On Deficit Bias and Immigration

Economics

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.