Immigrants, no matter what their status, pay the same taxes that citizens do—sales taxes, real estate taxes (if they rent or own a home), gasoline taxes. Some immigrants work in the informal economy and are paid under the table in cash, so they don’t have federal and state income taxes, or social security taxes, deducted from their paychecks. So do some citizens. In fact every time the kid next door babysits, or shovels the snow, he or she is working in the informal economy.
Much of the service sector operates in the informal sphere. Nanny jobs and housecleaning jobs—which tend to be held primarily by women—generally use informal arrangements whether the workers are citizen or immigrant, documented or undocumented. But increasingly, jobs that used to be in the formal sector—like factory jobs—have sunk into the informal sector through elaborate systems of subcontracting. Textile and apparel manufacturing are particularly notorious in this regard.1
There are some benefits for employers, and for consumers, from this informal sector. Employers can pay lower wages than those required by law. Consumers receive access to cheap products and services provided by these low-wage, untaxed workers.
But workers in the informal economy don’t fare so well. They don’t have access to any of the worker protections that come with formal employment, like minimum wage or health and safety regulations. Workers in the informal economy can’t get unemployment insurance or workers’ compensation and generally get no benefits from their employer (like health insurance or sick leave or vacation time).
It’s hard to calculate exact numbers for the informal economy because, by definition, it’s unregulated. One recent study in Los Angeles estimated that immigrants made up 40 percent of the city’s population, and one-fourth of these were undocumented. The informal economy accounted for some 15 percent of the city’s workforce, and undocumented workers were concentrated there: 60 percent of workers in the informal economy were undocumented.2
Many immigrants work in the formal economy, in which case they have all of the same tax deductions from their paychecks as citizens do. Undocumented immigrants who work in the formal economy generally do so by presenting false social security numbers. The Social Security Administration estimates that about three-fourth of undocumented workers do this.3
Public commentary about this practice is often quite angry. In fact, though, the only ones who lose anything when workers use a false social security number are the workers themselves. Taxes are deducted from their paychecks—but if they are undocumented, they still have no access to the benefits they are paying for, like social security or unemployment benefits.
Even with a false social security number, the federal and state taxes that are deducted from a worker’s paycheck will go into federal and state coffers. Social security payments are either credited to whoever’s number was used, or, if a worker uses a number that doesn’t belong to anybody, they go into the Social Security Administration’s “earnings suspense file.” As of 2005, Social Security was receiving about $7 billion a year through false social security numbers—allowing it to break even, because that’s about the same amount as the difference between what it paid out in benefits and what it received in payroll taxes. According to the New York Times, “illegal immigrant workers in the United States are now providing the system with a subsidy of as much as $7 billion a year.”4 Yet these workers will never be able to receive Social Security benefits.