Don't Restrict Immigration, Tax It
By Nathan Smith : BIO| 20 Jun 2006
The goal of this article is to outline an open borders policy that achieves "Pareto-improvement." Sounds boring, I know. But bear with me. Pareto-improvement, a term from economics, means that some people are made better off while no one is made worse off. In a complex world, it is impossible for a policy literally to make no one worse off. But policies can be designed that, while many benefit, no social group can be identified that is systematically harmed.
Simple freedom of migration, like simple free trade, does not satisfy the Pareto-improvement criterion. While the theory of comparative advantage proves that when Country A opens its markets to goods from Country B, Country A as a whole will be better off, within Country A there will be "winners," such as workers and capital owners in the industries which can penetrate new export markets, and "losers," such as import-competing industries.
Likewise, if Country A opens its borders to immigration from Country B, the native-born population of Country A as a whole will be better off -- by "a fraction of 1%" in Americans' case, according to one estimate -- but there will be some losers -- US high-school dropouts may be earning as much as 8% less than they would be absent immigration.
Whether this kind of policy is a good thing depends on the social welfare function, that is, on how much policymakers should value the well-being of different people. Many critiques of immigration assume that the government should emphasize the well-being of low-skilled native-born Americans, discount the well-being of American-born employers and skilled workers who benefit from complementarities with immigrants, and ignore the well-being of immigrants themselves. Stated baldly, this doesn't sound very moral. And one tactic of immigration advocates is simply to make it explicit. "Are low-skilled Americans the master race?" asks economist-blogger Bryan Caplan. (Some call this patriotism, but they are confusing love of country, a virtue, with non-love of people from other countries, a vice.)
To make the argument that underlies Caplan's rhetorical salvo, we would have to venture outside economics into moral philosophy. We might invoke Rawls' "veil of ignorance" device. If you had to design a world order from behind a veil of ignorance as to your position in it, would you (be honest now) design one in which you had a 42 percent chance of being born into a country with under $1,000 GDP per capita, and forced to stay there, not by distance or natural obstacles, but by man-made visa regimes and border controls -- all in order to protect the wages of people at least 10-20 times better off than yourself? However, it's my belief that however incontrovertible the case for it may be from the perspective of reason and justice, before advocating a course of action that one foresees is likely to harm real people, one should pause and see if there's a better way.
Fortunately there is. Economists have already solved the problem in the context of trade theory. To make free trade, or freedom of migration, Pareto-improving, it may be necessary to tax the winners and compensate the losers.
To apply this approach to migration is actually easier than with trade, because the biggest group of winners -- the immigrants themselves -- is an easily identifiable group, with distinct legal status. As for the losers, while there is no conclusive evidence about who (if anyone) is harmed by immigration, we could err on the generous side by providing immigration adjustment assistance to the American-born working poor generally.
How to Tax Immigration
The reason that open borders can lead to Pareto-improvement is because, aside from being unfair, border restrictions are also hugely inefficient. A whole lot of people who would be far more productive in America are forced to stay somewhere else. Since immigration makes the pie much bigger, everyone can get a bigger piece. Here's how.
* First, an open borders policy must be resolute in denying welfare and taxpayer-funded social services to (most) immigrants, because any social safety net provided in the US will represent a higher standard of living than what prevails in many countries.
* So, as an alternative "social safety net" for immigrants, every immigrant -- or guest worker -- should deposit at a US consulate (or at private firms authorized by the US government to administer this transaction) an amount equal to the cost of deporting them. Having made this deposit, the guest worker should be deported at his or her own pre-paid expense if he becomes unable to support him- or herself.
Second, one interest that is typically ignored in US policy discussions is the source countries. The effect of emigration on poor countries is ambiguous. Emigration may alleviate unemployment. Emigrants send home remittances. Emigrants may boost the economy when they return with skills and savings. But poor countries can also suffer from "brain drain," losing their best and brightest, including skilled workers in crucial fields such as health care. To offset possible negative effects of brain drain, we can increase the incentive of guest workers to return home through a forced savings program. When a guest worker is issued a visa, a special savings account would be created for him. When he gets a job, a certain percentage of each paycheck would automatically be deposited in this account. Guest workers will not be allowed to withdraw money from the account, except in their home countries. Or they can stay, accumulate a certain amount -- a citizenship threshold -- in their guest-worker savings account, and become citizens, at the cost of forfeiting the savings accounts. Forfeited savings accounts could be distributed equally among all US citizens, on an annual basis.
Finally, a surtax will be charged to guest workers, the proceeds of which will be paid out either to all American workers, or targeted to the working poor, ensuring that American-born workers will have a higher standard of living than guest workers who earn the same market wage.
In a recent article -- "A Right to Migrate" -- I suggested that the surtax could be set at 12.4% (i.e., the Social Security payroll tax), the mandatory savings rate at 20%, and the citizenship threshold at $50,000. But the important thing is that these are variables. By manipulating the levels of these variables, Congress could achieve a wide range of policy objectives. The policy is compatible with a moderately restrictionist approach to immigration, if the citizenship threshold, as well as the surtax and/or the mandatory savings rate, were raised to very high levels. Or, if we wanted to maximize revenue, we keep the surtax and the citizenship threshold at a moderately high level, low enough to attract a large number of immigrants and guest workers, high enough to glean substantial revenues from them. Or, if our top priority is foreign aid, we would set the citizenship threshold and the mandatory savings rate high, but the surtax very low.
Given the technical complexity of managing immigration by means of these policy instruments, Congress might be wise to delegate immigration policy to an independent agency, similar to the Federal Reserve, which would be given a broad mandate, such as: "Maximize the foreign aid effect of migration, subject to the constraint that the poorest 30% of American workers are compensated for any migration-related welfare losses, while keeping the total number of guest workers at or below 15% of the US resident population." This agency would then continuously study patterns of migration and their effect on labor markets, source countries, and the American-born working poor, and then adjust its three policy instruments periodically.
But it would never set quotas or caps. Migration taxes would monetize, and force potential migrants to internalize, the perceived negative externalities of immigration. But the government would abdicate the discretion (except on national security grounds) to admit or reject particular immigrants. The migration decision would be left where it should be, in the hands of the immigrant, who has the best information of all about just how badly he or she wants to come to America.
Who Would Use the Guest-Worker Visa?
I hasten to say -- my Pareto-improvement criterion requires it -- that current (legal) immigrants would not be affected by the new policy, nor would future immigrants coming through currently available legal channels. Our entire immigration apparatus would exist, at least for a while, while a new channel of immigration opened up alongside it. Immigrants through traditional channels would become a special set of immigrants exempted from the extra taxes other immigrants had to pay. Which raises the question: why would anyone want to use the new guest-worker visa at all?
One reason is that many people -- indeed, most people in this world -- are, in effect, permanently excluded from America by our border regime. Since immigration became a hot topic, I have been surprised to see, not only how many ordinary people, but how many leading opinion-makers don't understand this. For example, Duncan Currie in the Weekly Standard, in arguing that a US-Mexico border fence is not the moral equivalent of the Berlin Wall, wrote this:
"Despite... elite skepticism, polls show that most Americans support security fencing along the Mexican border. Unless they are all nostalgic for Walter Ulbricht and Erich Honecker's East Germany, these Americans seem to reject the 'Berlin Wall' sneers. They must appreciate the stark difference between a totalitarian regime that treated its own citizens as prisoners and a liberal democracy that merely wishes to drive illegal aliens into the proper immigration channels." (my italics)
What Currie and others fail to appreciate is that only 10,000 visas are available to unskilled immigrants on an annual basis, compared to tens of millions who would like to come. "Proper immigration channels" were never available to the vast majority of the 12 million illegals who work here on farms, in shops, offices, and homes. If they admired America, if they loved America, if they wanted to be part of America, illegality was their only option.
Politicians like to say that illegal immigrants will go to "the back of the line." This is nonsense, because it suggests that while there is a long line to get into the US, illegal immigrants could have waited and gotten to the front eventually. Our immigration system permanently shuts out most of humanity based on their place of birth.
In addition to the low-skilled laborers that our current border regime does not admit legally, the guest-worker visa outlined above would no doubt be attractive to tourists and students, who, not intending to work, would not be affected by extra taxes on earnings. But if my experience is any guide, many people who could come to the US through normal channels might nonetheless opt for the guest-worker visa.
My wife, a Russian national, recently received her Green Card. The process took two years -- a few months to get a fiancée visa to the US, which was our longest-ever separation, and then a year-and-a-half after her arrival before her permanent residency was authorized. During that time she was not allowed to work. The waiting and uncertainty, the separations, and the forced unemployment, were traumatic and depressing. And I would estimate her lost earnings and other costs associated with the process at about $50,000. It would have been more morally satisfying for us to have earned that $50,000 and paid it in taxes, knowing that it was being channeled to less fortunate Americans to help them adjust to the marginal labor-market impact of my wife's immigration.
Creating a new channel of immigration can't make guest workers worse off. If surtaxes and mandatory savings are too big a burden, they simply won't come, and they'll be in the same position as before. You can never harm a person by giving him one more option.
Hobbes, Locke and Border Enforcement
Since there's been persistent divergence between de jure and de facto US policy on immigration, any new policy proposal needs to come with a comment on enforceability. Here, too, taxing rather than restricting immigration has its advantages.
There's a widespread belief that the federal government is willfully refusing to enforce our immigration laws. I doubt it. Consider the following back-of-the-envelope calculation: "The INS inspects approximately 300 to 350 million foreign nationals each year for admission to the United States," according to the testimony of one Mark A. Mancini before the Judiciary Committee in 1999. Subtracting 24 million who actually do come, let's round that off to 300 million would-be visitors or migrants. Pew Research Center estimates that 500,000 cross the southern border each year. Another 100,000 may overstay their visas. This implies that -- if applicants for US visas are a reasonable proxy for the number who wish to come -- our border regime deters or prevents 99.8% of unauthorized would-be entrants to the United States. That's not an "open system of non-borders," as Victor Davis Hanson has described it. The US border regime must be one of the most effective systems of mass coercion in human history. Yet it still falls short.
A year ago I wrote an article called "Hobbes, Locke, and the Bush Doctrine," which began with the words: "A struggle is underway between two ideas: liberal democracy and sovereignty... It goes back to 17th-century England, where the respective proponents of the two views were John Locke and Thomas Hobbes."
I used this conceptual framework to discuss the Iraq War, but Locke and Hobbes are equally applicable to immigration. Locke believed that government is based on a social contract. A contract implies consent. When Jefferson and the Founding Fathers affirmed, in the Declaration of Independence, that "governments... derive their just powers from the consent of the governed," they were channeling Locke. Foreigners are not part of our social contract. With respect to them, we are in a state of nature. To Locke, the moral law is binding in the state of nature, so they cannot justly do, or threaten, violence to our persons or property, nor vice versa. Hence, in the Lockean framework, our government does not have the "just power" to prevent the entry of (peaceful) foreigners through coercion. Historian Paul Johnson describes immigration to America in 1815, when the American polity was closer to its Lockean roots:
"It was an astonishing moment of freedom in the world's history. An Englishman, without passport or papers, health certificate or any other documentation -- without luggage for that matter -- could plunk down £10 at a shipping counter in Liverpool and go aboard. He got nothing but water on board and had to provide for his own food. He might go down to the bottom but, if lucky, in due course he went ashore in New York, no one asking him who he was or where he was going. He then vanished into the entrails of the new society." (The Birth of the Modern, p. 204)
Hobbes believed in a social contract, too, but "consent" could be exacted by force. For Hobbes, in the absence of a social contract, the moral law is not binding. So, since illegal immigrants are not part of our social contract, we can do anything we want to them, shut them out, deport them, kill them, whatever.
Our border policies can be justified in Hobbesian terms but not in Lockean terms. Of course, we are free to be eclectic in our appropriation of 17th-century philosophers' ideas. The problem is that our polity is generally a Lockean one, and as such it is not good at enforcing Hobbesian laws. We regard illegal immigrants, in Lockean fashion, as human beings with rights and dignity. This attitude is not consistent with the creation of effective deterrents to illegal immigration. Since illegal immigrants are hard to catch, and their economic payoff is huge, punishment adequate to deter them would have to be very severe. Probably nothing short of regular pogroms would work. A Hobbesian would have no objections to that ("the Soveraigne is judge of what is necessary for the Peace and Defence of his Subjects") but we do.
Unlike immigration restrictions, immigration taxes are compatible with the principle of consent of the governed. A foreigner who comes to America with a guest-worker visa would thereby consent to pay the associated taxes. A foreigner who comes here without a visa would be guilty, not so much of illegal entry as of a form of tax evasion, and the state would respond, not by deporting him, but by confiscating his property. Enforcement would still be a challenge and require political will, but it would be possible, as it is not now, to get incentives right within the constraints of our ideas of justice.
A Paradigm Shift
In principle, since taxing rather than restricting immigration is in the interests of the median voter, a majoritarian democracy should be willing to pass it. Yet the idea of using immigration as a revenue source to offset perceived negative externalities has hardly been mentioned in the immigration debate. I don't think doubts about its feasibility are the reason. Rather, there's an ethical hang-up: people think it's discriminatory to make immigrants pay higher taxes, yet somehow it's not discriminatory to keep them out altogether, which hurts them much more.
Still, I think taxing immigration is an idea with a future, simply because it's the "rational middle ground" for which everyone is looking.
Nathan Smith is a TCS contributing writer.