| Description |
In the decades following WWII, when birth rates were high and immigration relatively low, the US and most other advanced countries chose to pay down much of the high levels of debt they had accumulated during the war. Yet since the mid-1970's and early 1980's, as net migration and high immigrant fertility became the main source of population growth, the governments of these same countries reversed course, choosing to allow both public debt and unfunded liabilities to grow faster than the economies that support them. To consider whether shifting demographics may be motivating greater tolerance for deficit finance, I build a model with an overlapping dynasties structure that unlike standard macroeconomic models, will behave differently depending on what share of the growth in the population is attributable to immigration. Furthermore, this model allows me to disaggregate the effects of economic policy so that I can distinguish between the behaviour of the model as a whole, and the effects of changes to fiscal policy on the portion of the population and their descendents already resident in the economy. What I am able to demonstrate is that a policy that first lowers the tax rate on capital income over a period of several decades, all the while accumulating debt to finance the shortfall in government revenues, and then raises it by the necessary amount to finance those debts, will generate a welfare benefit for the native population. The reason is that though such a policy generates economic inefficiencies, first raising but ultimately lowering output, these losses are more than compensated by the benefits accruing to natives of shifting some of the cost of today's government expenditure to future immigrants. It is important to emphasise that nowhere do I assume that today's economic agents are indifferent to the future of their own descendants. Instead, I determine for a calibrated model of the US economy precisely what level of deficit spending will generate the maximum benefit for native households for a given rate of immigration and policy horizon---one that balances the benefit of shifting some of the tax burden to people yet to arrive, against the losses entailed by not smoothing tax rates over time and burdening the children and grandchildren of the same natives with higher debt that they too will need to finance through higher taxes. I then compare the welfare gain these policies generate, against the losses these same policies would imply in the absence of immigration---the differences are substantial. Hence policies that appear inexplicable when we ignore the role of immigration, now appear to be rational choices for policymakers representing the interests of their present-day constituents. Looking forward, the simulations I perform, generate Debt/GDP projections till 2040 that appear remarkably similar to the forecasts produced by the Congressional Budget Office under its alternative fiscal scenario. Though the model I build and simulate is calibrated to match US data for the years 1981-2010, the results are generally valid for any developed economy absorbing immigrants, including the UK.
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| Exploitation Route |
I have given a series of two lectures explaining the methodology for simulating models of this type to a group of Economists at HMRC and HM Treasury. This work has been presented at the ESRC/HMRC International Conference on Taxation Analysis and Research, London, December 2011, the Royal Economic Society Conference, Cambridge, March 2012, and invited seminars at the University of Exeter, October 2011 and the University of Reading, March 2012, Royal Economic Society Meetings, Cambridge May 2013. First paper from project R&R and now resubmitted at The Economic Journal. This revised version has expanded analysis of different factor taxes. Second being prepared for submission.
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