Immigration Policy

Do Immigrants Cost Native-Born Taxpayers Money?

The Issue:

Immigration was a key issue during the 2016 presidential election and debates regarding both the number and the types of immigrants that should be allowed to come to the United States continue. An important factor in this consideration is whether immigration places a burden on taxpayers. Those who want less immigration argue that immigrants cost more in government-provided benefits than they pay in taxes, in effect raising taxes for native-born taxpayers to cover the net cost. But are immigrants costly to native-born taxpayers?

An individual's fiscal impact varies across their lifetime and carries on to the next generation. Hence, it makes sense to look at the fiscal costs and benefits of immigration over a longer time horizon.

The Facts:

Over the past two decades, the immigrant population in the U.S. has grown faster than the native-born population, increasing the share of immigrants in the total population and in the country's labor force. The foreign-born population was 42.3 million in 2014, representing about 13 percent of the U.S. population, up from 24.5 million and 9 percent of the population in 1995. Similarly, the portion of the labor force that is foreign-born has grown from 11 percent to about 16 percent in the past two decades. Immigrants and their children are expected to account for an important share of future workforce growth.

The foreign-born population was 42.3 million in 2014, representing about 13 percent of the U.S. population, up from 24.5 million and 9 percent of the population in 1995. Similarly, the portion of the labor force that is foreign-born has grown from 11 percent to about 16 percent in the past two decades. Immigrants and their children are expected to account for an important share of future workforce growth. The question of whether immigrants contribute more in taxes than they consume in government expenditures is complicated. It goes beyond the hot button issue of whether immigrants, particularly undocumented ones, abuse the social safety net. In addition to looking at how much immigrants access these services, a broader picture takes into account all government expenditures at the federal, state and local levels, including items such as defense spending, interest payment on the federal debt, and public education, among others. It also takes into account how much everyone pays in taxes. Even people whose income and wealth is low enough that they pay no income, property, or other wealth-based taxes pay sales taxes and user fees that fund government services. Moreover, The United States is a nation that runs budget deficits. This means that, on average, everyone receives more in public expenditures than they pay in taxes. Whether this is more pronounced in the case of immigrants than the native born is the more relevant question.

It goes beyond the hot button issue of whether immigrants, particularly undocumented ones, abuse the social safety net. In addition to looking at how much immigrants access these services, a broader picture takes into account all government expenditures at the federal, state and local levels, including items such as defense spending, interest payment on the federal debt, and public education, among others. It also takes into account how much everyone pays in taxes. Even people whose income and wealth is low enough that they pay no income, property, or other wealth-based taxes pay sales taxes and user fees that fund government services. Moreover, The United States is a nation that runs budget deficits. This means that, on average, everyone receives more in public expenditures than they pay in taxes. Whether this is more pronounced in the case of immigrants than the native born is the more relevant question. At any given point in time, the biggest determinant of net fiscal impact (taxes paid less benefits received) for any individual is their age. Children and older persons who are not likely to be working and receive education and health benefits, among others, are net beneficiaries of government expenditures. People in working ages are net taxpayers. This is true for all groups (see chart). Drawing from a 2017 report of the National Academies of Science, the chart compares the net fiscal impacts of different immigration generations by age group, including the immigrants themselves (the 1st generation); those born in the U.S. with one or more foreign-born parent (the 2nd generation)—these are the children of immigrants; and the rest of the native population or those with both parents US-born(the 3rd+ generation). For children, there is not much difference in the cost to the government across the groups. In the working ages, immigrants are less fiscally beneficial than native-born working age persons because they earn less on average and thus pay less in taxes. This is in part due to the fact that, on average, immigrants have tended to have less education than natives. The working-age children of immigrants (the 2nd generation) on the other hand, are the highest net taxpayers of all. They have on average higher levels of college attainment than both their immigrant parents and the rest of the native-born and are less likely to be in poverty. However, even within similar education groups, second generation persons have higher average incomes and are thus paying more in taxes and receiving less in benefits than immigrants or those with 2 native-born parents. In the older ages, immigrants and their children (the 1st and 2nd generations) are less expensive as they age than native-born elderly (the 3rd+ generation), mostly because they get less in old-age benefits.

Children and older persons who are not likely to be working and receive education and health benefits, among others, are net beneficiaries of government expenditures. People in working ages are net taxpayers. This is true for all groups (see chart). Drawing from a 2017 report of the National Academies of Science, the chart compares the net fiscal impacts of different immigration generations by age group, including the immigrants themselves (the 1st generation); those born in the U.S. with one or more foreign-born parent (the 2nd generation)—these are the children of immigrants; and the rest of the native population or those with both parents US-born(the 3rd+ generation). For children, there is not much difference in the cost to the government across the groups. In the working ages, immigrants are less fiscally beneficial than native-born working age persons because they earn less on average and thus pay less in taxes. This is in part due to the fact that, on average, immigrants have tended to have less education than natives. The working-age children of immigrants (the 2nd generation) on the other hand, are the highest net taxpayers of all. They have on average higher levels of college attainment than both their immigrant parents and the rest of the native-born and are less likely to be in poverty. However, even within similar education groups, second generation persons have higher average incomes and are thus paying more in taxes and receiving less in benefits than immigrants or those with 2 native-born parents. In the older ages, immigrants and their children (the 1st and 2nd generations) are less expensive as they age than native-born elderly (the 3rd+ generation), mostly because they get less in old-age benefits. Most immigrants are in their working ages and so, viewed as individuals, are average net taxpayers . Since they tend to arrive to the United States as adults, it means that the U.S. did not have to invest in their education, but will benefit from the taxes of their adult earnings. However, this also means they are more likely to have dependent children present, who receive public investments, mostly in education. Thus, largely because of the demography, looking at immigrants and their dependent children together at one moment in time, the fiscal picture is less favorable for immigrants than for the native born. As we explained earlier, our budget deficit means that everyone receives more in government benefits than they pay in taxes; but the ratio of expenditures-to-taxes is less favorable for immigrants than it is for native-born persons. Since more educated immigrants tend to have higher earnings and thus make greater tax contributions, some have suggested changing the U.S. immigration system towards a points system that favors more highly educated immigrants similar to Canada and Australia. However, it is important to note that the gap between immigrants and natives in terms of their fiscal burden has narrowed over the last two decades in the United States as immigrant education has risen in absolute terms as well as relative to the native born. (See this Econofact memo for details on the increase in education of immigrants since 2000 and the contribution of immigrants towards productivity and economic growth).

. Since they tend to arrive to the United States as adults, it means that the U.S. did not have to invest in their education, but will benefit from the taxes of their adult earnings. However, this also means they are more likely to have dependent children present, who receive public investments, mostly in education. Thus, largely because of the demography, looking at immigrants and their dependent children together at one moment in time, the fiscal picture is less favorable for immigrants than for the native born. As we explained earlier, our budget deficit means that everyone receives more in government benefits than they pay in taxes; but the ratio of expenditures-to-taxes is less favorable for immigrants than it is for native-born persons. Since more educated immigrants tend to have higher earnings and thus make greater tax contributions, some have suggested changing the U.S. immigration system towards a points system that favors more highly educated immigrants similar to Canada and Australia. However, it is important to note that the gap between immigrants and natives in terms of their fiscal burden has narrowed over the last two decades in the United States as immigrant education has risen in absolute terms as well as relative to the native born. (See this Econofact memo for details on the increase in education of immigrants since 2000 and the contribution of immigrants towards productivity and economic growth). Because a person's fiscal impact varies so much across their lifetime and carries on to the next generation, it makes sense to look at the fiscal costs and benefits of immigration over a longer time horizon. The National Academy Report addresses this by providing estimates of the fiscal impact over the next 75 years of an additional immigrant entering the United States, including the costs and benefits of his or her descendants. The estimates vary depending on how much education we think a future immigrant will bring, and what future U.S. fiscal policy will be. If immigrant flows return to the lower education composition of the past and if the U.S. continues to run large budget deficits, then the fiscal impact of an immigrant is going to be negative. Both of these scenarios are unlikely, however: overall global education is rising, meaning sending countries have fewer low education persons as potential immigrants to the U.S., and continuation of the current large U.S. deficits is unlikely to be a fiscally sustainable path over the course of the next 75 years. Thus, in the more likely future scenario where immigrant flows remain at least as well educated as they are today, and government lowers deficits, the future impact of one additional immigrant is strongly positive, with the government accruing an estimated net present value of $173,000 to $259,000 (see here for details).

The National Academy Report addresses this by providing estimates of the fiscal impact over the next 75 years of an additional immigrant entering the United States, including the costs and benefits of his or her descendants. The estimates vary depending on how much education we think a future immigrant will bring, and what future U.S. fiscal policy will be. If immigrant flows return to the lower education composition of the past and if the U.S. continues to run large budget deficits, then the fiscal impact of an immigrant is going to be negative. Both of these scenarios are unlikely, however: overall global education is rising, meaning sending countries have fewer low education persons as potential immigrants to the U.S., and continuation of the current large U.S. deficits is unlikely to be a fiscally sustainable path over the course of the next 75 years. Thus, in the more likely future scenario where immigrant flows remain at least as well educated as they are today, and government lowers deficits, the future impact of one additional immigrant is strongly positive, with the government accruing an estimated net present value of $173,000 to $259,000 (see here for details). How we account for government spending on items that do not necessarily cost the government more to provide when the population increases affects the estimates. The difference in the estimate of $173,000 versus $259,000 in net present value added per immigrant is in the accounting for expenditures on what economists call public goods – expenditures whose level does not increase with a larger population. Defense spending is a prime example, and indeed accounts for the major portion of such expenditures, as well as a large share of federal expenditures overall. If we do not consider these expenditures as a cost of an additional immigrant, the immigrant has a more positive effect on fiscal balance – the higher number – and the immigrant actually helps native-born taxpayers by sharing the fixed cost of these expenditures over a slightly larger population. If we consider these costs as rising with another immigrant arrival, then there is a less positive effect on fiscal balance – the lower but still positive number. Note that both numbers do include the positive impact that an immigrant would have on helping to pay interest on the national debt. The analysis does not include this as a cost to a new immigrant arrival in any scenario because he or she was not in the country at the time the debt was accrued, and so cannot be considered to increase its size or the associated interest expense.

The difference in the estimate of $173,000 versus $259,000 in net present value added per immigrant is in the accounting for expenditures on what economists call public goods – expenditures whose level does not increase with a larger population. Defense spending is a prime example, and indeed accounts for the major portion of such expenditures, as well as a large share of federal expenditures overall. If we do not consider these expenditures as a cost of an additional immigrant, the immigrant has a more positive effect on fiscal balance – the higher number – and the immigrant actually helps native-born taxpayers by sharing the fixed cost of these expenditures over a slightly larger population. If we consider these costs as rising with another immigrant arrival, then there is a less positive effect on fiscal balance – the lower but still positive number. Note that both numbers do include the positive impact that an immigrant would have on helping to pay interest on the national debt. The analysis does not include this as a cost to a new immigrant arrival in any scenario because he or she was not in the country at the time the debt was accrued, and so cannot be considered to increase its size or the associated interest expense. Where there do seem to be significant net costs of immigration is at the state and local level where education is mainly funded. While the investment in the education of the children of immigrants is costly to current taxpayers, they go on to enter the labor force, and become high net taxpayers in the future. However, the costs of educating the children of immigrants is paid for by state and local taxes, but the later benefits mainly accrue to the federal government in the form of income taxes. This imbalance could be addressed through greater transfers of funds from the federal government to those states with large immigrant populations, which would address the net burden on states, while still leaving a net benefit at the federal level.

While the investment in the education of the children of immigrants is costly to current taxpayers, they go on to enter the labor force, and become high net taxpayers in the future. However, the costs of educating the children of immigrants is paid for by state and local taxes, but the later benefits mainly accrue to the federal government in the form of income taxes. This imbalance could be addressed through greater transfers of funds from the federal government to those states with large immigrant populations, which would address the net burden on states, while still leaving a net benefit at the federal level. Attempts like this to estimate the net fiscal impact of immigration do not include any indirect effects immigration has on the economy. If, as research suggests, immigration raises productivity, then it contributes to faster economic growth, which raises tax revenues. Estimates of immigrant fiscal impact that do not include this effect should be considered a lower bound, at least in this respect.