We just had Tax Day, which gets me thinking about a myriad of tax-related topics. After reading an article from the Center of American Progress, I was thinking about taxes in the context of immigrants, whether they are legal, temporary, or unauthorized. One of the arguments that is commonly used against illegal immigration is that unauthorized immigrants do not pay taxes. "If they only mooch and don't pay their fair share, we shouldn't let them in," or so goes the argument. I looked at the issue of the economic impact of legalizing more immigrants about a year ago, and these immigrants are far from being moochers. As a matter of fact, they create a net positive economic benefit. The discussion I present here will be two-fold: 1) unauthorized immigrants already pay taxes, and 2) immigration reform that would grant these immigrants citizenship would mean even greater tax revenue.
Unauthorized Immigrants Pay Taxes
The argument used to bolster the anti-[illegal] immigration crowd is that unauthorized immigrants do not pay taxes to help fund the system. Supposedly, the jobs of unauthorized immigrants stay in the underground market, which means it doesn't circulate back to the licit, formal economy. Much to the dismay of the naysayers (e.g., the Heritage Foundation), unauthorized immigrants already pay taxes.
Anytime that an unauthorized immigrants buys gasoline, food, clothing or any other good, they have to pay consumption taxes. Unauthorized immigrants also pay taxes on property (also see here), even if they have to rent. Additionally, they also pay income taxes. According to the Congressional Budget Office (CBO), 6 million unauthorized immigrants, or about half, file income taxes return each year (CBO, 2007, p. 6).
More Legal Immigrants = More Tax Revenues
Not only do unauthorized immigrants already pay into the system, but if they were granted citizenship, they would contribute even more money (partially because of the higher wages they would earn). The idea here is that unauthorized immigrants work in the underground economy. By removing these workers from the informal economy, these workers can be taxed in line with documented workers with similar incomes. A recent study by the Institute on Taxation and Economic Policy (ITEP) confirms this economic theory, as well as the fact that unauthorized immigrants already pay taxes. The ITEP study estimates that legalizing immigration would increase state and local tax revenues by $2B per annum. According to the Social Security Administration (p. 3), only 3.1 million unauthorized workers paid Social Security taxes, which means legalization would increase tax revenues. Furthermore, if only half of unauthorized immigrants pay on income taxes, then the government would be able to collect on a majority of that other half.
For more impact on the state and local level, let's use the state of California as an example because California has a high population of unauthorized immigrants. What are the effects of not granting these workers legal status? The federal government misses out on $1.4B in tax revenues from California, and the state of California loses out on $310M in income taxes per annum (Paster et al, 2010, p. 1).
Last year, the CBO was analyzing the effects of S. 744, which was a piece of immigration reform legislation that would, amongst other things, grant legal status to a number of unauthorized immigrants. While doing its analysis, the CBO found that between 2014 and 2013, the legalization engendered by S. 744 would cause an increase of $459B in federal tax revenues (CBO, 2013, p. 2).
In summation, unauthorized immigrants already paid taxes. If we liberalized the flow of labor into this country, our country would experience further economic growth and our government would be able to collect more tax revenues as a result.