The Fiscal Impact of Immigration

By Alex Nowrasteh - CATO Institute

The fiscal impact of immigration — how immigrants and their descendants affect government budgets — is a widely debated and contentious issue. Economists overwhelmingly accept the economic gains of immigration, but are less certain about immigrants’ impact on government budgets. Contention over this issue is fueled by the numerous methodologies and complexity of analysis that obscure the fiscal costs of immigration.

The complexities are many. Each layer of the United States’ federal structure of government — federal, state, and local — is funded by different types of taxes and each spend their budgets on different programs and in different ways. Many government spending programs are only directed at certain age groups. Public education is one example of a front-loaded cost expended on children and young adults at the beginning of their lifespan, while Medicare and Social Security are back-loaded costs expended closer to the end of the recipient’s life span. The inter temporal structure of many government programs makes age a relevant factor in analyzing the fiscal costs of immigration, but so do other factors such as the skill level, fertility, and language ability of the immigrants themselves. This is not much different from the fiscal impact of newborn children, who consume vast amounts of public schooling before paying taxes. The working life of an immigrant, however, can be shorter than that of a native, because immigrants often immigrate later in life, after their window for taking advantage of government-funded education expires (Rowthorn 2008: 563-564).

The types of public goods consumed by immigrants also affect their fiscal impact. If the public goods are “pure,” meaning that they are non-rivalrous and non-excludable, then more taxpayers in the form of immigrants spread out the tax cost without diminishing the quality of the goods. Immigrants lower the tax burden of providing pure public goods. But, if the public goods are “congestible,” more immigrants could decrease the quality of the goods, prompting the government to spend more tax dollars to maintain the quality. Some congestion occurs for most government-supplied goods whenever population increases, by immigration or through procreation, but the fiscal impact varies widely.

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