Immigration

America is a country of immigrants and their descendants. If we hear about people that are against immigration this is misleading. Nobody (well, almost nobody) is against immigration. However, many people feel that American immigration laws are wrong and they have a point. (By the way, I immigrated to the US less than 20 years ago; hope this saves me from accusation that I am against immigration.) The situation when millions of people reside in the US illegally is far from normal. (Nobody knows the exact number of illegal immigrants;some people think that it is close to 12 millions.) It is obvious that American economy needs them. However, it seems that the way we are dealing with them today and the existing suggestions to solve the immigration problem are not satisfactory.

What do we want from immigration? First of all we would like to deal with law abiding citizens and taxpayers, we do not want to get criminals and welfare recipients. Stating the same in different way, we can say that the immigration should be beneficial not only for newcomers, but first of all for natural born American citizens. The immigrants made important contributions in many areas; there is no doubt that everybody benefited from their work . However, this is not always true at the level of individual immigrant; the goal of a good immigration law is to guarantee that we get the best people that are able to integrate into American society and become useful members of it.

How could we achieve this goal? Today government officials decide the fate of prospective immigrants. I believe that the right to decide should belong to employers. If a foreigner can find a steady job in the US without taking it from American, if he pays taxes and does not commit crimes, he should be able to stay legally in the US, to become a permanent resident and later a citizen. In all other cases he has no room in the US.
It should be easy to visit the US with tourist visa : only people with criminal record should be rejected. It should not be a problem to stay legally in the US to work or study. Hence only people without legal sources of income will have an incentive to stay illegally and these people should be deported.
It should not be a problem to get a permission to stay (temporarily or permanently) for family members under the
condition that all expenses (including
health insurance) are paid by the immigrant.
The main problem is to guarantee that the competition of foreigners will not drive down the salary of American workers. I support the suggestion to tax employers of immigrants. Then it will be more profitable to employ domestic workers (if they can be found). Together with existing laws protecting American workers this tax will leave to immigrants the jobs where they will not present an unfair competition to Americans.

Would the flow of immigrants increase if they could easily come to the US looking for job? This depends on the amount of tax employers should pay. One can adjust this amount to regulate the number of foreign workers in every industry. Of course, some employers could try to compensate themselves reducing the salary of foreigners. This should be illegal. Probably, employers will expect harder work from immigrants; this is not too bad , taking into account that we would like to get hard workers as new citizens.

The tax paid by the employers should be considered as the main proof of employment, that is necessary to get an extension of legal status of an immigrant. This provision will not allow tax avoidance if the foreigner has an intention to stay in the US.

It is clear that tax incentives can regulate the flow of immigrants if the foreigners unable to find a job will leave the US. If INS discovers that the foreigner is not able to support himself by legal means, this person should be required to leave the country. He can come back in a year or earlier if he is able to find a job. However, if he disobeys he should be deported immediately without the right to return. The deportation should not require any court decision. Is this cruel? Probably. However, one should take into account that the only thing necessary to avoid this cruelty is to comply with the request to leave the country for some time. The cost of compliance is so low that every reasonable man should leave and come back instead of staying illegally. It is impossible to arrest and deport millions of immigrants that entered the country illegally, but did not commit any other crimes. Their deportation would be disastrous for American economy. The laws about immigration are violated every day, because they are not reasonable. However, reasonable laws can be enforced.

The number of people succeeding in the job search will be much less than the number of foreigners trying to find a job. The main problem of INS will be to keep track of immigrants and to guarantee that they leave if they are unable to find a job. To keep the legal status the immigrants should regularly inform INS about they job situation and INS should have a way to contact them if necessary. In other words, in exchange for almost complete exclusion from the process of granting visas INS should get a very active role when the immigrants are already in the US.

After several years of legal work in the US
an immigrant should have a right to apply for permanent residence; his tax documents should constitute the basis of application. If it is clear that he can become in the future a useful citizen of the US he should get a green card.

The above proposal is not realistic at present time when due to the fear of terrorism it is difficult to enter the US even with tourist visa. However, in any case one should start with the immigrants already residing in the US (legally or illegally). They should get a legal right to stay in the US and their employers should be taxed. (However, an illegal immigrant should never get American citizenship). In the very beginning the tax should be negligible, however, it is important to have it if INS would like to know the employment history of immigrants.
As long as the tax on employers is so small that it works only as an accounting tool the legalization of undocumented immigrants is almost equivalent to amnesty. However, an amnesty of illegal immigrants gives only a temporary solution of the problem: new people come illegally and the problem reappears. Taxing employers will permit us to control the flow of new immigrants and raising the tax we will be able to get rid of immigrants that are not useful for American economy.
Of course, not every foreigner looking for a job in the US has an intention to stay here forever. The policy concerning temporary workers should be the same , but employers should pay lower tax.

Right way to help

There is an old story about two fishermen meeting a beggar. One of them gives him a fish, the second one gives him a net and shows how to use it. It is clear from this story that people knew what is the right way to help many centuries ago. Alas, it is very easy to forget even obvious lessons.

If the government helps the tsunami victims in Asia or starving people in Africa, it should help also Americans that need its aid. And it does, but not always in the right way.

I would like to make a suggestion that should work better. If a group of people is underrepresented in the workforce, the employer should be rewarded for employing a member of this group. This should be done for almost any group that is well defined and is sufficiently large . There are some exceptions;
for example, it is a wrong idea to apply this to mothers with small children. They have already a very important job and it is unreasonable to encourage them to leave it; they should get help in other way (for example, Swedish mothers get salary for raising children).
Of course, this idea is useful to fight discrimihation, but it can be used in many other cases. Take, for example, people recently released from jail. It is very natural that the prospective employer , if he has a choice, should prefer to hire somebody else. However, it is in our common interest to have these people working; then the chance of new crime will be much less.

Let us take disabled (or mentally retarded) people .
Sometimes, the employer should make costly adjustments to use them; one should create incentives to do this.

The unemployment among young people (especially, among young blacks) is quite high. This is understandable: employers prefer people with experience. However, this is very dangerous: keeping young people on the street is a good way to breed criminals.

Is it too expensive to encourage emloyers to hire people that are less productive? Probably, at the end of the day we'll find that the money are well spent. We are spending $25000 per year for every prisoner; if it takes $5000 or even $10000 to keep a person out of prison we can save a lot of money. In any case if somebody is not working this does not mean that he is not eating; his expenses are covered in some way (by crime or by government aid or by charity). We can ask employers to have a definite share of people from underrepresented categories on their payroll. If the share of these people is higher, then the employer will benefit, if it is lower he will be fined . (May be, the word "fine" is not appropriate here, "tax" is a better word. It is completely unnecessary to require from every employer to make adjustments for disabled people; it is much more efficient to make these adjustments only in some places. )
A byproduct of the suggested reform
would be a solution of the problem of illegal immigration. It is clear that no border control can solve this problem, because the US needs illegal immigrants
to take the jobs that citizens do not want to take for a good reason: the salary is too low. It would be very easy to find and deport at least half of 12000000 illegal immigrants we have, but what would happen with American agriculture ?

The claim that people with low IQ have no room in modern economics is a fallacy. The jobs of illegal immigrants are mostly low IQ jobs and we see that there is plenty
of them. The strict enforcement of immigration laws would free a lot of jobs for unskilled Americans, but they do not want to get these jobs. They would be happy to take them if the salary were much higher. Much higher salary is impossible from the viewpoint of employer: he would loose money. However, now all of us are loosing money
supporting the unemployed in some way or keeping them in jail. If the employer will get some support for hiring American citizens and will be fined for hiring illegal immigrants the problem of illegal immigration will be solved.
sufficiently high

Social Security

President Bush created already huge deficit with his policy of cutting taxes and raising spending at the same time. Now he would like to make a new hole in the budget with his plan to transform Social Security. Bin Laden claims that his goal is to
bankrupt the US; it looks like Bush does everything to help Bin Laden to achieve this goal.
Bush bases his plan on the fact that in the average the return of stocks is higher than the return of treasury securities. One can use this idea to solve the problems of Social Security without massive borrowing required by Bush proposal.

Social Security is a huge defined benefits pension plan. The main difference between Social Security and other pension plans of this kind is the rule that SSA can invest only in treasury securities and other pension plans do not obey this restriction. If Social Security were considered as a regular pension plan its financial situation would be excellent. Why could not we change the rules? This is not a new proposal; for example, it was suggested to divert 15% of SS tax to stocks and bonds.
Stocks give higher returns because they are more risky and individual accounts envisioned by Bush cannot provide secure income. However, a pension plan with long term goals can bear the risk; for Social Security the risk becomes insignificant in the long run. We get all benefits of individual investment accounts without their drawbacks. As an added benefit we obtain smaller management fees: it is much cheaper to manage large investments.

There exist serious objections against this proposal. It can lead to substantial influence of the government on the economy and such an influence is very dangerous. The investment decisions of bureaucrats are far from optimal ( better to say, the bureaucrats optimize their own well being). It seems, however,
that one can avoid all of these troubles.

The only way to guarantee that bureaucrats will not make wrong investment decisions is to avoid giving them the right to decide. This means that all decisions should be included in the law . For example, one can accept a rule that some part of SS tax should be invested in all existing mutual funds (or only in index funds) and the amount of investment should be proportional to the market share of the fund. One can modify this formula taking into account past returns, the degree of risk, etc; it is important only that the rule should be very precise and known to everybody. Of course, a formula of this kind cannot be optimal, however, it will work better than a decision of an average owner of individual account.
Such an investment strategy of SSA will not lead to market distortion.

In Roosevelt times Social Security was dismissed by many Republicans as a socialist idea. Today most of us agree that this was a good idea (and people having different opinion prefer to keep their opinion for themselves). Social Security is government program of right kind: all important decisions are made by Congress and bureaucrats do not have any power to change them. The above proposal has the same features.

What about individual accounts? This is a wrong idea if we are talking about saving Social Securiry,
however, it is a very good idea to create them at the top of Social Security. The goal of the government was to provide a safety net for retirees and this goal was achieved: Social Security provides them with modest, but decent standard of life. However, a natural goal of every person is to preserve his standard of life after retirement. This is his own problem, but the government can and should help him. Now the government is encouraging the retirement saving with its tax policy
(I am talking about IRA, 403 b plans, etc). However, the use of tax deductions in this relation is not reasonable. Let us suppose that a person in 33% tax bracket contributes $1000 to tax deductible IRA account. This means that he pays from its pocket only $670 and $330 are taken from the government. In other words, the government contributes $500 for
every $1000 invested by taxpayer. However, if the taxpayer is in 15% tax bracket, the government contributes only $175 for $1000 he invested. There is no incentive for young people that do not earn very much to contribute. The situation will change if instead of tax incentive we will have a fund that matches contributions of all people with the same rate (or , may be , contributions of young people should be matched with higher rate). The government could make an initial contribution to the retirement account ( one of proposals of this kind has a fancy name KidSave) and pay the management fee if the annual contribution exceeds some limit.
People will be real owners of their accounts ; they
will be able to make their own investment decisions.
(Notice, that in all proposals concerning the Bush-style reform of Social Security the freedom of
decisions of individual account holders is severely restricted.)

Tax reform

The necessity of tax reform is widely recognized. However, it is not trivial to replace the existing very complicated system with a simple system without essential redistribution of taxes. Happily, we are living in the age of computers and this helps. I am suggesting a very simple idea: to replace income tax with a transaction tax. This idea is not new: consumption tax is an example of transaction tax and there are people that think that one should use a national sales tax instead of income tax. This is an attractive suggestion: no hassle with tax forms, no cheating, everything is so simple that IRS is almost unnecessary. However, the existing system is progressive: the tax rate for the rich is higher . This means that the affluent people will be the main beneficiaries of the shift to sales tax.
I am suggesting to tax at the spot all transactions, not only sales. The tax rate should depend on the type of transaction and (for some types) on the annual income of taxpayer. The taxpayer should declare the expected income at the moment of transaction if he does not want to be charged with maximal rate. At the end of the year IRS computers will make corrections if the income is lower or higher than expected . (Another possibility is to use the last year data in calculation of tax.)
Of course, most of transactions are sales; in most cases the sales tax should not depend of income. (One can
take into account the income in indirect way taxing luxury goods with higher rate.) The number of transactions that should be reported to IRS will be relatively small; most of these transactions are reported to IRS anyway on various forms like W2, 1099, etc.
The transaction tax is very simple for taxpayer. It can take into account all existing deductions (technically this is simple, but, probably, it is reasonable to leave intact only the mortgage deduction ). Even without deductions the tax rates can be structured in such a way that in average people from every income group pay approximately the same tax as today.

Tax evasion will become more difficult (although there is no doubt that crooks will find some ways to cheat).
Probably, most of cash transactions will not be reported, but they escape taxation also in the existing system.

It is important that the tax base will become bigger (both income and consumption will be taxed) and this will lead to smaller marginal tax.