Reply to the Report ‘An Assessment of the Fiscal Effects of Immigration to the UK’ by Migration Watch

by Christian Dustmann and Tommaso Frattini

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

Migration Watch (MW) has released for publication on Thursday 13 March 2014 a report entitled ‘An Assessment of the Fiscal Effects of Immigration to the UK’.

In this report MW claims that our research paper on ‘The Fiscal Effects of Immigration to the UK’ [http://www.cream-migration.org/publ_uploads/CDP_22_13.pdf], released on November 5 2013, has some flaws that invalidate our main results, namely that EEA immigrants who came to the UK since 2000 have contributed over the last 11 substantially more in revenues than they received in state expenditures. This contrasts with the UK-born, who over the same period contributed substantially less than they received.

MW states that our main results – that EEA immigrants who came to the UK since 2000 have contributed over the last 11 years substantially more in revenues than they have received in state expenditures – is ‘simply wrong’ because it relies on the assumptions that that (page 7, point xi (a) of their report):

(1) [Migrant] employees earn the same as the UK-born population; (2) Self-employed migrants contribute far more than those employed; (3) Migrants own the same investments, property and other assets as the UK-born and long-term residents from the day they arrive in the UK. 

Their first claim is simply incorrect. At no point do we make assumption (1). We rather allocate earnings (and the ensuing tax receipts) according to the figures on earnings for immigrants and natives that we obtain from the UK Labour Force Survey (LFS). 

Further, their second claim is also incorrect. At no point do we make assumption (2). In fact, in the absence of information on self-employed earnings, we allocate tax payments of the self-employed according to the shares of income tax payments computed for employees. This may rather lead to an underestimate of the income taxes paid by immigrants, as relatively more immigrants are self-employed. 

Finally, we have responded to the third point in an earlier reply from November (ignored in the piece by MW), where we compute an extreme scenario where recent immigrants pay no corporate taxes and business rates whatsoever, and allocate these taxes to long term residents only. We still find that recent EU immigrant make a positive contribution, while the net contribution of natives remains negative.

MW’s main criticism is based on a fundamental misapprehension of what we are doing. MW’s main argument builds on a serious misinterpretation of the way we estimate income tax contributions and NIC payments of immigrants. MW claims that we assume that migrant employees earn the same as the UK-born population, and that self-employed migrants contribute more than those who are in salaried employment. But at no point do we make any of these assumptions, nor is there anything in our paper that suggests that in any way. It is therefore puzzling to us why their piece attacks our work so violently, based on a complete misapprehension of what we are doing. 

More precisely, data in the UK LFS does not collect information on self-employment earnings. Despite this shortcoming, the LFS is the best available data source for our purposes, as it contains consistent wage data and information on country of birth over a long time period. It is well known that the Annual Survey of Hours and Earnings (ASHE) that MW suggests as a more reliable data source (point 36, page 23) does not contain information on the earnings of self-employed either, and, more importantly, does not have any information on country of birth, which is obviously crucial for analysis on the fiscal impact of immigration.

Thus, in the absence of information on earnings of the self-employed, we use the LFS to construct the share of income tax and National Insurance contributions payments made by native and immigrant employees based on their reported earnings. We then use these shares to allocate the total amount of income tax and NIC revenues to immigrants and natives, including that paid by the self-employed. This strategy does not require making either assumption (1) or (2) above, as MW claims we do. Further, since self-employment is more common among recent EEA immigrants than among natives, this choice may lead to an underestimate of total EEA immigrant tax payments, exactly the opposite to what they claim.

MW also criticises the way we have allocated corporate tax payments. We assume that company ownership (i.e. share ownership) is similarly distributed between the native and immigrant population, and we clearly state this assumption in our paper (page 13). MW’s criticism is not new, and we have already responded to it in an earlier reply [http://www.cream-migration.org/commentsarticle.php?blog=2]. In the same reply, we also respond to a related criticism, which MW raises again, about the way we allocate business rate revenues, based on the share of self-employed in each population group. MW – and other commentators before – argued that this may be incorrect because business rates are primarily paid by large businesses.

As an example, MW says that Sainsburys pays £400 million a year in business rates (no source is given). But as we explained in our earlier response, ‘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.’ Coming back to MW’s example, the burden of business rates may be borne by consumers in terms of higher prices or local property owners in terms of lower rents, and so on.

In our previous reply, we have also computed the total fiscal contribution of recent EEA immigrants under the extreme (and clearly implausible) assumption that recent immigrants do not pay any corporate taxes or business rates, and we have allocated these taxes to long term residents. Even in this case, which represents an extreme lower bound on the tax payments of recent immigrants, we still find that EEA immigrants made a substantial overall positive net fiscal contribution, while the contribution of natives remains negative. It is disappointing that MW ignores this reply in their piece.

To summarise, MW’s main criticism is based on a stark misapprehension of our methodology. The report is written in a derogatory language seemingly attempting to undermine our reputation with suggestions that we do not adequately describe our methodology or comment on all our results. We are in fact very open about our methodology - which has been acknowledged even by earlier critics of our work (including Prof M. Stone, cited approvingly in their report, who comments that ‘we set out our assumptions with commendable clarity’ [page 3 here: http://www.civitas.org.uk/pdf/assumptionsandwizardry.pdf]).

Their strongly worded criticism is all the more surprising as the MW report is based on a substantial amount of guesswork, does not provide clear indication of how their figures are computed, and is at times sloppy or simply wrong. For example, the authors must have misread section 2.2.3 of our paper and/or earlier research of ours (Dustmann, 1997; and Dustmann, Fasani and Speciale 2013), as this research never claims that the level of consumption for migrants may be 20% lower than that of the indigenous population. Also, there seem to be calculation mistakes in some of the figures in their tables.

We welcome constructive criticism of our work, and we have engaged responsively and transparently with outside researchers who have raised criticisms since we believe that only an open and fact-based debate can do justice to a subject as sensitive as immigration. 

MW chose to circulate their critique to the media earlier this week without sending it to us so we have not had the chance to point out errors to them as we would have been able if they believed in conducting debate similarly openly. Although the report cites some of the reports that are critical of our work, MW has chosen to ignore detailed replies already made, notwithstanding the fact that they are easily available on the CReAM webpage [http://www.cream-migration.org/comments.php], were brought to their attention at the time, and already respond to some of their criticisms.