What immigrants mean for our economic future

Are immigrants good for the economy and the country’s balance sheet? That is the politically charged and analytically difficult question tackled in a three-year study by the National Academies of Sciences, Engineering, and Medicine. Last week, the panel (which I was a part of) released its report, The Economic and Fiscal Consequences of Immigration,  We concluded that immigrants benefit long-run economic growth in the United States in several key ways.

How do immigrant workers affect the economy?

Immigrants are arriving in their prime working years and help counterbalance a native population that is aging out of the workforce. They also help support federal programs through the taxes they pay.

Highly-skilled immigrants—those with at least a college degree—help raise overall wages and employment for US-born workers with and without a college degree. Skilled foreign-born workers boost innovation and productivity, hold more patents, and are more likely to start new businesses than native-born Americans.

Overall, immigration has little impact on either the long-run wages or employment levels of native-born workers. To the extent negative effects are found,earlier immigrants or native workers with less than a high school degree are the ones most affected.

Currently more than 40 million people living in the United States were born in other countries and roughly as many have at least one foreign-born parent. Together, they make up almost one in four Americans. An estimated 1 million legal permanent residents come into the United States each year. Since 2009, the number of undocumented immigrants has been fairly constant at around 11 million. About 300,000 to 400,000 arrive each year and about the same number leave.

While, overall, immigrants are still more likely than natives to have less than a high-school diploma, they are also more likely than natives to have graduate degrees. Those with higher degrees are more likely to be trained in fields such as science, technology, or math.

Do immigrants cost the government more than they pay in taxes, as some claim?

As most studies find, the answer is “it depends on how you measure it.” We found that the pattern of government spending and funds received from immigrants is roughly the same as it is for native-born people.

In general, children are a net cost because they receive education and pay no taxes, working-age people contribute more in taxes than they receive in benefits, and older people benefit more from government spending, primarily through Social Security and Medicare. Education costs are largely funded by state and local governments while retirement benefits are paid by the federal government.

How we calculate the costs depends on whether we’re looking at a point in time or at the cumulative contributions over a lifetime. The calculation is further complicated by how you allocate spending and taxes. While some costs increase as eligible populations increase (e.g., education, health care) others do not (e.g., public defense). A large share of government spending, federal spending especially, falls into this latter category of public goods. Should these costs be assigned to immigrants?  

If we assign average costs and assign the costs of kids to their parents, immigrants cost more than they provide in taxes, but so does everyone on average. The United States, after all, is running an annual budget deficit of about $500 billion dollars, with even higher deficits in 2012 and 2013, the last years used in the report.

If, instead, we assign only marginal costs to immigrants—in other words, if we don’t count the cost of public goods against them—they still cost more than they contribute in taxes, but their costs are a much smaller share than their share of the population. And the red ink assigned to US natives is much higher.

Similarly, immigrants contribute to our federal bottom line if we use a 75-year window to measure taxes paid and services received. The fiscal impacts of immigrants are generally positive at the federal level and negative at the state and local level.

Costs and contributions of immigrants vary across states, depending on age, educational levels, average income, and number of children. But, in general, immigrants are more expensive at the state and local level because they have more children than natives. Because we assign the benefits of education to the parents of those children, we find that they use more education dollars.

However, if you treat education as an investment in the future and allocate costs across the US population, the costs attributed to immigrants fall. In addition, as adults, the children of immigrants (second generation) pay higher taxes and use fewer services than immigrants or other natives that don’t have a foreign-born parent.

Immigrants are an important part of our communities and will be key to both our fiscal and economic future. As with native-born Americans, their net contribution to society and the economy will have less to do with where they come from and more to do with their individual characteristics. And that’s how it’s been in the United States for the past 240 years.

The study and the accompanying report were sponsored by the John D. and Catherine T. MacArthur Foundation, with additional support from the National Academies presidents’ funds. This article first appeared in TaxVox.