Aaron Krowne
Among other political issues which have been in the news lately, both the tax system (and how to improve it) and illegal immigration have figured prominently. However, these are largely seen as separate problems. Here I will offer some points which connect the two, and I think, show how they can both be elegantly solved, with everyone doing better off overall and saved a lot of hassle and strife. Indeed, it very well may be that one of the strongest arguments for radical tax system reform is its potential to solve the illegal immigration problem.
Based on leading estimates, there are about 11 million illegal immigrants living in the U.S. presently.1 This is about 4% of the U.S. population. This is a significant amount--particularly visible because illegal immigrants tend to be concentrated in areas in the south and west, due to Mexico's influence.2
Currently, the U.S. seems to be divided on whether to welcome and thank these illegal immigrants (as in the California proposal to allow illegals to get driver's licenses [Ali, 2005]), or greet them at our borders with a shotgun and a glare (as in the ``MinuteMen'' vigilante border patrols [Robbins, 2005]). This naturally arises from two outlooks on illegals, both of which are grounded in different situations. However, these views are symptomatic rather than foundational--neither seems to adequately address or account for the underlying problems due to illegal immigration, which result in various secondary observables upon which these views are based.
In one outlook, illegal immigrants do jobs that most politicians and middle-class voters would not want to do. They do the landscaping, construction, maintenance, housekeeping, and nannying of a vast swathe of these people. It's hard to hate them--especially given the personal contact.
In the other outlook, they are sucking up social services that tax-paying citizens fund, and refusing to truly accept and integrate into our culture. I would wager these views are more prevalent below and above the middle class: from people who can either afford ``domestic'' versions of the typical illegal immigrant services, or those who can't even afford the illegal immigrants. The common element is that illegal immigrants do not matter to these people, and they have no regular, interpersonal contact with them.
Illegal immigrants are also winning no friends among unemployed U.S. citizens. U.S. citizens used to do all of these jobs perfectly fine before illegal immigrants; now outsourcing and globalization have forced many former securely-employed blue collar workers out of work, adding insult to injury.
Typically these views coalesce along party boundaries. The Democrats, who perceive the Hispanic vote as an important contingent, take the former, welcoming view. They want to give illegal immigrants more citizen-like rights, in effect, providing them with more public services. The Republicans, who represent the wealthy upper-middle class and the working poor Caucasian contingent (who are disproportionately likely to be blue collar), take the latter stance. They want the illegals out, and they howl for tighter border controls to achieve this.
Who is right? In this paper, I will basically side with those critical of illegal immigration--but not really for any of the above reasons (and I don't advocate the same solutions). I believe the underlying reasons are economic far more than cultural, and are such that I certainly don't blame illegals for doing what they do. As I will show, the fault is, in fact, ours.
Income taxes are direct taxes. Direct taxes were expressly forbiden in the Constitution, as a per capita tax, as opposed to a tariff. It was expected that the federal government and states would continue to raise revenues through this latter sort of tax, and do so in perpetuity. Indeed, this continued for quite a while, in fact, until 1913. This was when the 16th Amendment enabled the income tax permanently, in effect altering the Constitution.
Ever since this happened, there have been public debates (more active at some times than others) about how income taxes should be designed in order to be just and equitable. In tax theory, this is understood less ambiguously as notions of horizontal equity and vertical equity [Thorndike and Ventry, 2002]. Horizontal equity means that those with similar incomes are taxed similarly. Vertical equity means that those with less income are taxed less--thus we admit that ``equity'' can be fostered without equivalence, in a sense.
Horizontal tax justice matters because of the government's tendency to grant favors to parties who have connections to the government, or are percieved as a disproportionately influential voting contingent. Wherever parties in similar economic situation are treated differently by tax law, horizontal equity (and hence justice) is sacrificed. In addition, there is a strong case to be made that complexity itself jeopardizes horizontal equity, as it creates openings for abuse and usually harms those who fail to understand the Byzantine rules.
Vertical tax justice matters because the mission of government is generally agreed-upon as one of providing a ``level playing field'' in society. That is, the less-fortunate (by no fault of their own) should be given a relative ``boost'' so that they might succeed (or, alternatively, be punished less by economic forces outside their control). In some cases, such a boost may be required for sheer survival. Thus, vertical tax inequality can be legitimately argued to improve tax justice.3
A tax system which places an extra burden on the fortunate to help the less forunate is called progressive (consider this as a completely arbitrary, value-neutral term, at least for the present). A tax system which places a disproportionate burden on the less fortunate, at the expense of the successful, is called regressive. These can be considered specific points on a an entire spectrum of tax progressivity.
Both vertical and horizontal tax system characteristics can effect progressivity. For example, let's say that the tax system is complicated and full of loopholes that one can exploit, if one expends sufficient effort. This might be in the form of a lot of personal time invested, or perhaps the need to hire a tax lawyer or accountant. In this case, the tax system will be regressive, because those who are already more successful will be able to reduce their tax burden, leaving the less fortunate to shoulder an disproportionate load.
Progressivity can be intentionally enacted to create vertical tax justice, by creating graduated tax brackets. This is something which is intentionally implemented in the current U.S. system.
With these preliminaries out of the way, I'll provide a quick summary of the current current tax debate in the U.S.4
Likely for political expediency, the prevailing debate has zeroed in on how to make the tax system more efficient. That is, the agreed-upon goal is not to scale the tax system back so that government has less spending power, but how to make it more efficient so it is less painful for citizens to use and requires less revenue to be raised to achieve the same ends. To accomplish such a thing, horizontal equity has been the focus, by way of simplification of the tax code. The proposed solutions generally fall into flat income taxes, a national sales tax, or a European-inspired Value Added Tax (VAT).
The details of these various schemes can be found elsewhere [Hassett, 2005; Boortz and Linder, 2005; Wik, 2005]. With the exception of national sales tax,5 all of them have been implemented (in some form) in other countries. Thus, they are not so far-fetched. As an example of the efficiency implications, some parties have argued that switching to a national sales tax or VAT would save the government $100-150 billion in lost revenues [Lugar, 1995].
Later on, I will argue that by switching to a national sales or VAT tax (both of which are consumption taxes [Ehrbar, 2005]), the illegal immigration problem can largely be solved. This would not be the case for a flat income tax. Thus, I argue, the consumption taxes are superior, if for this reason alone.
A final note, for all you nit-pickers out there: for the purposes of this discussion, I consider the social security, FICA, and ``Medicaid'' taxes to be plain income taxes.6 I will call all of these things income taxes. And when you add up all these kinds of taxes on income, you'll probably notice my numbers are pretty reasonable.
The core argument is very simple. Illegal immigrants are, by definition, not living in the U.S. as citizens. This means they are not participating in the tax system. In sum, they are not paying taxes.7
It seems to be an implicit assumption that the thing about immigrants which enables them to accept lower wages is that they have some innate ability or desire to live, in the U.S., in more austere conditions than natives. Perhaps willingness to live on the cheap is a factor. But I would argue the dominant factor is that their their overall expenses have been lowered 20-30% by the fact that they do not pay taxes! Put another way, each dollar they earn is worth 20-30% more, so they require proportionally fewer dollars from employers.8
``So what,'' many will say--``no one wants those jobs anyway.'' This point (alluded to earlier) is another version of the politically-correct, but foolish platitude that illegal immigrants are actually needed to do the domestic jobs no one wants to do. In fact, this ``dirty jobs'' argument is quite silly upon serious inspection. It is in part obviated by the fact that most Mexicans don't really ``want'' to do these jobs either; the work simply provides a means to survive and maintain a better situation. And of course, it is also partially false: there are plenty of unemployed U.S. citizens who ``want'' to do these jobs just as much as the illegal immigrants. So while we're all not ``wanting'' to do these jobs, why should we give the benefits to illegal immigrants?9
History shows that these jobs were previously taken up by U.S. citizens, and currently, there are plenty of unemployed who would and could do them. We should not necessarily think of them as ``undesireable careers,'' which is how people seem to assume Mexicans see them. Such jobs in fact provide a natural safety net for those down on their luck, those faced with major economic change, those with no high-value marketable skills, or those just starting out (like teenagers--remember when teenagers used to mow lawns instead of Mexicans?) From this perspective, these jobs are part of a system which allows all citizens to have some place in the labor market, at all times, for all situations.
Such jobs are precipitously reduced (or largely eliminated) by the competition of a labor force which demands a drastic 20-30% fewer dollars. Assuming a conservative 20% labor cost savings, a $7/hr salary becomes a $5.60/hr salary--suspiciously within the minimum wage range. This is a no-brainer for any business or individual that can substitute illegals for tax-paying U.S. citizens.
Ultimately, because they skip out on taxes, illegal immigrants are actually rewarded for the lower wages they can automatically accept. In essence, they have a much higher effective purchasing power from each dollar--which they, as illegal immigrants uniquely enjoy--and therefore have lots of available employment. This is discriminatory against the least fortunate of U.S. citizens in a perverse, backwards sort of way.
For a decision as big as whether or not to move to the United States and live illegally, you can bet there is some risk vs. reward and cost-benefit figuring going on in the minds of prospective illegals, even if only implicitly.
Take on, if you can, the perspective of a poor Mexican, either living at the bottom of the economic system, or completely jobless and in absolute poverty. Life is not so good for you, and you want to improve your situation. You know that you have the option of immigrating to the U.S. and living illegally, in a black wage market. You know people who can make the trip happen, and you may even have some relatives living in the U.S. (legitimately or not) who will help fund it for you.
Do you do it, or not? Let's summarize the current situation:
If you think you can make it across the border, then, you probably will make the trip. It's as much a no-brainer as the U.S. employer who is considering hiring domestic labor at $7/hr versus you at $5.60/hr.
In sum, the tax system of the U.S., and the juxtaposition of the economies of the U.S. and Mexico (and to a lesser extent, other countries) has led to a situation where there is almost no cost or risk to illegally immigrating--and an enormous benefit.
Besides that fact that people are suspicious of lots of foreigners in their country (who refuse to integrate), there are hard economic reasons that illegal immigration is a bad thing.
As discussed, illegal immigration provides a pool of labor which can work significantly cheaper than domestic labor, purely as a result of tax evasion. This has two key, interconnected results:
Recall that a quantity equivalent to about 4% of the native (or naturalized) U.S. population is living and working here illegally. Also consider that unemployment in the U.S., of late, hovers around 5%. In fact, this number is so persistant that economists call it structural unemployment. We can't seem to make it go any lower.
These numbers--4% illegal immigrants and 5% unemployment--are on the same order of size. We should be concerned about this. To be a little more explicit: let's assume that only 2/3 of the illegal immigrants are of working age and working. That leaves a pool 2.6% the size of the population in general. Further, lets assume that, were these people to leave, half of their jobs would be taken up by the domestic unemployed. This would mean that unemployment would be reduced to about 3.7%, and over 3.7 million additional people would have jobs.
If you ask me, that is a lot of people.
Consider, also, that this assumes only half of the vacancies would go into new jobs. The other half would consist of already-employed people moving from their current jobs to jobs vacated by illegal immigrants. Why would they do this? Simple: because the wages would be higher.
Let's look at a simple, illustrative scenario, with a simplified, ``toy'' labor market, to see how this can be.
Assume that you're a U.S. citizen, without highly-valued, marketable skills, who needs a basic job to survive. You could be a teenager or college-aged youth, a veteran, someone emerging from retirement because of financial misfortune, or anyone else in the demographic typically called ``the working poor.'' Let's say there is no illegal immigration, and there are two jobs available to you. You can work for Wal-mart for $8/hr, or you can work on a landscaping crew for $7/hr. Obviously, you take the Wal-mart job, if only because it is higher-paying.
Now, let's add in the illegal immigration problem. You've suddenly got 7.7 million extra people in the U.S. Since they dont pay taxes, for them, $5.60/hr is the same as your $7/hr. To compete with domestic labor, these illegal immigrants actually bid wages down to this level (or lower, if they are willing to live in worse conditions). Responding to this, landscaping companies are now paying $5.60/hr instead of $7.
So hundreds of thousands of domestic laborers have now been driven out of landscaping work, since they've all been underbid. And suddenly, they are all competing for the jobs at Wal-mart. What does Wal-mart then do? Of course, it gleefully bids wages down as low as they'll go, which, lets assume, is now $6/hr. Wal-mart lowers prices. But there are now a lot of pissed off domestic laborers, and everyone is pissed off at Wal-mart, and most people are also pissed off at the illegal immigrants.
All we did was add in illegal immigration, and now you are only able to earn $6/hr at the same Wal-mart job. Note that you aren't working on a landscaping crew and you haven't lost the job, yet you've still had to take a pay cut due to the indirect, but massive influence of adding over seven million sub-base laborers.
This effect can be extended upward: IT desktop support may fall from $12/hr to $11/hr, and so forth, because now lots of Wal-mart's best former employees are competing for relatively ``cushy'' IT jobs. Thus, one can see how the introduction of illegal aliens has effects that ripple throughout the labor market, though they are felt most markedly near ``the bottom.''
So, without the illegal immigrant labor force, wages would go up for the domestic unemployed who took up the previously-black market jobs. Wages would even go up for those who stuck with their current jobs, rather than switching into vacated roles. Wages would have to go up--because now nearly everyone working would be paying into the same tax system; thus they would have to be paid more.
What this all shows is that illegal immigrants have a distorting effect on the labor market in general, because they represent a ``sub-base wage'' labor contingent. Since they're not part of the tax system, they don't represent the normal lowest-wage contingent; they're below even this. Without such a contingent, wages would have to snap back to a normal scale. Domestic low-wage earners would no longer have to compete with those who can, in effect, demand less than subsistence wages.
The illegal immigration problem, or more accurately, the distorting effect of the tax system that causes it, is related to a number of other surface problems which are normally considered separately:
So, a parallel, illegal immigrant subculture exists, initially to help newcomers into a strange country, but justifying itself on an ongoing basis because of these hostile social adversities. Staying within the boundaries of this subculture feels much more safe for its constituents.
Most of these people are either in high-tech services (programmers, technicians, call center staff) or in the blue-collar sector (factory workers of all sorts). Even if they eventually find domestic jobs, the illegal immigrant labor force inevitably has some effect on this process, making those jobs lower-paying, extending the amount of time it takes to find them, and leaving fewer ``temporary'' low-skill jobs to act as a fall-back. To make matters worse, this domestic unemployed contingent is very aware of the working illegal alien presence, especially in southern and western areas, where it predominates.
Sometimes it's eerie how spot-on the founding fathers of the United States were. Though they made direct taxes explicitly illegal, later governments couldn't figure out why (and couldn't help themselves), so they simply erased that pesky little clause of the Constitution. As argued above, the income tax is basically a huge bulls-eye painted on the United States that says ``exploit me.'' It sets up a scenario whereby those who wish to opt out of the citizenship system, and indeed, the core of our social fabric, are actually rewarded.
We will not successfully prevent illegal immigration by ``watching our borders more closely.'' The cost of doing such a thing perfectly will be astronomical, and even then, still susceptible to false positives that would be a civil liberties nightmare.
The cheap, easy, elegant, and humane solution to illegal immigration is simply to do away with the income tax system. If you do this, the 20-30% wage advantage of illegals vanishes instantly.
How could we do this? The design of a tax system for the United States which leaves out income taxes is beyond the scope of this essay. However, any Value Added Tax (VAT) or national sales tax would achieve the necessary effect. The VAT is a comprehensive supply-side tax that taxes the value added (price differential) at each transaction in the supply pipeline. The national sales tax simply occurs at point-of-sale. A problem with the latter is that the distinction between wholesale and retail needs to be drawn, and is perhaps a contentious and messy point (which needs to be policed). In addition, a national sales tax can ``double'' (or more)-tax the same item and its components, simply as an artifact of there being many stages of value addition in the supply pipeline. A VAT is in essence a sales tax that doesn't have this problem.
In either case, these are taxes that no one would be able to avoid paying--native or illegal immigrant. They could also be designed so that the switch from income taxes to supply-side-based tax would be revenue-neutral (i.e., the same amount of tax revenue is raised by the government).
All of this would drastically stem the influx of illegal immigrants. Many who are over here would likely return home. People would continue to immigrate as long as the U.S. offered the possibility of a better absolute standard of living--but they'd have no incentive to do it illegally. With illegal immigration falling off, support networks inside and outside the U.S. for it would dwindle. Costs to make the trip would rise, due to lower demand for it, which would precipitate further drops in demand. There'd be fewer relatives in the U.S. to send money back for support and to make the trip in turn. The risk-reward and cost-benefit calculation would be upended in an accelerating, self-reinforcing way.
Interestingly, the Latin Americans who still chose to immigrate to the U.S., and successfully do so, would increasingly be attractive to us: that is, educated, having or acquiring valuable skills, intelligent, and motivated. And almost certainly: English-speakers.
While individual Mexicans (for example) would likely be worse-off in the short-run, Mexico would be better off not being a dependent nation: it would have to develop itself internally instead of looking externally for its daily bread. All Mexicans would thus win in the long run.
I have received a number of criticisms of the above, which I believe are actually accounted for under my assumptions and arguments, but which I will address here in a more specific manner. These are:
This critique is a result of focusing on the immigrant part of my argument instead of the illegal part. Legal immigrants have of course always been a part of the U.S. tradition. But such people paid taxes, and hence competed with native domestic workers on a level playing field.
Why have immigrants historically been so prevalent in low-end wage labor? This is a result of ways in which immigrants are normally less competitive than domestic workers: they typically lack sufficient language skills, general knowledge of the local culture, support networks that foster economic success, and often lack advanced education and vocational training because they are escaping countries where these things were not available to them.
The Chinese did, after all, build the domestic railroads. But this is because they lacked English ability and native business and technology knowledge, not because they were illegal aliens and hence tax evaders. In a healthy labor market, low-end wage labor is a mixed population, containing both immigrants and natives. However, by avoiding the core tax burden, illegal aliens manage to drive out this native component of this sector of the work force, who simply cannot compete. This is the key difference between today and the past, as well as the difference between the legitimate and illegal immigrant populations.
The main observation--that the cost of some products and services is lowered--is of course true. In this sense, the patrons of illegal immigrant labor directly benefit quite a bit, and these effects also propagate through the wider economy. However, the complete argument is that in the entire social cost-benefit calculation, this effect makes illegal immigration a positive phenomenon.
I believe this argument must be false. Let's look at the conceptual ``balance sheet'' of illegal immigration:
| Minus | Plus |
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|
You can't get something for nothing. The savings in lower labor cost is (at most) equivalent to the loss in tax revenue from displaced citizens.12 It may help to imagine the national economy as one of those framed, sliding-grid puzzles, where there is one square absent. That square, in this situation, is the missing tax revenue the illegal aliens are not paying. No matter how you move the blocks around in attempt to make a better picture, there will still be a square missing.
One could also think of the ``friction'' of this shifting as the hard-to-measure social effects due to the impact on the domestic labor force. When you add in the impact of 11 million non-taxpayers on the public infrastructure, this is very much a negative-sum game.
Income taxes are already invasive, corrupt, politically gameable, and regressive. These things are all discussed amply elsewhere [Boortz and Linder, 2005; Edwards, 2003; Graetz, 1997]. However, as I've shown here, income taxes are also largely responsible for the illegal immigration problem. This in turn quite visibly and painfully harms the domestic labor market, and causes secondary social and political strife.
Its time to admit that the founding fathers got this one right: eliminate the income tax to stop illegal immigration.