January 26, 2004

National Data, By Edwin S. Rubenstein

A Supply-Side Solution For Illegal Immigration

We have it on the authority of Jonah Goldberg that a massive deportation of illegals is “simply not going to happen.” Therefore, he claims, we have to support the Bush Amnesty/“Temporary Worker” plan.

Elementary economics suggests a different answer. In the 1970s—admittedly before Jonah’s time—Jack Kemp’s supply-side speechwriters taught him to recite the mantra: “Generally speaking, if you subsidize something, you get more of it and if you tax it you get less of it.” Kemp’s speechwriters’ point back then: the U.S. was taxing work and subsidizing leisure, hence should cut marginal tax rates.

But today, the mantra applies equally well to the illegal immigrant presence. (Needless to say, this has not dawned on Kemp’s current speechwriters.)

In earlier columns, I’ve documented how the U.S. taxpayer subsidizes the immigrant presence (legal and illegal). Here I look at a way to tax the immigrant presence—especially illegals.

And, let me repeat slowly, so that even Jack Kemp can understand: if we subsidize illegals we will get more of them. And if we tax illegals we will get less of them—they will self-deport.

Got it?

Immigrants, legal and illegal, send a lot of money home (click here for table). The slowing U.S. economy did not staunch the outflow of remittances to Mexico and other Latin American destinations, from which most illegals come. The total remittance flow to the region rose 18% in 2002, to a record $32 billion. This represents a significant acceleration of an already large growth rate, bringing the increase since 2000 to almost 40%. Mexico accounts for about one-third of the total.

Remittances are not taxed. But they could be. Taxing remittances would be not unlike taxing e-commerce:

71% of all remittance senders use wire service companies like Western Union or Money Gram.

Banks are used by another 11%

The name, location, and social security number of such senders can easily be tracked

Tax collection can be automatic, much like the state sales tax protocols proposed for e-commerce

A ten percent remittance tax on 2002’s remittances would have yielded $3.2 billion.

Alternatively, remittances could simply be subjected to a federal fee. U.S. banks and wire service companies already charge flat fees ranging from $10 to $30 for wiring as much as $1,000 to Mexico. The revenue potential of a Federal remittance fee is easily estimated:

6 million Latino immigrants (42% of adult foreign-born Hispanics) regularly send money to their families back home. Most immigrants wire money once a month

72 million remittance transactions annually (6 million times 12)

A flat $30 remittance fee could generate $2.2 billion ($30 times 72 million) for the Federal government

Arguably, this would be doing the recipient countries a favor. The case is often made that remittances distort their economies.

A tax on remittances could be considered a user fee for the cost of educating and emergency-room-medicating illegal immigrants and their children in the U.S... For example, President Bush’s recent Medicare reform includes $1 billion federal compensation spread over four years to the border state hospitals, which are compelled under current law to treat illegals free. That tab is currently picked up by the American taxpayer. If fine-tuning is required, it would be a simple matter to restrict remittance fees to countries known to be major senders of illegals.

The fundamental objective, however, is to alter the incentives faced by illegal immigrants.

Tax them and they will go away.

Edwin S. Rubenstein (email him) is President of ESR Research Economic Consultants in Indianapolis.