Tax Reckoning for Illegal Immigrants?

By David Seminara on April 15, 2010

Illegal immigrants are standing at the ready to solve America's public deficit crisis – or so you might conclude upon reading the Schumer-Graham immigration reform/amnesty proposal. One of the least plausible elements of the bill is the notion that providing legal status to illegal immigrants will be a boon to the U.S. Treasury.

The first part of this plan involves the creation of tamper-proof Social Security cards with biometric identifiers. This is obviously a much needed reform, but will it create an increase in tax revenues, as Senators Schumer and Graham claim? A huge number of illegal migrants work in the informal, cash economy, and the fact is that this arrangement is convenient for both them and their employers. Is a contractor who pays illegal immigrant landscapers in cash suddenly going to put them on the books if they are granted amnesty and become legal? Even with a huge enforcement effort, it would still be extraordinarily difficult to stop employers from entering into informal cash-for-work arrangements.

The second part of the plan that involves our tax base requires illegal immigrants who wish to "earn" legal residency to pay back taxes on all of the income they've earned since arriving in the U.S. I contacted the offices of Senators Schumer and Graham on multiple occasions to ask them how this might work in practice, but received no response. Presumably, their plan would require applicants to provide some sort of affidavit or sworn statement regarding their prior earnings. But the notion that migrants who have already disregarded our immigration laws are going to provide an honest accounting of how much they've earned and then pay back taxes on that amount is fanciful at best.

The issue here isn't that illegal immigrants are any more dishonest than the rest of us – let's face it, there are plenty of red-blooded Americans who evade taxes as well. The reality, though, is that the vast majority of illegal immigrants come from countries where state tax collection is weak and tax evasion is an ingrained part of the culture. A recent report by the Inter-American Development Bank highlights how rampant tax evasion is in the countries that send the most illegal immigrants to the U.S. In Mexico, nearly 70 percent of employers with fewer than 10 employees are registered, and hence pay no taxes at all. Of small-to-mid size companies, 63 percent pay no taxes, and even among large employers, 48 percent pay no tax. In El Salvador, which sends the second-largest number of illegal immigrants to the U.S. behind Mexico, the situation is even worse. Only 1 percent of employers with fewer than 10 workers are registered to pay taxes, and only 3 percent of larger employers are registered.

This is not a problem confined to Latin America – tax evasion is no less common in other parts of the world which send substantial numbers of illegal immigrants to the U.S. The point here is that many illegal immigrants in the U.S. have never paid taxes before to any state and don't view tax evasion as a crime. During my years as a consular officer for the Department of State, I had the opportunity to examine the tax returns of legal immigrants who were sponsoring relatives to immigrate to the U.S. The law requires sponsors to meet federal poverty guidelines and this was frequently a problem for many foreign-born U.S. citizens, not because they didn't earn enough, but because they didn't report their income on their taxes.

Most of these legal immigrants worked in the kinds of occupations that are also common for illegal immigrants, such as construction, restaurant work, landscaping, and so on. They were paid in cash, or operated their own small businesses and weren't shy about the fact that they cheated on their taxes, even when speaking to a U.S. government official. Many would gladly brandish healthy bank account statements and would freely acknowledge that their tax returns were bogus. They simply attached no stigma to tax evasion, and their attitude was more or less: "only a fool pays taxes, right?"

Also, because they came from countries where wages were quite low, they didn't think that reporting wages of only $2,000 or less for full-time work to be implausible in the way that native-born American citizens would.

Aside from the fact that illegal immigrants tend to come from countries where tax evasion is the norm, and the reality that many work in cash-economy jobs, there is also the issue of poverty. Times are tough, and illegal immigrants often remit whatever savings they have back to their home countries. Even if they wanted to provide an honest accounting of all of their earnings and pay back taxes on them, how would they save up enough cash to do so?

Senators Schumer and Graham know very well that the back taxes issue is largely symbolic, and any increase in tax revenues generated by an enhanced Social Security card will be marginal. The goal here is to try to make their amnesty plan sound as tough as possible. The problem is that the rhetoric on taxes is about as honest as a Bernie Madoff sales pitch.