Athens Eco Latino

	Febrero / February 2006 Vol. 3 Número / Issue 11

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Illegal Immigrants and the Tax Base

by Cynthia M. Portalatin, Mario E. Delgado, and Mayra F. Diaz, USDA

Most of the time we readily admit that persons, things and events are not perfect, or capable of providing a 100% of anything. Notwithstanding this conviction, we more often than not judge and measure what we dislike or disapprove of, against a perfect or ideal estate; while what we like or approve of, we frequently judge against a less than perfect measure. This approach to making judgments and decisions is not rational or even logical, typically biased and ultimately ineffective. Nevertheless we employ it time after time in support of preconceived views and tendencies.

For the sake of accuracy and objectivity, let us avoid falling in the above trap in evaluating what follows. Let us open our perspective and judge the bottom line impact of illegal immigrants on our tax base on its factual merits and from a balanced comparison of realistic conditions. To this end we will separate their economic impact from both the supply and demand sides; that is as both Producers (employees and entrepreneurs) and as Consumers (buyers or recipients of goods and services). This evaluation will weigh their net qualitative direction and not a quantitative measure of their net effect on taxes. It is not an evaluation of their contribution to our GDP. This evaluation will also use the term "illegal" and not the correct term "undocumented" for clarity and familiarity purposes.

It is our contention that illegal immigrants, even in their less than perfect compliance with our tax laws, provide a positive contribution to the net national tax base (direct and indirect tax contribution minus public services outlays on their behalf). And perhaps ironically so, superior to the contribution from legal immigrants.

Illegal immigrants as laborers and entrepreneurs impact our national tax base directly or indirectly through the following avenues:

- Individual Tax ID Numbers (TIN) are issued by the IRS to illegals for the sole purpose of collecting taxes from them. Many companies require and use this form of identification. Illegal immigrants are also aware that in the future, as it has happened in the past, the opportunities to qualify for amnesty programs or other beneficial legislation will depend on if they can prove to have been paying taxes during their undocumented history. Because of the above conditions, there are more illegals paying taxes through this method than the public is aware of. This avenue represents a direct contribution to the national tax base.

- Illegals are willing to work very hard, for longer hours, without receiving overtime, without employee benefits and in less than adequate and legally mandated working conditions. This behavior allows the hiring businesses to attain and retain much higher revenues and profits than normal. These windfall gains place businesses at higher tax brackets and therefore having to pay more taxes. This is without a doubt a significant indirect contribution to the national tax base by illegals.

- Illegals through their low wages and benefits and with their higher than normal productivity allows marginal businesses to survive, or not having to outsource overseas some of their operations. This is another indirect contribution from illegals to the tax base that would not exist in their absence.

- Illegals often come to work even if injured or ill and without placing any claims on sick leave or on workman's compensation. This work ethic allows the company to report higher income than otherwise (savings from unnecessary scheduling and staffing expenses) and hence pay higher taxes, resulting in another indirect contribution to the tax base from illegals.

- Under the current "earned income credits" program, individuals and families with income below certain minimum, not only do not pay taxes but receive supplemental income from existing tax funds. Many illegals would qualify for this credit, but their status prevents them, hence indirectly saving taxes.

- More often than not, it is not the illegals that promote the evasion of taxes, but the enterprise that hires them. These businesses by not reporting the illegals as employees, avoid paying the corresponding expenses associated such as social security, workman's compensation and unemployment compensation benefits. The illegals do not know or are not clear about these. The companies in turn get to retain more income and hence pay higher taxes, again, another indirect contribution by illegals to our national tax base.

- Illegals are entrepreneurial when given the opportunity. In this capacity there are less incentives or opportunities for tax evasion. In their capacity as businessmen, they contribute directly to our national tax base. There are numerous illegals in this role and their numbers get larger every year.

- The illegals that report their taxes utilizing a fraudulent social security number tend not to claim their tax return at the end of the year. This becomes an unclaimed surplus to Social Security and indirectly a contribution to our Federal finances.

Only in two (#1 & #7) of the seven above listed conditions might some of the illegals achieve tax evasion. Even in these specific avoidance instances, they don't stop making their contribution "in-flesh" and hence paying through the additional taxes paid by the gaining business. It would not be surprising that even in these specific instances of evasion, their indirect contribution "in-flesh" more than offsets their evaded amounts. Further, illegals that evade taxes don't pay them period; however the proportion that does so is probably much smaller than assumed.

Much of the blame over the issue of tax evasion should not fall on them exclusively, but also on their employers. Illegals by definition are vulnerable, hence willing to follow their employers' wishes. By not reporting illegals as employees, employers do not have to pay the various taxes and customary employee benefits. The additional bottom line amounts are a roundabout way of illegals paying taxes "in-flesh".

Evading taxes is a common practice especially in the small business and self employed communities. This practice is not particular to the illegal equation, but widely spread in our economic culture. Placing more resources in enforcing the tax laws across the board would make a more significant contribution to our tax base than focusing on chasing down illegals. Illegals after all may have a net positive impact on our tax base even after accounting for their tax avoidance.

Illegals have not only been welcomed, but even directly recruited by our at large business community because of their better than normal productivity, production quality and lower overall costs. Illegals improve our tax base as compared to legal immigrants and our native labor force and augment the earnings and survivability of our enterprises. The popular position that illegals take more from our tax base than they contribute is an invalid observation as far as the direction of the above qualitative measures are concerned. Ultimately, this is our country and as such, we should internally and without duress determine who comes in to visit or to stay. But this is a separate issue and we need to address it independently.

Illegal immigrants as consumers contribute directly to our national tax base and minimize their claim to it (social services) through the following avenues:

- By paying sales and other consumption related taxes. Education and other public services are paid with these funds.

- By paying property taxes indirectly through their rent payments or directly through mortgage payments. Many public services are paid with these funds.

- Illegals make use of emergency medical facilities on a limited basis or as a last resort (when conditions are severe).

- Illegals place a relatively lower level of demand on public services such as utilities, police and emergency services, etc. than a legal resident would. They prefer to keep as low a profile as possible.

- Illegals have a very high propensity to consume. This increases the demand for existing products and for the creation of new businesses. This demand has both a direct and a multiplier impact on income and taxes. Again, this is another indirect contribution by illegals to our tax base.

- Their demand with its "underground" characteristics and limited legal support puts back into circulation dilapidated assets such as trailers, apartments, lots lacking adequate utilities, vehicles, etc. This demand generates a brand new taxable income stream otherwise non-existent.

- By not being eligible to apply for favorably priced government programs, such as soft loans for residences and business purchases, illegals end up paying higher prices in the marketplace. Businesses providing these products and services to the illegals make higher than normal income and hence pay more taxes than otherwise.

- In general private sector lenders take advantage of the illegals limited access to capital and charge them more than economically justified interests. This gouging allows lenders to earn above normal income and hence pay more taxes than otherwise.

- Illegals often make use of private medical facilities and pay cash accordingly. They do not utilize emergency medical services every time they need medical attention as it is often implied. - Like everyone else, they prefer to pay for the services of a family doctor as often as possible.

- They evade paying taxes whenever buying from an "underground" business from within their communities. However, this is not a common practice as they typically find better variety and prices within legal businesses operating in the open economy.

- They do make use of educational services for their children; a service that is paid with public funds. However, many illegals are single, or do not have children with them. Until they are established, they often prefer to leave their families behind.

Only one (#1) of the above eleven contributory elements have a negative effect on the tax base. Their net effect on the tax base is even more positive than as a producer. They may make indirect use of subsidized government programs such as with faith based organizations; however this is not a widespread practice, as they favor anonymity. Education, being the only public service they make full use of, is probably not utilized until after they bring their families or start one. This gives our tax base time to capture contributions from the illegals either in-cash and/or in-flesh from the various avenues as a producer or consumer listed above.

Only a comprehensive quantitative study will be able to determine the net bottom line dollar contribution to our national tax base from illegal immigrants. Nevertheless, based on the above exposition, it may be safe to anticipate that their net contribution to our tax base is going to prove to be positive. It has been established in previous quantitative studies that immigrants in general contribute to the short and long term growth of our economy. We may now add that perhaps illegals also contribute to the tax base. Economically, therefore, it is not rational to exclude illegals. From cultural, social or political standpoints we may not want them around, and that should be our prerogative; but let us make sure we do not confuse the issues.

A large proportion of immigrants, legals and illegals, come to our shores primarily to better their economic lots. We therefore may safely suggest that given the same or similar opportunities in their native lands, they would have stayed behind. Perhaps it would be more natural and profitable to regulate their numbers, not by incurring unending enforcement costs, but by helping their countries of origin provide matching funds on business development and infrastructure programs to help these ambitious immigrants realize their material goals in their respective communities.

Estimates from the World Bank on remittances by immigrants indicate for example that Mexico will receive over $18 Billion in remittances from formal channels by the end of CY 2005. This figure represents approximately 2.7% of Mexico's GDP for 2004. The World Bank report also indicates that there could be an additional 50% of remittances through informal channels ("Emerging Markets Indicators - Remittances", The Economist, Nov. 26, 2005). By participating in matching community specific economic development programs, we as a nation would not only reduce the inflow of immigrants to more acceptable levels, but would also assist the participating nations in distributing their wealth not only more effectively, but also more equitably.