13. Seth Stephens-Davidowitz, Everybody Lies: Big Data, New Data, and What the Internet Can Tell Us About Who We Really Are. (New York: HarperCollins, 2017), 184–185.
14. Sari Pekkala Kerr, William Kerr, Çağlar Özden, and Christopher Parsons, “Global Talent Flows,” Journal of Economic Perspectives 30:4 (2016), 83–106: 87.
15. These trends also hold for immigrants in other rich countries. See “Six Degrees and Separation: Immigrants to America Are Better Educated than Ever Before,” Economist, June 8, 2017; and Jeanne Batalova and Michael Fix, “New Brain Gain: Rising Human Capital among Recent Immigrants to the United States,” Fact Sheet. Migration Policy Institute, 2017.
16. Blau and Mackie, The Economic and Fiscal Consequences, 243.
17. There is substantial evidence that immigrant diversity enhances measures of economic prosperity. Alberto Alesina, Johann Harnoss, and Hillel Rapoport, “Birthplace Diversity and Economic Prosperity,” Journal of Economic Growth 21:2 (2016): 101–138.
18. Lewis and Peri. ”Immigration.”
19. For a review of studies and evidence on these points, see Blau and Mackie, The Economic and Fiscal Consequences, chapter 6.
20. Gustavo López and Kristen Bialik, “Key Findings about US Immigrants,” Pew Research Center, May 3, 2017.
21. In 2015, this excluded natives of the following countries: Bangladesh, Brazil, Canada, China (mainland-born, excluding Hong Kong SAR and Taiwan), Columbia, Dominican Republic, Ecuador, El Salvador, Haiti, India, Jamaica, Mexico, Nigeria, Pakistan, Peru, The Philippines, South Korea, United Kingdom (except Northern Ireland) and its dependent territories, and Vietnam. See “Diversity Visa Lottery Results,” USA Diversity Lottery, http://www.usadiversitylottery.com/diversity-visa-lottery-results/dv2015-result.php.
22. Michael A. Clemens, Claudio E. Montenegro, and Lant Pritchett, “The Place Premium: Wage Differences for Identical Workers Across the US Border,” SDT Working Paper Series 321, Universidad de Chile, 2010.
23. Dani Rodrik, “Is Global Equality the Enemy of National Equality?” SSRN Scholarly Paper, Social Science Research Network, 2017, 7.
24. Michael A. Clemens, “Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?” Journal of Economic Perspectives 25:3 (2011), 83–106. See also John Kennan, “Open Borders,” Review of Economic Dynamics 16:2 (2013), L1–L13.
25. Peri, “Immigrants, Productivity”; Blau and Mackie, The Economic and Fiscal Consequences.
26. For examples of studies with this conclusion, see George J. Borjas, Jeffrey Grogger, and Gordon H. Hanson, “Immigration and the Economic Status of African-American Men,” Economica 77:306 (2010), 255–282; and George J. Borjas, Jeffrey Grogger, and Gordon H. Hanson, “Substitution Between Immigrants, Natives, and Skill Groups,” Working Paper 17461. NBER Working Papers. National Bureau of Economic Research, 2011.
27. See Giovanni Peri, “Immigrants, Productivity, and Labor Markets,” Journal of Economic Perspectives 30:4 (2016), 3–30; and Blau and Mackie, The Economic and Fiscal Consequences, for overviews of studies that consider the labor market effects of immigrants on wages and employment. Employment effects are generally small, and where they are negative, the adverse consequences are confined to hours worked (rather than employment rates) of native teens and employment of prior immigrants.
28. As one example, see Islam, Islam, and Nguyen, “Skilled Immigration.”
29. Immigrants were even more concentrated in the top five cities in 1990–2000, with about half of all migrants in New York, Miami, Los Angeles, Chicago, and San Francisco. See William H. Frey, “Where Immigrant Growth Matters Most,” Brookings, May, 2017.
30. Lisa Christensen Gee, Matthew Gardner, and Meg Wiehe, “Undocumented Immigrants’ State & Local Tax Contributions,” The Institute on Taxation & Economic Policy, 2016.
31. For an overview of the evidence on this question, see Blau and Mackie, The Economic and Fiscal Consequences.
32. Data are from the US Census.
33. Data are from the US Census.
34. Yet fears of terrorism by refugee immigrants border on the absurd; over the period 1975 to 2015, “the annual chance of an American being killed in a terrorist attack committed on U.S. soil by a refugee was one in 3.6 billion.” See Nowrasteh, Alex. 2017. “Syrian Refugees and the Precautionary Principle.” Cato Institute. January 28.
35. J. R. Clark, Robert Lawson, Alex Nowrasteh, Benjamin Powell, and Ryan Murphy, “Does Immigration Impact Institutions?” Public Choice 163:3-4 (2015): 321–335.
36. Muzaffar Chrishti and Michelle Mittelstadt, “Unauthorized Immigrants with Criminal Convictions: Who Might Be a Priority for Removal?” Migrationpolicy.org. November 2016; Vivian Yee, “Here’s the Reality about Illegal Immigrants in the United States,” New York Times, March 6, 2017.
37. National Academies of Sciences, Engineering, and Medicine, Division of Behavioral and Social Sciences and Education, Committee on Population, The Integration of Immigrants into American Society. National Academies Press, 2016.
38. Keith Head and John Ries, “Immigration and Trade Creation: Econometric Evidence from Canada,” The Canadian Journal of Economics / Revue Canadienne d’Economique 31:1 (1998), 47–62; Sourafel Girma and Zhihao Yu, “The Link between Immigration and Trade: Evidence from the United Kingdom,” Weltwirtschaftliches Archiv 138:1 (2002): 115–130.
39. Kerr et al., “Global Talent Flows,” 95.
40. Facts for India are from the US Census and the World Bank. Facts for Mexico are from The Pew Research Center, Global Attitudes and Trends, and the World Bank.
41. Michael A. Clemens, “Do Visas Kill? Health Effects of African Health Professional Emigration,” Working Paper 114, Center for Global Development, 2007.
42. John Gibson and David McKenzie, “Eight Questions about Brain Drain,” Journal of Economic Perspectives 25:3 (2011), 107–128: 135.
43. There is a possible two-year extension for STEM (science, technology, engineering, and mathematics) students.
44. A 2015 survey found that 48 percent of international doctoral STEM (science, technology, engineering, and mathematics) students want to stay in the United States after graduation, with 40.5 percent undecided and 12 percent wanting to leave. Those who planned to return home cited family as an important motivator. See Xueying Han and Richard P. Appelbaum, “Will They Stay or Will They Go?: International STEM Students Are Up for Grabs,” Ewing Marion Kauffman Foundation, 2016.
45. For a discussion of recent aspects of this problem, see Deanne Fitzmaurice and Katie Benner, “Meet the Foreign Tech Workers Left in Limbo by Trump,” New York Times, April 19, 2017.
46. Moni Basu, “Why the Highly Coveted Visa That Changed My Life Is Now Reviled in America,” CNN.com. June 4, 2017.
47. William A. Kandel, “US Family-Based Immigration Policy,” R43145, Congressional Research Service, February 9, 2018.
48. Presently, the largest sources of refugee migrants to the United States are the Democratic Republic of Congo, Syria, Burma, and Iraq. Gustavo Lopez and Kristin Bialik, “Key Findings about US Immigrants,” Pew Research Center. May 3, 2017.
49. There is no single number that would be ideal here. Thirty percent is an increase that could be handled without creating undue stress to our infrastructure or to state and local budgets. Completely open borders are not realistic, or even desirable, but there is certainly a strong case for more immigration.
50. William N. Evans and Daniel Fitzgerald, “The Economic and Social Outcomes of Refugees in the United States: Evidence from the ACS,” NBER Working Paper 23498, June 2017.
51. Lopez and Bialik, “Key Findings.”
52. While tough enforcement may have contributed to these trends, the dominant reason that migrants have returned home is family reunification. Rising standards of living in Mexico may have also played a role. See Ana Gonzalez-Barrera, “More Mexicans Leaving than Coming to the US,” Pew Research Center’s Hispanic Trends Project. November 19, 2015.
53. An electronic employment
verification system could be effective. For statistics on the relative size of border-control spending, see Council of Economic Advisers, Economic Report of the President (Washington DC: United States Government Printing Office, 2013), 152.
54. See Robert Warren and Donald Kerwin, “The 2,000 Mile Wall in Search of a Purpose: Since 2007 Visa Overstays have Outnumbered Undocumented Border Crossers by a Half Million,” Journal on Migration and Human Security 5:1 (2017), 124-136.
55. Congressional Budget Office, Senate Amendment 1150 to S. 1348, the Comprehensive Immigration Reform Act of 2007, June 4, 2007.
9. Equipping Workers for a Modern Global Economy
1. Of course, countries often have different preferences about the optimal tax rate or level of regulation, and cooperation need not involve harmonization. Cooperation can, however, help countries avoid some of the harmful aspects of tax and regulatory competition.
2. Milton Friedman argued for a negative income tax similar to the Earned Income Tax Credit (EITC), and such proposals are also popular with thinkers on the left. Both House GOP Speaker Paul Ryan and President Barack Obama have supported expanding the EITC. While design issues are important, the EITC is a deservedly popular tool for fighting poverty.
3. In theory, a net positive inducement to work requires that the work-encouraging effect of the tax credit (the substitution effect) prevail over the desire to work less due to higher incomes (the income effect). For workers in this economic group, this is likely. There are also possible adverse effects due to the phase-out of the tax credit at higher incomes.
4. Trade adjustment programs include various types of assistance, including training benefits, job search allowances, relocation allowances, and health tax credits.
5. The Congressional Budget Office has estimated that the repeal of the individual mandate will mean that 13 million fewer Americans will be insured by 2027. Insurance premiums are likely to rise for others, since healthy individuals are more likely to opt out of buying insurance. The repeal was enacted as part of tax legislation, known as the Tax Cuts and Jobs Act (TCJA), to save $314 billion (over ten years) that would otherwise have gone to subsidize the premiums of people legally required by the Affordable Care Act (ACA) to have insurance but unable to afford it. This weakens the entire structure of the ACA. See Congressional Budget Office, Repealing the Individual Health Insurance Mandate: An Updated Estimate, November 8, 2017.
6. The 2008 financial crisis was caused in part by insufficient financial regulation, leading to hazardous lending practices and large systemic risks that endangered the economy. In response, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. Among other things, this legislation established the Consumer Financial Protection Bureau (CFPB), the first financial agency specifically tasked with looking out for consumers’ interests. The CFPB’s straightforward mandate—to give consumers the tools they need to achieve financial success and stability—has kept its staff busy. For example, in January 2017, the CFPB found that two of the three major credit-reporting agencies, Equifax and Transunion, engaged in deceptive marketing practices, and demanded that Equifax and Transunion pay more than $23 million to their victims. Yet the goals of the CFPB are in danger. Congress has recently revisited many key components of Dodd-Frank, including the requirement that compels retirement advisers to value their clients’ interests above their own.
7. See James Feyrer and Bruce Sacerdote, “How Much Would US Style Fiscal Integration Buffer European Unemployment and Income Shocks? (A Comparative Empirical Analysis),” The American Economic Review 103:3 (2013), 125–28; and Xavier Sala-i-Martin and Jeffrey Sachs, “Fiscal Federalism and Optimum Currency Areas: Evidence for Europe from the United States,” Working Paper 3855, NBER Working Papers, National Bureau of Economic Research, 1991.
8. About 43 percent of American children live in low-income households; providing these children with care and resources can counteract some of poverty’s negative health and life outcomes. Education and adult-income outcomes are substantially better for people who were enrolled in high-quality care as children than for those who received lower-quality care or stayed at home. See https://heckmanequation.org/resource/13-roi-toolbox/for an overview of this research area. Also see Jorge Luis García, James J. Heckman, Duncan Ermini Leaf, and María José Prados, “Quantifying the Life-Cycle Benefits of a Prototypical Early Childhood Program,” Working Paper 23479, NBER Working Papers, National Bureau of Economic Research, 2017.
9. In 1980, federal civilian R&D spending was about 1.2 percent of GDP. In 2015, it was only 0.8 percent of GDP. For a discussion, see Jeffrey D. Sachs, Building the New American Economy: Smart, Fair, and Sustainable (New York: Columbia University Press, 2017), Chapter 2.
10. M. Ishaq Nadiri and Theofanis P. Mamuneas, “The Effects of Public Infrastructure and R&D Capital on the Cost Structure and Performance of US Manufacturing Industries,” The Review of Economics and Statistics 76:1 (1994), 22–37.
11. Chris Buckley, “China’s New Bridges: Rising High, But Buried in Debt,” New York Times, June 10, 2017.
12. Unfortunately, recent tax legislation—known the Tax Cuts and Jobs Act—violates this principle. TCJA will increase deficits by about $1.5 trillion over the coming ten-year period, at a time when the economy is already at, or perhaps beyond, full employment. As the legislation was passed in December 2017, the unemployment rate was 4.1 percent.
13. These facts are based on 2014 data from the US Bureau of Economic Analysis survey of US multinational companies and their affiliates abroad.
10. A Grand Bargain for Better Tax Policy
1. The official title of the law is Public Law 115-97.
2. Raj Chetty, David Grusky, Maximilian Hell, Nathaniel Hendren, Robert Manduca, and Jimmy Narang, “The Fading American Dream: Trends in Absolute Income Mobility since 1940,” Science 356 (6336) (2017), 398–406.
3. Data are from 2012. Sources can be found at https://www.irs.gov/uac/soi-tax-stats-individual-statistical-tables-by-tax-rate-and-income-percentile and http://www.taxpolicycenter.org/model-estimates/distribution-capital-gains-and-qualified-dividends/distribution-long-term-capital-2.
4. See Juan Carlos Conesa, Sagiri Kitao, and Dirk Krueger, “Taxing Capital? Not a Bad Idea after All!” American Economic Review 99:1 (2009), 25–48; Peter Diamond and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,” Journal of Economic Perspectives 25:4 (2011), 165–190; Emmanuel Farhi, Christopher Sleet, Iván Werning, and Sevin Yeltekin, “Non-Linear Capital Taxation Without Commitment,” The Review of Economic Studies 79:4 (2012), 1469–1493; Thomas Piketty and Emmanuel Saez, “A Theory of Optimal Capital Taxation,” Working Paper 17989, NBER Working Papers, National Bureau of Economic Research, 2012; Thomas Piketty and Emmanuel Saez, “A Theory of Optimal Inheritance Taxation,” Econometrica 81:5 (2013), 1851–1886.
5. In recent years, there was a large preference for pass-through income relative to corporate income for domestic companies. A key study shows that the US government likely loses substantial revenue due to the favorable treatment of noncorporate business income, which has increased the share of business income that is more lightly taxed. If the corporate share of business income had remained constant in recent years, the US government would have over $100 billion additional revenue from the taxation of business income. See Michael Cooper, John McClelland, James Pearce, Richard Prisinzano, Joseph Sullivan, Danny Yagan, Owen Zidar, and Eric Zwick, “Business in the United States: Who Owns It, and How Much Tax Do They Pay?” Tax Policy and the Economy, 30:1 (2016), 91–128. The TCJA may have changed that relative preference, since the statutory corporate tax rate was cut dramatically, from 35 percent to 21 percent. However, there are also new preferences for pass-through income, as many pass-through business owners are allowed to deduct 20 percent of their qualified business income.
6. In recent years, our business tax system subsidized debt-financed investments and may have taxed equity-financed
investments twice. One option for reform is to exempt the “normal” return to capital at the business level by allowing immediate expensing of investment purchases and removing the deductibility of interest expense; this would treat different types of investment the same. Since most of the corporate tax base is “excess” returns to capital, and the normal returns to capital would still be taxed at the individual level, this favorable treatment of the normal return to capital may have a smaller impact on the tax base than one might think. US Treasury Department economists calculate that the fraction of the corporate tax base that is excess returns was about 75 percent over the period 2003–2013. See Laura Power and Austin Frerick, “Have Excess Returns to Corporations Been Increasing Over Time?” National Tax Journal 69:4 (2016), 831–846. However, it is important to note that the vast majority of US equity income is not taxed at the individual level by the US government. See Leonard E. Burman, Kimberly A. Clausing, and Lydia Austin, 2017, “Is US Corporate Income Double-Taxed?” National Tax Journal 70 (3), 675–706. Thus, some taxation of the normal return to capital at the corporate level is likely justified. Also, rethinking some of the tax preferences that shelter capital income from tax at the individual level makes good sense. Options include mark-to-market taxation for high-income individuals, limits on the size of tax-exempt retirement accounts, interest charges for deferred capital gains, and reforms to estate taxation that would eliminate the nontaxation of capital gains due to step-up in basis at death.
7. A foreign tax credit for foreign taxes paid avoids double taxation.
8. Extrapolating to the present year generates larger estimates, but for 2012 estimates, see Kimberly Clausing, “The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond,” National Tax Journal 69:4 (2016), 905–934. For a discussion of stateless income tax planning, see Edward D. Kleinbard, “The Lessons of Stateless Income,” Tax Law Review 65:1 (2012), 99–171. In many respects, this problem will be worse under the TCJA. The legislation exempts foreign income from taxation, making explicit, and permanent, the tax preference for foreign income. While a minimum tax is meant to reduce profit-shifting to low-tax havens, it still incentivizes income earned abroad relative to that earned in the United States. The first ten percent of return on assets in foreign countries is tax free, and the minimum tax rate is half the US rate. Also, since income earned in high-tax countries can generate foreign tax credits that offset the minimum tax due, the new system makes the United States the least desirable place to book income: both havens and high-tax countries are tax-preferred relative to the United States.
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