Richwine on the Net Fiscal Effect of Low-Skilled Immigrants
In Open Borders, I heavily rely on the National Academy of Sciences report on The Economic and Fiscal Consequences of Immigration to estimate the net fiscal effect of immigration. Recently one of my graduate students pointed out this post by Jason Richwine criticizing my interpretation of the results.
Among dropouts, immigrants in the 25-64 and 65+ age categories are clearly fiscal burdens, as they cost taxpayers $225,000 and $257,000, respectively. Caplan, however, is tantalized by the age 0-24 column, which shows positive $35,000. “Even young high school dropouts more than pull their weight,” he concludes.
That conclusion is based on a misunderstanding of the table. Among immigrants in the age 25-64 and 65-plus columns, the education rows refer to the education of the immigrants themselves. However, in the age 0-24 column, education refers to the education of the immigrants’ parents. As p. 464 of the National Academies’ report explains, “If the immigrant arrives before age 25, we instead predict a future education level … based on parental education.” The reason the fiscal impact appears positive is that the model assumes that the children of high school dropouts will get more education than their parents did. In other words, most of Caplan’s “young high school dropouts” are not dropouts at all.
Richwine concludes in a gentlemanly manner:
This is an understandable mistake, as the National Academies authors should have been clearer that the age 0-24 column has a different interpretation than the other two age columns. Nevertheless, Caplan’s misinterpretation has led him far astray.
Did I indeed misread the report? Yes. Volume editor Francine Blau connected me with Gretchen Donehower, one of the authors of the section, and she confirmed my mistake.
Here’s the relevant NAS passage:
Because an individual’s tax payments and benefit receipts differ so much by the individual’s educational attainment, to predict future flows for an immigrant one must first predict the educational level that individual and his descendants will attain. An immigrant who arrives after age 25 is likely to maintain the education level observed on arrival, so we assume no change in educational attainment after age 25. If the immigrant arrives before age 25, we instead predict a future education level by estimating regression functions that predict offspring education based on parental education.
In hindsight, I was always a little puzzled by the NAS tables. What does it mean, after all, to report the net fiscal impact of a 10-year-old college graduate? I was also somewhat puzzled by how young immigrants could have such a favorable fiscal effect when taxpayers are immediately paying massive sums to educate so many of them. But I deferred to the NAS numbers instead of double-checking the text. I did read the whole chapter, but this qualification failed to register. Mea culpa.
In light of Richwine’s correction, here is my revised position on the NAS report.
1. Young immigrants (ages 0-24) whose parents are high school dropouts have a positive net fiscal effect.
2. But the dropout parents themselves generally have a negative effect, even if they arrive as young adults.
3. Even 25-year-old immigrant high school dropouts have a negative net fiscal effect (-$186,000), though 25-year-old immigrant high school graduates have a positive net fiscal effect (+$72,000).
I continue to stand by several closely related controversial claims, most notably:
1. Immigrants have a much more favorable fiscal effects than matching natives. The table showing that 25-year-old immigrant dropouts have a net fiscal effect of -$186,000 also shows that 25-year-old native dropouts have a net fiscal effect of -$388,000!
2. If you consider this an inadequate basis for restricting the reproduction of natives, it is hard to see why it is an adequate basis for restricting the migration of foreigners.
Last point: If there is a second-edition of Open Borders, I’ll definitely fix the mistake and thank Richwine for pointing out my error.
HT: Simon Laird
Nov 18 2020 at 11:24am
And of course, there’s always keyhole solutions.
Nov 18 2020 at 11:42am
So, if the net fiscal effect of 25-year-old natives is negative, the U.S. should import more 25-year-old immigrants to enhance the net fiscal effect of natives?
Nov 18 2020 at 2:28pm
No, they’re separate things. It’s like saying if you lost $100 last week then you should pick up the $100 you found on the sidewalk.
Nov 18 2020 at 12:00pm
In our area most of the lawn/yard care company personnel are Hispanic. When we have used on-demand maid services, the women who come are also Hispanic. These folks are earning salaries and paying taxes. I doubt they are college graduates.
Nov 18 2020 at 2:56pm
If the negative factors are anywhere near correct, I suspect it is a function of screwed up policies rather than the immigrants themselves. The ones I know have a work ethic almost unavailable from natives. Much of the open borders rhetoric is severely flawed. This criticism is flawed in another direction.
Nov 18 2020 at 3:00pm
“If you consider this an inadequate basis for restricting the reproduction of natives, it is hard to see why it is an adequate basis for restricting the migration of foreigners.”
Is it REALLY?
Nov 18 2020 at 3:26pm
Slightly off topic, but I just wanted to leave a comment commending you for openly taking the criticism, acknowledging the mistake, apologizing, and committing to making a correction in a public fashion.
It shouldn’t be, but this is all-too-rare so I think it’s worth highlighting when it happens. Kudos to you.
Nov 18 2020 at 7:36pm
“Taxpayer” is a remarkably interesting concept.
The number of people filling taxes in 2016 was 140.9 mill, but “real taxpayers” (people actually paying taxes) were way less:
Just 7 million people pay almost 60% of the federal taxes collected.
35 million pay 86% of the total amount collected.
70 million people don’t pay taxes at all (3% of the total)
And that is talking about the amount payed. Talking about the difference between the amount payed and the amount received (in cash, goods, or services) the number of “net real contributors” is, very likely, extremely small.
That basically means that most people using the “immigrants are a burden to taxpayers” argument are pointing out the fact that they think immigrants are a burden to “other people” and, implying that they want just themselves having the exclusivity on being a burden on the few “truly net taxpayers”.
So, only a handful of people will have the “moral right” to make this kind of argument. And thru anecdotical evidence, I have the impression that very few among those suckers, will make a difference between “native” and “imported” “burdens”.
Nov 19 2020 at 9:47am
Is that any tax or income tax? Between FICA and federal excise taxes, I find that unlikely. Last time I looked, the bottom quintile were still net positive taxpayers. Negative rate on income tax (due to EITC and child credits) but FICA more than offset that…albeit slightly.
Nov 19 2020 at 9:52am
Update with numbers, as of 2017 (the latest I can find):
The bottom quintile (which would be 28MM by your numbers) paid -10.9% in income tax, 9.4% in payroll tax, 0.6% in corporate tax, and 2.2% in excise tax, for a net of 1.3%. I am sure that about the bottom half of that group were negative net, but that would be 14MM not 70MM.
On just income tax, the 2nd quintile is negative also, so your 70MM may be correct for income tax but not for the entire federal tax burden.
Nov 19 2020 at 10:37am
Figures for 2019 from the Peter G Peterson Foundation
Half of taxpayer still contribute north of 85% of the total taxes collected.
Furthermore, the bottom half of the taxpayer contributions are payroll taxes which you can argue mainly finance your own retirement (the system was designed to that end although has been seriously perverted since then).
And, again, what should be considered (when analyzing your “moral right” to the “burden to taxpayer argument”) are your net contributions (taxes you pay less services you received).
My point is that this kind of argument is more likely to be made by people “competing” with immigrants to be a tax burden that by the very few truly “net taxpayer”.
And that is without entering the murky waters of “tax incidence”, knowing who really really pay the taxes at the end of the day is just impossible (corporate taxes as a good example): in the absence of the payroll taxes would I take home my present net salary plus my share of the payroll taxes plus my employer share of the payroll taxes or just my net salary or what?.
Truth is: with a lot of difficulties we could know how nominally pay taxes. There is no way we can know who “really” support the “tax burden” (who is worse off because we have our tax system in place). So, the whole “immigrants are a tax burden” argument is a “nominal” one not a “real” one. Kind of the nowadays equivalent of discussing the sex of angels.
Nov 19 2020 at 12:01pm
Adding another layer of complexity, more so after the last tax reform, a significant part of the “tax burden” has been/is being left to “tomorrow’s taxpayer”.
So, the “right” analysis should be made, in a very Ricardian way, assuming taxpayers “live” forever. The key question then would be who is having bigger intergenerational economic progress, the “native” or the “imported” taxpayers?
At this point I would recommend dropping the whole “tax burden argument” against immigration since it is a pure though experiment almost impossible to support of falsified with “true facts”.
After all, despite the sheer complication of the National Academies Report it only scratches (at best) the surface of the “real reality”.
Nov 19 2020 at 10:07am
Robc, my figures were for Federal Income Tax data.
Sorry for not including the link
Nov 19 2020 at 10:18am
That was what I guessed, that leaves out 3 forms of federal taxation, two of which are pretty tiny. But the biggie is payroll tax, which averages about 9% for the bottom 4 quintiles. It starts falling off in the top quintile and income gets above the annual SS limit and more income is from non-“earned income” sources.
As I said, it reduces that 70 million number down to roughly 14 million.
Nov 18 2020 at 10:50pm
Most of the fiscal burden is, I assume, due to various entitlements for which they are eligible or will be in retirement? Presumably, US social security, medicare, and other entitlements are better than what most would have access to in the countries from which they came, and most would be much better off moving here even if we made our welfare state less generous. So this seems like a good argument for reducing the size of our welfare state, thereby increasing the number of immigrants it’s economically ‘worth it’ to accept. Trading in ‘big government’ for more immigration would be Pareto-efficient.
Nov 18 2020 at 10:56pm
This is a very weak argument:
“2. If you consider this an inadequate basis for restricting the reproduction of natives, it is hard to see why it is an adequate basis for restricting the migration of foreigners.”
The infringement of liberty required to “restrict reproduction” is of a radically different type and severity than that required to “restrict migration.” The former makes you worse off than you were ex-ante, while the latter simply preserves the status quo. Liberal states don’t, absent truly extraordinary, thought-experiment type reasons, restrict the freedom to reproduce. On the other hand, the question whether migrants are entitled to cross borders entirely at their own discretion is highly controversial, and requires independent argument.
In fact, I believe that there are at least some circumstances that would warrant a liberal state maintaining limits on migration, as my co-author Danny Frederick and I argue here: file:///C:/Users/mfrie/Downloads/The_Liberal_Defense_of_Immigration_Contr.pdf
Nov 18 2020 at 11:27pm
I would disagree. According to that logic, everyone who cannot escape Venezuela is “no worse off and not harmed, simply keeping the status quo” by being imprisoned in a socialist disaster. It is clear that your problem is assuming that the status quo is acceptable, which brings me to this quote:
Nov 18 2020 at 11:34pm
A working link (I hope): https://cosmosandtaxis.files.wordpress.com/2020/04/frederick_friedman_ct_vol8_iss_2_3.pdf
Nov 19 2020 at 9:51am
That’s a very interesting definition of “status quo” meaning “US citizens status quo” and, since we are talking about restricting changes (moving out of your country or having babies) to the present situation, your definition also includes individuals capacity to change his/hers “status quo” as part of his/her “status quo” (arguably an oxymoron) .
Laws restricting migration do alter the “status quo” of “immigrants to be” the same way that law restricting reproduction alter the “status quo” of the “parents to be”.
Both put a state mandated constraint on your future options base on a cost-benefit analysis for the government coffers.
What you imply in your reasoning is that the status quo of the US citizens is of a different “type” that the status quo of residents of other states. And that restricting the US citizens ability to change their status quo is much more “severe” that restricting the non US citizens ability to change theirs.
That is a very weak argument.
Nov 19 2020 at 3:03pm
Feel free to read and critique the linked peer-reviewed philosophy paper, which presents and defends just this argument. But to see this quickly, consider the weight of the US government’s duty to defend against a foreign invasion of the United States, relative to its obligation to defend the territorial integrity of say Vietnam. The Vietnamese are good people too, right?
Nov 19 2020 at 6:50pm
Future natural-born American citizens (the children or grandchildren of current citizens) are just as analogous to the Vietnamese as immigrants are: they aren’t citizens yet because they don’t exist, and so their interests matter less than the well-being of current Americans, and if they conflict, the government should side with Americans that are currently alive at the expense of future generations just the same as it should side with natives over immigrants, no?
Nov 19 2020 at 8:41pm
The fact that, having enough time, one could imagine an hypothetical situation (an “invasion” of people from a foreign closed Islamic society) in which a liberal state could have reasons to impose significant restrictions on immigration, does not imply, in any possible sense, that this same liberal state is entitled to impose restrictions based on the “burden to taxpayer” argument we were discussing here.
Same way that the fact that I can imagine a situation in which it would be moral to shoot and kill my neighbor does not entitled my to do so if his dog break into my property.
Regarding your argument about the different nature of the US Government duty, the proper comparison (as far as Bryan’s argument about the “native vs imported burden” is concerned), would be to compare the weight of the US government’s duty to defend against a foreign “closed society kind of invasion” of the United States (“imported tax burden” coming from third countries) vs the weight of the US government’s duty to defend against an “closed society kind of invasion” coming from Texas (“native tax burden” coming from within USA).
I did not see why there should be a different government duty (in type and severity) protecting the taxpayers from the same threat, depending just on the geographical origin of the threat and not on its size and veracity.
[PD: Regarding your paper, being a deeply convinced Huemerian I do not accept any duty to obey any government and do not recognized them any right to coerce me. But do not see how this normative position or your paper’s normative position could/should affect the positive discussion on the “burden to taxpayer” argument]
Nov 19 2020 at 10:58pm
The paper in question has absolutely nothing to do with “burdens on taxpayers” or the economic consequences of migration. It is solely concerned with a liberal state’s obligation to its citizens to remain liberal. None of my comments stated or implied anything to the contrary. But, the arguments presented in the paper are relevant to this thread because it defeats any argument for true, i.e. unconditional. open borders. And that is Caplan’s position.
Nov 19 2020 at 3:56pm
Thanks for posting a correction, Bryan; this is an encouraging practice and sets a good example for all of us.
While it would be great if all immigrants were fiscal surpluses, the issue is somewhat beside the argument for open borders. The practical implication would simply be a reason to exclude immigrants from some public programs.
Nov 20 2020 at 5:43am
.. or you make access to these programs conditional, meritable. Open borders do not have to mean access to every club.
Nov 20 2020 at 8:34am
… or you create a separate account of immigrant contributions and immigrant cost to public programs and regulate the latter (or the former or both) for the balance to be positive or zero at all times.
… or you realize that individuals contribute to the well-being of his fellow citizens in more ways than paying taxes: they create consumer surplus to his “fellow” new citizens, they create profits to the business/individuals that sell them goods and services, they “create” part of the profits of his employers …
There are many solutions to the imaginary (or at least unproven) problem of the “immigrant tax burden”, which, by the way, is more frequently made by people that is, or feel he is, competing with immigrants for being a tax burden that by the very few of us really supporting the “tax burden
Nov 21 2020 at 6:45am
Fiscal effects are a poor way of judging the total net benefits of greater immigration to non-immigrants, especially if we preferentially eliminated restrictions on those likely to become high-income earners/entrepreneurs.
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