Immigration, Inequality, and Income Taxes

Labor Economics Public Policy No Comments
Swiss banknotes and tax forms from Zurich canton with a red pen

In order to understand the true distributional consequences of immigration (how immigration affects different groups within a population) and design effective policy responses, we must determine how immigration impacts net earnings inequality (as opposed to gross earnings inequality).

In Barcelona School of Economics Working Paper 1470, “Immigration, Inequality and Income Taxes,” Mirjam Bächli and Albrecht Glitz study how immigration affects the way in which local governments set their effective income tax rates and the consequences that this has for the distributional impact of immigration.

Using administrative data from Switzerland, the authors find that immigrant inflows not only raise gross earnings inequality but also reduce the progressivity of local income taxes, further increasing after-tax inequality.

Immigration Increases Gross Earnings Inequality Among Natives

The authors find that migrant inflows of the 2010s had a sizeable impact on household-level gross earnings inequality in Switzerland.

Table 1 below presents the team’s analysis of pre-tax earnings at different percentiles, where the outcome variable is the change in income inequality among native workers.

Regressions in first differences at the municipality level over the time period 2010–2019 following Dustmann et al. (2013). The outcome is the one-year difference in log annual earnings of native households at different percentiles. Year fixed effects, canton fixed effects, and control variables (changes in the average age of 25-64 year old natives, in the share of natives with tertiary education, and in the share of natives with upper-secondary education) included. Standard errors in parentheses are clustered at the municipal level. * p
Table 1: Pre-tax Earnings Analysis at Different Percentiles

Specifically:

  • Column (1) looks at the change in the interquartile range (the difference between the 75th and 25th percentiles of earnings)
  • Column (2) looks at the change in the interdecile range (the difference between the 90th and 10th percentiles of earnings)

According to the instrumental variable (IV) results:

  • The same 1% inflow leads to a 3.23 log point increase in the earnings gap between the 90th and 10th percentiles.
  • A 1% increase in the immigrant inflow rate leads to a 1.13 log point increase in the earnings gap between the 75th and 25th percentiles.

Local Governments Respond to Immigration by Reducing Tax Progressivity

Cantons and municipalities in Switzerland react to higher immigrant inflows by systematically lowering their local tax multipliers, effectively dampening the progressivity of their income taxes and further increasing after-tax earnings inequality.

Table 2 below reports the estimated impacts of immigration on local tax multipliers. Columns (2) and (4) show that a 1% immigrant inflow rate reduces municipal tax multipliers by 0.012 (or 0.35 standard deviations) and cantonal tax multipliers by 0.060 (or 1.55 standard deviations).

Regressions in first differences at the cantonal level over the time period 2010–2019. The outcome is the one-year difference in the cantonal multiplier. Year fixed effects and control variables (share adult women in 2010, share young in 2010, share married in 2010, share unemployed in 2010, share employed in manufacturing in 2000, log of the average per capita earnings in 2010, share living in urban areas in 2010) included. In the even columns we drop the canton of Geneva. WCB is short for wild cluster bootstrap. Standard errors in parentheses are clustered at the cantonal level. * p
Table 2: Impact on Municipal Tax Multiplier

A Significant Portion of the Increase in Net Earnings Inequality is Due to Political Decisions

Based on the estimates in Tables 1 and 2 (and quantitatively less important responses in terms of income tax rates at different earnings levels), we can see that around 10% of the total impact of immigration on net earnings inequality can be attributed to the political channel (the impact on cantonal and municipal tax multipliers).

This means that local authorities significantly reinforce the impact of immigration on earnings inequality through tax policy adjustments. 

Overall, this paper demonstrates that immigration in Switzerland not only increases gross earnings inequality but also induces local governments to reduce the progressivity of the prevailing income taxes, significantly amplifying after-tax earnings inequality.

This political response, which is found to be particularly pronounced in regions with strong anti-immigration party support, suggests that local authorities adjust their tax policies in response to shifting preferences for redistribution among their constituents.

In contrast, there is no evidence that local authorities reduce their tax multipliers due to decreased revenue needs.