Public Deficit Bias and Immigration

By Michael Ben-Gad

http://d.repec.org/n?u=RePEc:red:sed013:21&r=dge

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 favour of deficit finance is not infinite. Today’s population or their descendants, 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 dead weight 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 behaviour 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.

This paper makes the interesting point that a developed economy that expects higher immigration in the future can afford higher public deficits now. This is because the immigrants are not part of the citizenship, which includes the current residents and their descendants. The distortions of future taxes therefore in part apply to people outside of the set the government cares about, and it can thus delay more the taxes.

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