April 15, 2007

Tax Day Coffee Smelling

Officially, tax day isn't until Tuesday (due to the 15th being on a Sunday and the 16th being an official holiday in D.C.) but the well known and lamented date of April 15th mustn't go by without some discussion of the state of taxation in America.

"Work hard. Be faithful. You'll get your just reward."

Those words appear on a statuette my father was given on the occasion of the closing of the College of Engineering at the University of Denver, where he had tenure. (The statuette was of a conscientious gentleman with a giant blue screw through his torso.) They can just as well be applied to American taxpayers who have earned a high school diploma or better in their educational career.

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The preceeding chart comes from a fascinating April 4, 2007 study report by Robert Rector et. al. of The Heritage Foundation entitled, 'The Fiscal Cost of Low-Skill Households to the U.S. Taxpayer.' The report summarizes the chart this way:

Chart 7 com­pares households headed by persons without a high school diploma to households headed by persons with a high school diploma or better. Whereas the dropout-headed household paid only $9,689 in taxes in FY 2004, the higher-skill households paid $34,629— more than three times as much. While dropout-headed households received from $32,138 to $43,084 in benefits, high-skill households received less: $21,520 to $30,819. The difference in government benefits was due largely to the greater amount of means-tested aid received by low-skill households.

Households headed by dropouts received $22,449 more in immediate benefits (i.e., direct and means-tested aid, education, and population-based services) than they paid in taxes. Higher-skill households paid $13,109 more in taxes than they received in imme­diate benefits.

OK, so you're probably wondering, what's new? What's new is the trend in dropout households in the U.S. According to the World Net Daily article that cites the study:

About two-thirds of illegal alien households are headed by someone without a high school degree. Only 10 percent of native-born Americans fit into that category.

I have advocated on these pages (and stand by it today) that immigration should be free and unlimited to non-criminal aliens, provided that citizenship (and voting rights) must still be earned and that entitlement programs that make immigrants a burden on the taxpayer are first reduced or eliminated.

The Rector report explains the realities we face.

Politically feasible changes in government policy will have little effect on the level of fiscal deficit generated by most low-skill households for decades. For example, to make the average low-skill household fiscally neutral (taxes paid equaling immediate benefits received plus interest on government debt), it would be necessary to eliminate Social Security, Medicare, all 60 means-tested aid programs and cut the cost of public education in half. It seems certain that, on average, low-skill households will generate deep fiscal deficits for the foreseeable future.

Hat tip: The Canadian Sentinel

Click continue reading to see the report's conclusion in its entirety.

Conclusion

Households headed by persons without a high school diploma are roughly 15 percent of all U.S. households. Overall, these households impose a significant fiscal burden on other taxpayers: The cost of the government benefits they consume greatly exceeds the taxes they pay to government. Before government undertakes to transfer even more economic resources to these households, it should have a very clear account of the magnitude of the economic transfers that already occur.

The substantial net tax burden imposed by low-skill U.S. households also suggests lessons for immigration pol­icy. Recently proposed immigration legislation would greatly increase the number of poorly educated immigrants entering and living in the United States.[12] Before this policy is adopted, Congress should examine carefully the potential negative fiscal effects of low-skill immigrant households receiving services.

Politically feasible changes in government policy will have little effect on the level of fiscal deficit generated by most low-skill households for decades. For example, to make the average low-skill household fiscally neutral (taxes paid equaling immediate benefits received plus interest on government debt), it would be necessary to eliminate Social Security, Medicare, all 60 means-tested aid programs and cut the cost of public education in half. It seems certain that, on average, low-skill households will generate deep fiscal deficits for the foreseeable future. Policies that reduce the future number of high school dropouts and other policies affecting future generations could reduce long-term costs.

Future government policies that would expand entitlement programs such as Medicaid would increase future deficits at the margin. Policies that reduced the out-of-wedlock childbearing rate or which increased the real educa­tional attainments and wages of future low-skill workers could reduce deficits somewhat in the long run.

Changes to immigration policy could have a much larger effect on the fiscal deficits generated by low-skill fam­ilies. Policies which would substantially increase the inflow of low-skill immigrant workers receiving services would dramatically increase the fiscal deficits described in this paper and impose substantial costs on U.S. taxpayers.

Education Immigration Internecine Second Bush Administration We're from the government, and here to help. Posted by JohnGalt at April 15, 2007 12:57 PM

Mmmm coffee.

Bastiat talks about "the seen and the unseen." With all due respect, you -- and my brother in law -- and a lot of other people whom I highly respect -- love to point to a datum in the "seen" category and say "See?"

Lower income households provide less revenue and use more government services. Who is surprised? Those without a diploma will earn less than those with; illegal immigrants tend to be less educated than native born citizens, yup.

I contend, still, that the "unseen" value that these workers and consumers bring to the economy more than compensates for the increased use of public services. The educated in your table are able to earn what they do, in large part, because there is a less educated work force (stop him before he says "comparative advantage" -- too late!).

To allow the educated (or ambitious dropouts like me and AlexC) to get ahead and innovate frequently requires allowing them to leverage less-educated labor. As Ricardo showed, both will be wealthier.

Posted by: jk at April 15, 2007 2:06 PM | What do you think? [1]