Posts Tagged ‘taxes’


Special mention

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Special mention

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Yesterday, I argued that capitalism has, over the course of its history, generated movements of masses of people, both within and between nations. However, in the United States, the effects of capitalism’s laws of population are mostly ignored, as are the links between internal and external migrations of workers. Instead, the discussion tends to focus only on the consequences of immigration (and, even then, on only some of the consequences).

And that’s exactly the focus of the new study, “The Economic and Fiscal Consequences of Immigration,” by the Panel on the Economic and Fiscal Consequences of Immigration of the National Academies of Sciences, Engineering, and Medicine.

I won’t attempt to summarize the entire, 508-page study (itself a follow-up to the last major report on the topic by the National Academies, The New Americans: Economic, Demographic, and Fiscal Effects of Immigration, in 1997). However, as I read it, the study boils down to two key questions: First, what are the consequences of immigration, particularly those involving wage and employment prospects, for individuals already established in the United States? Second, what are the fiscal impacts of immigrants for local, state, and federal governments?

The answer to the first question is covered in Chapter 5 of the report, titled “Employment and Wage Impacts of Immigration.” The panel surveys a large, diverse literature, which they summarize as follows (on p. 4):

When measured over a period of 10 years or more, the impact of immigration on the wages of natives overall is very small. However, estimates for subgroups span a comparatively wider range, indicating a revised and somewhat more detailed understanding of the wage impact of immigration since the 1990s. To the extent that negative wage effects are found, prior immigrants—who are often the closest substitutes for new immigrants—are most likely to experience them, followed by native-born high-school dropouts, who share job qualifications similar to the large share of low-skilled workers among immigrants to the United States.

The first result, concerning the effects over a decade or more, should be treated with more than a few grains of salt. That’s because, as George Borjas explains, the finding (that “the impact of immigration on the wages of natives overall is very small”) is actually an artifact of the mathematical assumptions on which the models are built. More important are the shorter-run effects on the wages of workers against whom immigrants are often thrown into competition: prior immigrants and native-born high-school dropouts. Their wages do fall when large numbers of foreign-born workers immigrate and are forced to have the freedom to sell their ability to work within U.S. labor markets. And, of course, one can argue that new immigrants’ wages are lower than they otherwise might have been because of the existence of a large pool of previous immigrants (many of them without documents) and native-born workers without high-school degrees.

So, who gains from immigration?  Clearly, employers benefit from the existing “stock” as well as the annual “flow” of immigrants, especially since foreign-born workers “are more responsive than natives to regional differences in labor demand” (p. 222) and because “immigrants can be employed under arrangements in which payroll taxes are ignored and labor regulations are not observed” (p. 242).* That’s particularly true in the construction industry, where foreign-born workers constitute about 25 percent of the labor force.**

And, of course, there are two other major groups that benefit from an influx of workers: wealthy households that directly employ them, in “child care, landscaping, . . .and other household services” (p. 226); and the owners of the housing stock, who rent to immigrant workers and their families.***

The other major area of academic and policy research, and a key area in the Panel’s report, has to do with the impact of immigration on public finances. As with labor-market effects, estimating the fiscal impacts of immigration is complex (since it involves different levels of government as well as different generations of foreign-born workers and their families). The general conclusion is that the fiscal impacts of immigrants are generally positive at the federal level and negative at the state and local levels (p. 354):

State and local governments bear the burden of providing education benefits, upon arrival and continuing, to young immigrants and to the children of immigrants, but their methods of taxation tend to recoup relatively fewer contributions later from the most highly educated taxpayers. Federal benefits, in contrast, are largely focused on the elderly, so the relative youthfulness of arriving immigrants means that they tend to have positive fiscal impacts on federal finances in the short term. In addition, federal taxes are more strongly progressive, drawing more contributions from the most highly educated. The investment in public education requires public funds and pays public dividends, but a key issue is that the public dividends tend to be absorbed by the federal government, while the public funds are provided by the states. The fact that states bear much of the fiscal burden of immigration may incentivize state-level policies to exclude immigrants. Equity issues between the federal government and across states should be given consideration in future iterations of immigration policy.

It should come as no surprise, then, that especially at the local and state levels, where taxation is generally much less progressive than for the federal government, native-born workers (in additional to small-business owners and others) are forced to shoulder a higher burden of financing the expansion of education and other public programs needed by immigrant (especially first-generation immigrant) workers and their families. Over the longer-run, though, the net fiscal impact of immigrant (especially second- and higher-generation immigrant) workers turns positive, particularly at the federal level—and their future contributions to Social Security and other national programs will take some of the burden off other workers.

And the bottom line? The Panel itself never attempts to combine the labor-market and fiscal effects to determine the overall impact of immigration.**** But it’s clear from the various pieces of information this study provides that, as with all of the other periods of internal and external migration induced by U.S. capitalism, recent waves of immigration have benefited a tiny group of employers at the top, who in turn have managed to shift the costs—through wage reductions and higher taxes—onto workers (both recent immigrants and native-born workers).

The problem in American public debate is, now as in previous battles over immigration, foreign-born workers are scapegoated—and attention is shifted from the real cause of immigration.***** As I see it, American workers have every right to be concerned about lower wages and higher taxes. But they also have to recognize that wage stagnation and their growing tax burden are only partly caused by immigration—and that capitalism, not the influx of foreign-born workers, is what is responsible for their plight.


*As a result, immigrant workers are “more likely to hold jobs characterized by poor working conditions or high risk than are natives” (p. 242).

**Overall, if immigrant labor accounts for a large percentage (according to the report, 16.5 percent) of the total number of hours worked in the United States, the Panel estimates that “the current stock of immigrants lowered wages by 5.2 percent and generated an immigration surplus of $54.2 billion, representing a 0.31 percent overall increase in income that accrues to the native population” (p. 128), most of which flows to their employers.

***For example, according to the Panel (p. 227),

The immigrant share of rental unit growth was 26.4 percent in the 1980s, 60.4 percent in the 1990s, and 31.7 percent in the 2000s; it is projected to be 26.4 percent in the 2010s. The unusually high immigrant share of rental unit growth in the 1990s is attributed to an upswing in immigration in that decade, combined with a downswing in the population growth of native-born young adults, due to the arrival in adult years of the undersized cohort known as Generation X (those born from the mid-1960s to the early 1980s).

****In a footnote, Borjas attempts a back-of-the-envelope calculation of the total wealth transfer—which amounts to $500 billion—caused by immigration:

The calculation of the immigration surplus reported in Chapter 4 of the NAS report assumes that GDP is $17.5 trillion; that 65% of GDP goes to workers; and that 16.5% percent of the workforce is foreign-born. The report also says that “the current stock of immigrants lowered wages by 5.2 percent.”

Because only 65% of GDP goes to workers, that means that the total earnings of all workers is $11.4 trillion (or 0.65 × 17.5). But because only 16.5% of workers are foreign-born, the fraction of total earnings that goes to native workers is $9.5 trillion (or 0.835 × 11.4). The NAS report says that native earnings fell by 5.2 percent, so that the wage transfer from native workers to employers is $494 billion (or 0.052 × 9.5).

****There is, of course, a large nativist lobby that has spearheaded that scapegoating.


Special mention

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Yesterday, I questioned the case—presented by Jason Furman and the White House Council of Economic Advisers—that the Obama administration had made a “historic achievement in reducing inequality.”

James Kwak, as it turns out, had much the same reaction:

inequality is every bit the problem we’ve always thought it was. It’s not as bad today as it would be if John McCain had been elected eight years ago. But we’re no closer to addressing its fundamental causes.


First, Kwak explains that the key chart behind the Obama administration claim (which I’ve reposted above) is not what it seems. It doesn’t show inequality has actually declined by the stipulated amounts. What it does show is that (a) in 2017 (and therefore a forecast for next year) and (b) in comparison to a world in which the Bush-era tax cuts didn’t expire and without the Affordable Care Act (and therefore a parallel universe of lower tax rates and pre-Obama health coverage rates) “our universe is a little less unequal than that parallel universe.”

In summary, the economic factors that produce higher pre-tax income inequality—stagnant middle-class wages, high corporate profits, and booming asset markets—are alive and well, and it doesn’t seem the Obama administration has done much about them. The administration did pass the Affordable Care Act and let the Bush tax cuts expire for the rich, both of which helped mitigate the pre-tax inequality produced by contemporary American capitalism. But even if Barack Obama called inequality the “defining challenge of our time,” he has done little to tackle its fundamental causes. Let’s hope the next president does better.


Kwak then takes on the larger issue of whether inequality has actually been getting worse or better under the Obama administration. What he shows (much as I argued yesterday) is that, while tax-and-transfer policies have made the distribution of income less unequal than it otherwise would have been (thus, the red line is lower than either the green or blue lines), they’ve done nothing to change the “underlying economic factors that determine inequality of pre-tax income.”

What we’ve seen then is pre-tax inequality has continued to grow and, even though tax-and-transfer policies lower the degree of inequality (and, indeed, have widened the gap between pre-tax and post-tax inequality), overall inequality has continued to grow under the Obama administration.

And looking forward?

Yes, 2015 was a good year for middle-class families, but it didn’t come close to making up for several bad years during the current expansion. There’s no obvious reason why the pre-tax income share of the 1% will stop rising anytime soon—except for the next recession, after which it will most likely continue its long-term ascent.

That, in my view, is why “economic inequality will remain the ‘defining challenge of the next generation, too’.”


Inequality may be the “defining challenge of our time.” But you wouldn’t know so from Monday evening’s presidential debate, in which neither candidate directly addressed the issue.

But the Obama administration seems to be in full gear—with an op-ed piece by chair of the White House Council of Economic Advisers Jason Furman and an extensive report by the Council of Economic Advisers (pdf)—celebrating its own “historic achievement in reducing inequality.”*

Tax changes enacted since 2009 have boosted the share of after-tax income received by the bottom 99 percent of families by more than the tax changes of any previous Administration since at least 1960. President Obama has also overseen the largest increase in Federal investment to reduce inequality since the Great Society, largely reflecting the coverage provisions of the Affordable Care Act (ACA) and expanded tax credits for working families.

And the results? Together, the changes in tax policy and the ACA provisions will increase the share of after-tax income received by the bottom quintile in 2017 by less than one percentage point and reduce the share received by the top 1 percent by all of 1.2 percentage points.

That’s something, it is true, but it does not reverse the spectacular growth in inequality the United States has witnessed in recent decades (when the share of income captured by the top 1 percent rose from 9 percent in 1971 to 22 percent in 2015), and it doesn’t even touch the even-more-dramatic inequality in the distribution of wealth (such that in 2013, the last year for which data are available, families in the top 10 percent of the wealth distribution held 76 percent of all family wealth, families in the 51st to the 90th percentiles held 23 percent, and those in the bottom half of the distribution held no more than 1 percent).

So, what’s the problem? We already know, thanks to a 2015 Brookings Study (pdf), that the effect of changes in top individual tax rates (including a redistribution of all new revenues to household in the bottom 20 percent of the income distribution) are “exceedingly modest.”** And, of course, changes in tax rates on income have little if any effect on the unequal distribution of wealth.

The fact that the current administration can cite its own policies as a “historic achievement” just confirms how little other administrations have done to moderate growing inequality in the United States over the course of the past three decades.

They also confirm the fact that, unless and until the United States decides to tackle the issue of wealth ownership and the resulting unequal market distribution of income— especially the ability of the tiny group at the top to capture and invest for their own sake the enormous surplus created by everyone else—it’s clear that economic inequality will remain the “defining challenge of the next generation, too.”


*The same issue has been taken up on the other side of the pond, about whether the last Labor government did anything to reverse “the rise of inequality seen under the previous Conservative administration.” According to the data cited by Simon Wren-Lewis, the best that can be said is Labor did not continue the previous rise in inequality, although it certainly didn’t reverse it.

**Here’s the authors’ conclusion:

In this analysis we have simulated the effects of increasing the top income tax rate under three possible reforms: (a) raise the top individual income tax rate from 39.6 to 45 percent; (2) raise the top individual income tax rate from 39.6 to 50 percent; and (3) raise the top individual income tax rate to 50 percent for income greater than $1 million for joint filers, $750,000 for single filers. We calculate the resulting change in income inequality under these scenarios assuming an explicit redistribution of all new revenue to households in the bottom 20 percent of the income distribution. The resulting effects on overall income inequality are exceedingly modest, with changes in the Gini coefficient of less than 0.01.

That such a sizable increase in the top personal income tax rate leads to a strikingly limited reduction in overall income inequality speaks to the limitations of this particular approach to addressing the broader challenge. It also reflects the fact that the high level of U.S. income inequality is characterized by a wide divergence in income between higher-income households and those at the middle and below.