Forget Mexico -- Here's who should pay for the Wall

The piece was orginally published by CNBC on Jan. 25, 2017


During his presidential campaign, Donald Trump promised not only to 'build a wall' to seal the southern US border, but to make Mexico pay for it. Mexico has demurred for now, and in the meantime, the President-elect has instructed Congress to find the funds to build the wall, estimated to cost $10-38 billion.

Nevertheless, a better source of funding is available: the illegal immigrants themselves.

Most undocumented immigrants come to the U.S. to work, and for a simple reason. Wages are higher here. Farm work in the U.S. typically pays $10-12 per hour, while a gardener in Mexico might earn $2-3 per hour, only a quarter of U.S. wages. The differential is even higher in places like Guatemala or Nicaragua, which are substantially poorer than Mexico. For a Guatemalan border jumper, the pay differential can be a factor of 10 or more. That serves as an enormous inducement to come to the U.S.

We can value the size of the inducement through the price of an illegal border crossing. Havoscope, a group tracking black market prices, estimates that human smugglers charge $4,000 to bring a Mexican to the U.S. and $7,000 for a Guatemalan. This corresponds to anecdotal evidence, for example, from a 2010 VOA article:

One [undocumented immigrant] says he paid a Mexican smuggler two thousand dollars to transport him across the U.S.- Mexico border. He walked across the desert for eight nights and slept by day before making his way to Virginia.

If we allow this worker traveled for two weeks to reach his U.S. destination, and that his daily value in the U.S. is about $100, then his total travel cost exceeded $3,000. Crossing the border has substantial value.

We can compare the cost of border crossings with Federal tax revenues actually received from undocumented immigrants. According to the PEW Research Center, about 11 million undocumented aliens reside in the U.S., of which 8 million are in the workforce. A study by the Federation for American Immigration Reform (FAIR) calculates that undocumented workers in 2010 generated approximately $5.3 billion in Federal tax revenues, excluding Medicare contributions.

Thus, the average undocumented working immigrant generated less than $700 per year in Federal revenue. At the same time, the typical immigrant works 60 hours per week and earns perhaps $28,000 per year. Do the math, and the effective Federal tax rate for undocumented immigrants is 2.5 percent.

The current system –and we do have a current system—is the cause. Today, the system works like this. An undocumented immigrant with an appetite for risk tries to jump the border. If he succeeds, he gets a free pass in the U.S. Employers will not require documentation because they desperately need the help.

Municipalities do not ask for papers, because Mexicans are backbones of the service economy in places like New Jersey and California, and because mayors fear that driving illegals underground just creates more crime. Consequently, many Americans today accept a de facto system which holds that, if a Mexican can get over the border, he can live and work in the U.S. without paying taxes, as long as he keeps his nose clean. The unfortunate implication is, however, that almost all the taxable value of illegal immigrants is lost at the border.

If the border were treated not as a fence, but as a gate, then we might expect undocumented immigrants to be willing to pay to the U.S. government that which they otherwise would pay to human smugglers and lose in travel time, that is, about $4,000 per year in visa fees and related taxes. If all undocumented workers did so, Federal revenues would increase by $33 billion. Even so, this would constitute an effective tax rate of only 14 percent for the typical working immigrant.

And government revenues could be higher still. The lack of legality has many hidden costs. For example, an illegal immigrant could be robbed or die in the desert. They may fail at entering the U.S. and have to try again. They may be cheated out of wages by U.S. employers. They may become sick without coverage.

They can be deported at any time, or may be unable to return to see their families for long stretches. Conducting daily business—opening bank accounts, obtaining a mobile phone, renting an apartment—is a challenge. Further, a lack of papers disqualifies immigrants from higher value-added jobs in management or the trades. Valuing the benefits of legality is inherently tricky, but it is probably worth $2,000-$4,000 per year per worker beyond the value of actual border crossing itself.

Thus, undocumented immigrants might be willing to pay $6,000-$8,000 in visa fees and taxes per year if they could enter the U.S. on short notice at will. Even at the higher end, the effective tax rate would only average around 30 percent. Put it all together, and the Federal government is probably leaving revenues in excess of $40 billion on the table every year.

And that's not all. Dealing with illegal immigrants is actually quite expensive. FAIR estimated the annual cost in 2010, excluding healthcare expenditures, at $22 billion. Much of it is spent on enforcement at the border. If Mexican immigrants with clean criminal records could enter at will for a fee, then the entire need for a wall disappears.

Our analysis suggests that Federal outlays could therefore be reduced, perhaps by as much as $10 billion per year. Thus, the total swing in the Federal budget could be as much as $50 billion per year. That's a lot, enough not only to pay for the wall, but with a good bit left over to make a dent on Obamacare reforms.

Many Americans are understandably fed up with illegal immigration. We can try to solve it with a wall and deportation. Nevertheless, this has many downsides, including the potential collapse of the U.S. agricultural sector; the risk of shutting seasonal workers in the U.S., rather than shutting them out; spending vast sums on an initiative which proves no more successful than the war on drugs; and precipitating extraordinary social tensions at a time when illegal immigration is not the only priority on the Trump administration's plate.

Alternatively, we can consider a market-based approach which not only addresses most of the concerns about illegal immigration, but generates substantial funds for the U.S. government. There is a better way.