Immigration Heritage

June 8, 2007

The Senate keeps grinding away on the immigration bill, making it worse this week by further restricting the guest worker provision. Majority Leader Harry Reid also seems to be walking away from the effort, calling it "the President's bill," which suggests he's preparing to blame Republicans for any defeat.
But no matter what happens this year, the immigration debate isn't going away. And among the unfortunate myths that have gathered media attention is that immigrants are a net cost to U.S. taxpayers -- that is, that they use more government benefits than they contribute in taxes.
This notion is being sold in particular by the Heritage Foundation, which once favored liberal immigration but now is pitching a study by Robert Rector claiming that households headed by low-skilled immigrants use $89 billion more in government services than they pay in taxes. We'd be worried too if this were true, but a tour of the serious economic literature shows it isn't.
The Heritage study calculates the impact only of low-skilled immigrants, those without a high school degree. This group accounts for about one-third of all U.S. immigrants. Higher-skilled immigrants are indisputably fiscal bargains because they have high earnings and pay taxes under the highly progressive American tax code. Even Mr. Rector concedes that "immigrants with a college degree become positive fiscal contributors from the outset; the taxes they pay will exceed the benefits their families receive." Raising the number of H-1B visas for computer scientists, mathematicians and other skilled immigrants should be an easy call.
Most studies also agree that the fiscal impact of the overall immigration population -- roughly 30 million people -- is also positive. In a comprehensive 1997 study, the National Academy of Sciences concluded that over their lifetimes immigrants and their children pay an estimated $80,000 more in taxes to all levels of government than they receive in benefits.
* * *
The debate is over the impact of the lowest skilled immigrants -- the 4.5 million heads of households, legal and illegal, who don't hold a high school degree. The Heritage study, which has become grist for talk radio, overstates the costs of immigrants.
First, of the estimated $19,588 of government benefits collected by low-skilled immigrant households each year, $8,462 -- or 43% -- are the cost for educating children. This leads to a strange logic. Under the Heritage cost-benefit framework, children are financial burdens to society and the surest way to balance the budget would be for Americans to stop having kids.
One of every four children born in America has an immigrant mother, but Mr. Rector is guilty of single-entry bookkeeping: He counts the costs of educating these children of immigrants but he fails to count the taxes they pay as adults. This is a major oversight because scholars have consistently shown that the children of immigrants tend to be the highest achievers and earners of all generations.
A study by economist Adam Zaretsky of the Federal Reserve Bank of St. Louis compared the earnings and taxes of three groups: the native-born, immigrants, and the children of immigrants. He found that "Recent immigrants pay the least [taxes], but their children, who tend to make more money and live in high-income/high-tax states, pay the most."
David Card recently showed, for the National Bureau of Economic Research, that "of the 39 largest country-of-origin groups, sons from 33 groups and daughters from 32 groups have higher average educational attainment than the children of natives. . . . Evidence of the intergenerational progress of immigrants' children points to above-average levels of education even for children whose fathers had much lower schooling than native-born fathers." This is powerful evidence of the economic assimilation of the children of immigrant parents.
Mr. Rector also reports that the average low-skilled immigrant household collects $4,891 in Social Security and Medicare annually. But even conceding his figures, Social Security is a pay-as-you-go system. Retiree benefits are financed by the payroll taxes of current workers. Immigrants subsidize Social Security and Medicare because they pay taxes for 30 or 40 years without any parent collecting a monthly benefit check. This provides a one-generation net windfall -- an insight first pointed out in a 1984 study by the late economist Julian Simon and published by . . . the Heritage Foundation.
The Social Security Administration trustees agree with the original Heritage study (Simon's) and conclude in their latest actuarial report that the unfunded liabilities of Social Security "decrease with increasing rates of net immigration . . . Each additional 100,000 net immigrants increase the long-range actuarial balance by about 0.07 percent of taxable payroll."
What does that mean for the Treasury? The net present value of the net payroll taxes paid over benefits received from one million immigrants per year is just shy of $2 trillion through 2080. Even low-skilled immigrants are net contributors to the trust fund.
Heritage once made this point itself, notably in a 1998 study by economist William Beach, who calculated that Hispanics -- especially young, single males -- pay far more into Social Security than they receive over their lifetimes. Mr. Beach found that, in 1997 dollars, a typical Hispanic couple would receive $347,000 less in lifetime benefits than they pay in, allowing for a normal rate of return on payroll taxes. Maybe Heritage ought to dust off those intellectual archives, unless it's decided to bend to the fashions of the moment.
Correcting for this overstatement of retirement and education costs erases most of Mr. Rector's alleged fiscal deficit. What about the other $30 billion or so a year? Well, it turns out that about six of 10 native-born American households also receive more in government services than they pay in taxes. No one would suggest that 60% of native-born Americans are economic drains; why conclude this of low-skilled immigrants?
More broadly, the Rector study ignores that immigrants make economic contributions beyond net tax or benefit payments. One is that immigrants lower costs of production and thus reduce consumer prices, which in turn increase the real income of Americans.
A second benefit is that the labor provided by low-skilled immigrants complements the skills of native-born Americans, thus raising everyone's productivity and output. A 2006 National Bureau of Economic Research study noted that "immigrants stimulate investment, have skill sets and educational levels that complement those of natives, and do not compete for the same jobs as most natives." Immigration increased the average wages of all native-born workers in the 1990s by 1.1%, except those who did not have a high school diploma.
The President's Council of Economic Advisers recently added up all these benefits, updating the procedures used by the National Academy of Sciences, and concluded that the value of immigrants to the overall economy is a net positive $30 billion a year. Any such number is by its nature a general estimate, but the key point is that immigrants are an overall economic plus, not a drain.
* * *
A decade ago, Republicans wisely adopted a policy of "immigration yes, welfare no." It has been a great success. Welfare eligibility of immigrants was restricted and the result has been a near-50% decline in welfare use by the foreign born. If low-skilled immigrants are using too many government benefits, conservatives should be fighting to restrict welfare payments, not the immigrants.