NCPA - National Center for Policy Analysis


May 26, 2006

Tax policy is one area where governments can help reduce the burden of illegal immigration, says Bruce Bartlett, an ex-Treasury Department official.

By definition, illegal aliens are part of the underground economy -- a part of the economy that is unrecorded in gross domestic product and consists of criminal activity and otherwise legal economic output that stays hidden from government to avoid taxes, regulations and other constraints. No one really knows how big the underground economy is, but a common estimate is 10 percent of GDP, or about $1.3 trillion, says Bartlett.

Moreover, the underground economy supports the employment of millions of workers -- mainly illegals -- and one cannot realistically tax them the way citizens are taxed, says Bartlett:

  • Workers in the underground economy are usually paid cash off the books; such wages are unreported to the tax authorities and those receiving them are highly unlikely to file income tax returns.
  • Therefore, the income tax is never going to raise much revenue from illegal aliens; in fact, it is estimated that illegal-alien households pay only 20 percent as much income tax as non-illegal immigrant households.
  • However, payroll taxes have broader coverage because there are no exemptions or offsets, so it is not surprising that illegal aliens pay more of these -- about 40 percent of what citizens and legal aliens pay.
  • But when it comes to federal excise taxes, such as those for gasoline or tobacco, illegal aliens pay close to the same amount of tax as the rest of us.

Consequently, when it comes to state taxes, the same sort of pattern holds: illegal aliens pay very little state income taxes, but close to their fair share of sales taxes. Therefore, states that rely heavily on sales taxes are going to get more revenue from their illegal aliens to pay for the expenses they incur, says Bartlett.

Source: Bruce Bartlett, "The Illegal Immigrant Taxpayer," Wall Street Journal, May 19, 2006.

For text (subscription required):


Browse more articles on Tax and Spending Issues