Sunday, 4 January 2015

Do immigrants have a positive or negative fiscal impact?

Immigrants have all sorts of effects on a society. Here I just want to consider their fiscal impact. Proponents of higher immigration, or at least opponents of lower immigration, argue that the fiscal impact of immigrants is positive. Such arguments are usually made on the basis of empirical studies documenting that, on average, immigrants pay more in taxes than they take in public services. Interestingly, proponents of higher immigration tend to come mainly from the progressive left and the liberal right. For example, in Britain, the newspapers most favourable toward immigration are arguably The Guardian and The Economist

It is certainly true that in many countries and time periods the fiscal impact of immigrants has been positive. Yet there is no iron-clad law of economics dictating that this must be the case. Whether immigrants will have a positive or negative fiscal impact depends on two main factors: the characteristics of the immigrants themselves, which is partly a function of the host country's immigration policy; and the level of public service provision within the host country. (It may also depend on natives' attitudes toward immigrants. If natives' happen to be extremely xenophobic, then the arrival of immigrants might provoke violent backlashes that generate substantial fiscal costs. But for the sake of simplicity, I will ignore such effects.)

It is quite obvious that the fiscal impact of immigrants depends on their characteristics. Immigrants are often highly motivated, conscientious and entrepreneurial. 40% of US Fortune 500 companies--including such giants as Google, Ebay and Yahoo--were reportedly founded by first or second generation immigrants. Yet it is clearly not true that every prospective immigrant is nascent entrepreneur waiting to found a billion-dollar firm. 

Within any country, there are some people who pay more in taxes than they take in public services, and others who take more in public services than they pay in taxes. This is not a conspiracy; it is the whole point of the welfare state. (Trivially, if a county with zero immigration runs a budget deficit, then the fiscal contribution of the average citizen is negative.) In general, working age people and those with higher skills pay relatively more in, while old people and those with lower skills take relatively more out. Consequently, if immigrants comprise mostly high-skilled individuals of working age, they are more likely to have positive fiscal impact, but if they comprise mostly low-skilled individuals or those of old age, they are more likely to have a negative fiscal impact. 

There are very few circumstances in which high-skilled individuals of working age will not have a positive fiscal impact. Students, doctors, engineers, athletes and investors nearly always pay more in taxes than they take in public services. By contrast, the net fiscal impact of low-skilled individuals and those of old age depends on the level of public service provision within the host country: the greater the level, the higher the skills needed, and the lower the age needed, for an immigrant to have a positive fiscal impact. For example, if the host country guarantees a pension and healthcare to anyone older than 65, and the average immigrant is a 70-year-old with no assets, his fiscal impact will almost certainly be negative. 

As the chart above indicates, all the territories in which international migrants comprise more than 50% of the population are either oil-rich monarchies or tax havens. In comparison, migrants comprise between 5 and 15% of the population in most Western European countries. The fraction is somewhat higher in Canada (21%), New Zealand (25%) and Australia (28%), three countries that employ both highly selective immigration and guest worker schemes. (Data are from the UN; figures are for 2013.) To my knowledge, no country that takes a substantial number of low-skilled or old age immigrants has what could be described as a universal welfare state. Sweden, which does have a universal welfare state, has taken more than most countries, but evidence suggests that immigration is undermining support for the welfare state there.

This is not to say, however, that letting in many more low-skilled workers couldn't improve social welfare at the global level.


  1. A couple of points. One is that though it is certainly likely that some legal migration will have a positive fiscal impact (ie., of skilled workers who will pay taxes etc), some won't (ie., low/unskilled workers who may not be working at all but are receiving benefits from a system towards which they have not contributed) And there's the whole issue of low/unskilled workers who are working in the black economy - of which there are vast but unknown numbers in many western economies, which rather screws up the whole calculation anyway!
    Also, of course there are costs and benefits which are not fiscal but still extremely important - ie., overcrowding, access to services, housing, cultural/religious conflicts, imported tribal/gang warfare, transport, education, health and general quality of life as opposed to standard of living. Though theoretically interesting, I am not sure that calculations of the 'strictly' fiscal benefits of migration are really of primary importance in considering the impact of large-scale immigration as a whole.

  2. Yes, non-fiscal costs and benefits are also important, but somewhat harder to quantify.