Tuesday 26 November 2013

Further Response to Comments on “The Fiscal Impact of Immigration on the UK”

by Christian Dustmann and Tommaso Frattini

Centre for Research and Analysis of Migration (CReAM) at University College London

Our paper “The Fiscal Impact of Immigration on the UK” [http://www.cream-migration.org/publ_uploads/CDP_22_13.pdf] has continued to be the object of lively debate.  We intend here to address certain criticisms and explore further issues. In particular, among the points that have been raised, there has been criticism of the way we deal with the allocation of corporate tax revenues and of business rates. We have responded to these criticisms before [http://creamcomments.blogspot.co.uk/2013/11/nothing-is-hidden-in-our-report-on.html]. 

In a recent piece [http://strongerinnumbers.com/komposersitelocal/CReAMresponse1.pdf], Michael O’Connor argues again that our way of allocating corporate tax revenues between UK natives and different immigrant groups would over-estimate the likely payments of recent immigrants for two reasons:
  1. “As it treats even a recent immigrant as having the same investment in UK companies as soon as they arrive as a lifelong resident does”.
  2. As “the same fiscal contribution will be attributed to any partner accompanying the migrating worker and also to any child they might have”, so that the “fiscal contribution [of immigrants] through corporate taxes will be deemed to increase with every new migrant and new child born”.
We welcome all suggestions for improving our estimates, and indeed we acknowledge that point 1 deserves consideration. However, point 2 incorrectly overstates his case, as we allocate revenues of corporation taxes (and of capital gains tax) – after taking out the share which is paid by overseas shareholders – on a per capita basis among the adult (18+) population only (we explain this in Table A2 [http://www.cream-migration.org/publ_uploads/CDP_22_13.pdf]). Therefore it is not the case that the estimated amount of corporation taxes paid by immigrants is “deemed to increase with every new child born”.

As regards point 1, we believe that in the absence of better approximations, a per capita allocation among the adult population is a reasonable criterion. However, we could also take the comment to its extreme consequence, and assume that immigrants arrived since 2000 do not contribute at all to corporate and capital gains tax revenues in any year. This is obviously an extreme assumption, and one which will considerably under-estimate the tax payments of immigrants. Nevertheless, it will clearly establish a lowest bound estimate for the tax contributions immigrants make. We show what effect this would have below.

In a previous comment [http://strongerinnumbers.com/cream3.html], Michael O’Connor also suggests that our imputation of business rates revenues based on share of self-employment might misleadingly over-estimate the tax payments of recent immigrants. We have already responded to that criticism, which we think is unfounded [http://creamcomments.blogspot.co.uk/2013/11/nothing-is-hidden-in-our-report-on.html]. Here we should reiterate that allocating business rates according to self-employment shares – as we do – does not mean that we are assuming that only the self-employed pay them. It just means that we believe a reasonable proxy for the distribution of business rates revenues might be the self-employment density among immigrants and natives. 

The allocation of corporate taxation and business rates raises complicated questions of incidence.  The fact that businesses write the cheques does not mean that the burdens do not fall ultimately on people. Whether those people are customers, shareholders, property owners or whoever, depends upon how economic decisions and, as a consequence, prices respond to taxation and is not a straightforward question. 

However, again, an extreme scenario would be one where immigrants who have arrived since 2000 do not pay any business rates.

We have re-estimated our models to obtain the net fiscal contribution of immigrants and natives for these extreme scenarios. Remember that corporate and capital gains tax amount to more than 9% of total government revenues, and business rates to more than 4% of total government revenues (see Table A2 in our paper [http://www.cream-migration.org/publ_uploads/CDP_22_13.pdf]), so we are assuming that more than 13% of total revenues are only attributable to natives and immigrants who were in the UK before 2000.

The next table compares our original results with the results that we obtain under these extreme assumptions.
Years 2001-2011
Original calculations in our paper



Recent EEA

Recent Non EEA
 Overall net fiscal contributions (million, 2011 GBP equivalent),  2001-2011
 Ratio of real revenues to real expenditures, 2001-2011
Assuming no corporation tax, capital gains tax, or business rates paid by recent immigrants
 Overall net fiscal contributions (million, 2011 GBP equivalent) , 2001-2011
 Ratio of real revenues to real expenditures, 2001-2011

As the entries in the table clearly show, even under this scenario, recent EEA immigrants still make a substantial positive net fiscal contribution over the period 2001-2011. The numbers in the Table show that they would have paid 21% more in taxes than they received in transfers and benefits. Moreover, even though the net fiscal contribution of recent non-EEA immigrants is now negative (although less negative than that of natives, despite the fact that we allocate the revenues from corporate and capital gains tax and business rates to natives), the overall contributions of all immigrants who arrived since 2000 still remains  positive.1

More generally, and as we have already mentioned in our first response, we believe we have taken an approach that tends to understate overall immigrants’ fiscal contributions, for different reasons. In our calculations we always consider second generation immigrant children (i.e. the UK-born children of foreign-born parents) until age 15 as immigrants, but (due to a lack of information in the LFS that allows us to identify individuals born to immigrants once they have left the parental household) we consider them as natives when they are adults (we explain that and discuss the consequences of this assumption in section 2.1.1 in our paper).  In this way, we understate immigrant contributions from a dynamic angle. One can see this from two perspectives. Looking at it one way, we consider the cost of educating the children of immigrants, but we do not correspondingly consider the savings the UK makes by not bearing the cost of educating adult and highly educated migrants. Alternatively, looking at it in another way, we consider the cost of educating UK-born children of immigrants as a cost of immigration, but when these children grow up, work and pay taxes we allocate their revenues to the native population.

An alternative approach, that would perhaps get closer to capturing the dynamic fiscal effects of immigration, would be to not consider the costs of educating the UK-born children of immigrants. If we do so, the estimated net fiscal contributions of immigrants obviously increase, especially for those groups who have more children. In this case, and maintaining the extreme assumption of no corporate and capital gains tax and no business rates paid by recent immigrants, the ratio of revenues to expenditures would be 1.23 for recent EEA immigrants and 0.98 for recent non-EEA immigrants (while still 0.9 for natives). 

1 There was also a slight misunderstanding of our Table 1 in Michael O’Connor’s piece. To reconstruct the size of the total population from our Table 1, one should just sum over columns 1-2-3, and not over all columns, as columns 4 and 5 are just subsamples of columns 2 and 3, respectively. 

1 comment:

  1. It still seems highly unlikely that those on low incomes pay more tax than those on higher incomes. Even allowing for various misallocations based on the assumptions, it would still appear that the UK has an extremely regressive tax system.

    Of course, having a low median salary may hide that recent EU migrants include many very well paid managers and professionals that do pay a lot of tax. It would be interesting to see the average tax paid by decile of income. Are the majority of recent EU migrants really making a net contribution or is it just those in the top 2 deciles?


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