After the dust settled in the 2024 U.S. presidential campaign, it was a given that immigration was going to be a major topic during Trump's second term. He beefed up border control and has implemented mass deportation. Additionally, Trump signed off on a 1 percent remittance tax that will most likely fuel the immigration he is trying to stop. He is trying to use a law and order justification, even though immigrants are about half as likely to commit crimes as native-born citizens. While he is tackling immigration for criminal justice and cultural reasons, there is one aspect of restricting immigration that Trump is neglecting: its fiscal impact.
What happens to a nation's balance sheet when a country closes its doors to newly arrived immigrants who are workers, taxpayers, and/or future parents? Amid the campaign slogans and punditry, few commentators or pundits have asked what immigration will cost this country in a fiscal sense. As federal deficits mount and such entitlement programs as Social Security and Medicaid become insolvent, immigration is not merely a cultural issue, but a budgetary one. A new report from the American Enterprise Institute (AEI) released earlier this month takes this concern seriously by presenting a post-pandemic snapshot with updated 2024 Current Population Survey data. With these data on newly arrived immigrants, there is a more updated projection of fiscal impact.
The AEI report finds that immigrants with a Bachelor's or graduate degree have a strong net fiscal impact. For low-income households, the net fiscal impact has a net direct cost in the short-term (see below). However, the AEI study identifies often overlooked, indirect positive fiscal effects as a result of low-income workers who increase the net benefit. This is hardly surprising since undocumented immigrants pay nearly $100 billion in taxes annually.
One of the key indirect benefits is that the immigrants provide higher wages of native workers as a result of complementary immigrant workers. By increasing labor market efficiency, both low-skilled and high-skilled immigrants can boost native workers' wages, which in turn increases overall tax revenue.
Second, immigrants contribute to capital stock growth. With more workers, the existing stock of capital (e.g., factories, equipment, infrastructure) becomes relatively scarce. To rebalance the capital-to-labor ratio, firms are incentivized to invest in new capital. More capital translates into more capital-related tax revenue. Once these indirect positives are accounted for, it can offset the short-term fiscal costs on the state level in education (see Colas and Sachs, 2024).
Looking at the long-term, AEI estimates that in a 75-year time horizon, increased immigration would reduce the fiscal gap by $750,000 per household. With the 2.2 million new households (7.9 million people/average household size of 3.6 people), the result would be a reduction of the long-term fiscal gap by $1.75 trillion.
This finding about net positive fiscal impact lines up with a 2023 Cato Institute white paper saying that even immigrants without a high school diploma contribute a net positive fiscal impact. This AEI paper also lines up with a Congressional Budget Office (CBO) report from July 2024 about the fiscal impact of immigration. The CBO found that over the next decade, increased immigration by 200,000 a year would add $1.2 trillion in revenue. The 2023 IMF research paper also demonstrates the macroeconomic benefits of immigration, including increased GDP, employment, total factor productivity (TFP), and labor productivity.
This evidence should be taken seriously when analyzing Trump's mass deportation. This AEI report shows that the post-pandemic surge in immigration strengthened federal revenue and expanded the labor supply. As I pointed out last month, forced mass deportations would not only be morally problematic, but fiscally reckless. In terms of increasing fiscal deficits, mass deportation will end up reducing the GDP and reducing workers' wages, both of which have serious fiscal consequences.
Immigrants are often depicted as a fiscal burden on the citizens of the United States. However, after crunching the numbers, the opposite turns out to be the reality. Far from draining this country, immigrants stabilize this country's fiscal health. With growing deficits and declining fertility levels in the United States, restricting immigration not only fails to solve the problem; it makes matters worse. If Trump wants to be serious about immigration policy, it should not start with a border wall, raids from ICE, or fantasies about how immigrants are disproportionately responsible for crime. It needs to start with economic reality.
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