In my latest TaxBytes column for the Dallas-based Institute for Policy Innovation, titled “Higher Immigration Will Reduce the Federal Deficit,” posted on February 28, I wrote:
Almost all the news is bad. But there’s one little bit of good news in the CBO’s February report. The CBO’s economists estimate that because of higher immigration, growth of real GDP will be higher. Specifically, says the CBO:
Most of the increase in the projected population reflects larger net immigration. That greater immigration is projected to boost the growth rate of the nation’s real gross domestic product (GDP) by an average of 0.2 percentage points a year from 2024 to 2034, leaving real GDP roughly 2 percent larger in 2034 than it would be otherwise.
This higher real GDP generates more tax revenues than otherwise. How much more?
Here’s what I wrote:
With higher growth, of course, come higher tax revenues, although reading the CBO’s report is like looking at the output of a black box. CBO Director Phill Swagel elaborated on the effect of immigration earlier this month. He stated:
The labor force in 2033 is larger by 5.2 million people, mostly because of higher net immigration. As a result of those changes in the labor force, we estimate that, from 2023 to 2034, GDP will be greater by about $7 trillion and revenues will be greater by about $1 trillion than they would have been otherwise. We are continuing to assess the implications of immigration for revenues and spending.
I took Swagel’s word for it, but it’s hard to believe that an additional $7 trillion in output yields only an additional $1 trillion in federal revenues. My back-of-the envelope calculations suggest a much higher effect on federal revenues.
Here’s my thinking.
The marginal federal tax rate on that higher GDP is probably about 40 percent. If that sounds high, remember that we have not just federal income taxes, but also payroll taxes of 15.3 percent on most earned income and a corporate income tax rate of 21 percent. So 40 percent sounds plausible. And certainly 30 percent is on the low end. So the added tax revenue should be at least 30 percent of $7 trillion, which is $2.1 trillion.
You might say that more immigrants mean more government spending and that could well be true. But the CBO is saying that revenues will be $1 trillion higher.
