On Deficit Bias and Immigration

Economics

Speaker:Michael Ben-Gad, City University London
Date: Friday 28 October 2011
Time: 16.15
Location: STC/D

Further details

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 investigate the behavior of an overlapping dynasties optimal growth model to quantify how much policy makers can shift the burden of taxation between the present-day inhabitants of a country and future immigrants, by altering rates of distortionary factor taxation or deficit finance. In a standard macroeconomic model with representative agents and inelastic labour supply, if government expenditure is a fixed share of net national product, policy-makers can minimize the deadweight loss of factor taxation by holding the tax rate on capital constant over time and equalizing the long-run tax rates on capital and labour income. Furthermore, fluctuations in the tax rate on labour income are neutral. By contrast, in a model of an economy without representative agents---here one that is absorbing a continuous stream of immigrants, debt is not neutral, and the potential for redistributing resources from future immigrants to natives by deviating from standard optimal policy outweighs losses in efficiency generating a bias in favour of deficit finance. I use data for the United States between 1980-2010 to calibrate the model and calculate the optimal fiscal policy from the perspective of the native population associated with a wide range of different rates of immigration and quantify the welfare gain that accrues to the members of the native population.