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Public Deficit Bias and Immigration

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  • Michael Ben-Gad

    (City University London)

Abstract

How much can governments shift the cost of government expenditure from today's voters to tomorrow's generations of immigrants, without resorting to taxation that is explicitly discriminatory? I demonstrate that if their societies are absorbing continuous flows of new immigrants, we should expect governments that represent the interests of today's population, even if that population is altruistically linked to future generations, to choose policies that shift some portion of the tax burden to the future. This bias in favor of deficit finance is not infinite. Today's population or their descendents, together with future immigrants, ultimately pay the higher taxes necessary to finance the accumulated debt, and live with the additional excess burdens these higher taxes generate. For a given rate of immigration and policy horizon, governments balance the deadweight losses associated with fluctuating tax rates against the benefits that accrue to the initial resident population from shifting part of the burden of financing government expenditure to future immigrant families. To measure the deficit bias, I analyse the dynamic behavior of an optimal growth model with overlapping dynasties and factor taxation, calibrated for the US economy. Models with overlapping infinite-lived dynasties allow for a very clear distinction between natural population growth (an increase in the size of existing dynasties) and immigration (the addition of new dynasties). They also provide an alternative to the strict dichotomy between models with overlapping generations, where agents disregard the impact of their choices on future generations, and the quasi-Ricardian world of infinite-lived dynasties with representative agents that fully participate in both the economy and the political system in every period. The trajectory of the debt burden predicted by the model is a good match for the rise in US Federal government debt since the early 1980's, as well as the increases in debt projected by the Congressional Budget Office over the next few decades.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 21.

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Date of creation: 2013
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Handle: RePEc:red:sed013:21

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References

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  1. Marco Battaglini & Stephen Coate, 2006. "A Dynamic Theory of Public Spending, Taxation and Debt," NBER Working Papers 12100, National Bureau of Economic Research, Inc.
  2. Karin Mayr, 2004. "The fiscal impact of immigrants in Austria--a generational accounting analysis," Economics working papers 2004-09, Department of Economics, Johannes Kepler University Linz, Austria.
  3. Philip Oreopoulos & Alan J. Auerbach, 1999. "Analyzing the Fiscal Impact of U.S. Immigration," American Economic Review, American Economic Association, vol. 89(2), pages 176-180, May.
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  5. M. Dolores Collado & IÒigo Iturbe-Ormaetxe & Guadalupe Valera, 2004. "Quantifying the Impact of Immigration on the Spanish Welfare State," International Tax and Public Finance, Springer, vol. 11(3), pages 335-353, 05.
  6. Ben-Gad, Michael, 2004. "The economic effects of immigration--a dynamic analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 28(9), pages 1825-1845, July.
  7. Jim Dolmas & Gregory W. Huffman, 2004. "On The Political Economy Of Immigration And Income Redistribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1129-1168, November.
  8. Michael Ben-Gad, 2008. "Capital-Skill Complementarity and the Immigration Surplus," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(2), pages 335-365, April.
  9. Kjetil Storesletten, . "Sustaining Fiscal Policy Through Immigration," Homapage Papers _005, Stockholm University, Institute for International Economic Studies.
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  11. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  12. Xavier Chojnicki, 2012. "The fiscal impact of immigration in France: a generational accounting approach," Working Papers 2012-11, CEPII research center.
  13. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
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  15. Christian Keuschnigg & Mirela Keuschnigg & Reinhard Koman & Erik Lüth & Bernd Raffelüschen, 2000. "Public Debt and Generational Balance in Austria," Empirica, Springer, vol. 27(3), pages 225-252, September.
  16. Xavier Chojnicki & Frédéric Docquier & Lionel Ragot, 2011. "Should the US have locked heaven’s door?," Journal of Population Economics, Springer, vol. 24(1), pages 317-359, January.
  17. Zak, Paul J. & Feng, Yi & Kugler, Jacek, 2002. "Immigration, fertility, and growth," Journal of Economic Dynamics and Control, Elsevier, vol. 26(4), pages 547-576, April.
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  1. Public Deficit Bias and Immigration
    by Christian Zimmermann in NEP-DGE blog on 2013-08-11 23:23:02

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