Immigrants and Taxes

April 11, 2006

The recent debate on the issue of illegal immigration has led some to question whether or not undocumented immigrants pay taxes, and if so, how much. A story from KRQE in Albequerque combines this hot-button issue with another current top story – income tax filing — and sheds some light on the growing number of undocumented immigrants filing a return with the IRS. From KRQE:

The IRS has seen an increase in the number of tax returns filed using an Individual Tax Identification Number.

The system originally was designed for people living abroad who had investments in the US.

But it quickly is becoming used by undocumented workers who aren’t eligible for Social Security numbers.

Last year, 1.4 million people filed tax returns using the numbers. That’s an increase of 40 percent over the previous year.

In 2003, 7,600 people in New Mexico requested the numbers.

For opponents of illegal immigration, the system shows the federal government’s fractured approach to the country’s undocumented work force.

Immigrant-rights groups say paying taxes is one way immigrants show they want to comply with US laws.

The question of how much illegal immigrants pay in taxes is not always clear cut because attempts to answer it suffer from the same common problems that persists when trying to allocate the incidence of any tax – who the law says must pay (statutory incidence) and who actually pays (economic incidence). In addition, like most estimates pertaining to undocumented immigrants, the numbers are all over the map.

It is true that many undocumented immigrants pay payroll taxes (i.e. FICA and Medicare) using either an invalid Social Security number or a Tax Identification Number (TIN), and empirical evidence tends to show that a large fraction of the economic incidence of these taxes falls on workers.

Some of these same individuals also pay income taxes, assuming their reported adjusted gross incomes are high enough to where they actually have a positive liability. Certain legal questions such as the proper filing status most likely exists as well, and mixing a complicated tax system with the complicated issue of undocumented workers can cause nightmares for willing accountants and law enforcement.

But even if one is paid “under the table” where neither the employer nor employee report the income to the IRS, other taxes are paid by illegal immigrants. This would include mainly sales taxes on items purchased in most states and localities. Only states with most likely few undocumented individuals — Alaska, Montana, Oregon, New Hampshire, and Delaware — do not have a statewide sales tax. The incidence of sales taxes varies by product, but in terms of essential products that low-income immigrants are most likely to purchase (i.e. food, clothing, etc.), they tend to be highly inelastic, meaning the burden mostly falls on the them as the consumer.

Corporate income taxes could also be paid in part by illegal immigrants. The burden of any corporate tax will fall on a combination of three parties: workers, consumers, and/or shareholders. While illegal immigrants tend to not be active investors, they are often workers and consumers, so they do bear a fraction of that burden.

Overall, while some illegal immigrants may work in the black market, avoiding taxes entirely is not practically possible. Even those illegal immigrants who may be involved in other illegal activities like drug smuggling/dealing ultimately pay some tax when they use that income to purchase goods.

While some argue that illegal immigrants do not pay their fair share of taxes compared to the value of government services they receive, this is partially a normative question that needs to be accompanied by more empirical evidence to support or refute. But to answer the question, “Do illegal immigrants pay any taxes?” the answer is clearly yes.

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