Monday, June 05, 2006

Immigration and Pareto

Economists who have a more favorable view of immigration (like me) emphasize that it enhances global economic efficiency: By allowing a mutually advantageous trade between the immigrant and his or her employer, the economic pie grows larger.

Economists who are more skeptical about immigration (like my Harvard colleague George Borjas) point out that some Americans, specifically those with fewer skills, are made worse off by increased competition from the new workers. Even if the overall pie gets larger, some people may end up with a smaller slice.

Here is a challenge for those us in the pro-immigration camp: Can we devise a system of taxes and transfers that turns the increase in economic efficiency from immigration into a Pareto improvement? In other words, can the winners from increased immigration compensate the losers so that, in the end, some people are better off and no one is worse off?

I recognize that "no one" is a strong word. The Pareto criterion, strictly construed, is probably not realistic. I will settle for a weaker solution, which I'll call an approximate Pareto improvement: a system of taxes and transfers such that, in the end, many people are better off and at most a very few people are only a little worse off. I want a practical solution--one that not only works on the blackboard but that you could propose to your congressman.

Here is a first-pass attempt at an answer: When immigrants come to the United States to work, they agree to pay higher payroll taxes. The extra revenue is used to finance a payroll tax cut for American workers. The immigrants are better off because they are allowed into this country. The Americans they compete against are better off because they get a tax cut.

I know: Some people will say, "There he goes again, thinking that tax cuts are the solution to all problems. Just what you'd expect from an ex-Bushie." But if a revenue-neutral system of payroll tax surcharges and rebates could be devised to turn immigration into an approximate Pareto improvement, the debate over immigration might become a lot less polarized.