Scandinavian Working Papers in Economics

Seminar Papers,
Stockholm University, Institute for International Economic Studies

No 664: Sustaining Fiscal Policy Through Immigration

Kjetil Storesletten ()
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Kjetil Storesletten: Institute for International Economic Studies, Stockholm University, Postal: Stockholm University, S-106 69 Stockholm, Sweden

Abstract: This paper explores the fiscal implications of immigration to the US and argues that immigration policy should be viewed as a vital part of fiscal policy. In particular a case is made that skills and age at the time of arrival are of great importance for the cost-benefit calculation of new immigrants. Using a calibrated general equilibrium overlapping generations model, which explicitly accounts for key differences between immigrants and natives, Social Security and the demographic transition, I investigate if an immigration policy reform alone could resolve the fiscal problems associated with the ageing of the baby boom generation I find that such policies exist and are characterized by increased inflows of working-age high and medium skilled immigrants. One particular feasible policy involves admitting 1.6 million 40-44 year-old high skilled immigrants annually compared to a total of 1.1 million today. In contrast an income tax hike of 4.4% points would be required if future fiscal problems were to be solved by a once and for all tax reform. To further illuminate the fiscal impact of immigration I compute the net government gain in present value terms of admitting one additional immigrant. This figure varies considerably with age and skills and reaches a maximum of seven times GNP per capita for high skilled 40-44 year-old immigrants. In contrast new immigrants represent on average a small net gain of $7,400 or 0.3 times GNP per capita.

Keywords: fiscal policy; immigration

JEL-codes: F22; H20; H50; J15

41 pages, September 4, 1998

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