes, that also implies expending some resources in deterring the less valuable immigrants.]
Immigration should be thought of as public investment with a very high rate of return.
Jose Pablo
Mar 1 2024 at 11:20pm
the less valuable immigrants.
How do you “value” a person? (don’t trust everything that you hear, immigrants are also “persons”)
In this “individual valuation” of yours, do you take past performance in country A as the predictor of future performance in country B? (that’s a well-known mistake in finance. Maybe it is also a mistake in “immigrant’s valuation”)
In this “individual valuation” of yours, do you take into account the “destination” of the immigrant? A “more valuable” immigrant heading to Puerto Rico to work in a low productivity industry could be “less valuable” that a “less valuable” immigrant heading to San Francisco to work in a high productivity industry.
In this “individual valuation” of yours, do you take a “Ricardian” approach and estimate also the “value” of the “less valuable immigrants'” descendants (which could be large) or the “disvalue” of the “more valuable immigrants'” descendants (that could become serial killers)?
Who would be in charge of carrying out this complex valuation of “individual value”?
Jose Pablo
Mar 2 2024 at 1:23am
expending some resources in deterring the less valuable immigrants.
Why? After allowing in all the “valuable immigrants” you can find, allowing the “less valuable immigrants” will also increase RGDP (and have a positive revenue effect). Once all the “valuable immigrants” are in, letting in the less valuable immigrants will still be positive “at the margin” (which, as you are well aware, should be the criteria).
Your whole reasoning seems to be as flawed as the dream of reason monster of your “immigrant valuation” proposal.
Monte
Mar 1 2024 at 12:05pm
Robert Rector (Senior Research Fellow – Heritage Foundation), in his testimony before the U.S. Senate Committee on the Budget (9-13-23) stated:
Concluding remarks:
I sincerely appreciate any comments you might have in response (I’m taking Mssr. Rector’s conclusions at face value, as I cannot attest to the quality of his research).
Source: The Net Fiscal Costs of Low-skilled and Illegal Immigration for the U.S. Taxpayer
Neil Munro
Mar 2 2024 at 2:44am
You should consider the other half of the CBO report: lower wages and slower productivity growth.
That should trim the government’s profit.
You could also go back and read the National Academies report.
See here: https://www.breitbart.com/immigration/2024/02/09/congress-joe-bidens-migration-cuts-u-s-wages-and-workplace-investment/
Yours, etc.
Cyberike
Mar 3 2024 at 2:19pm
Forget all this GDP – marginal tax rate BS. Illegal immigration saves me money, period. Here in Houston it costs me about 7 k for a new roof, 25 bucks a week for lawn service, 75 bucks a week for housecleaning, ad infinitum. This saves me thousands of dollars a year in real money, while all that other stuff about tax expenditures don’t cost me a dime.
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